Income and expenses are two sides of the same coin. And one liability that you cannot afford to turn a blind eye to is income tax. While you cannot evade paying taxes, the best you can do is to minimise their effect on your wallet.
What are the Tax Slabs ?
The basic exemption limit for personal income tax is:
Rs 180,000.
Rs 190,000 for resident women below the age of 60 years;
Rs 250,000 for the age of 60 years or above but below 80 years.
Rs 500,000 for resident individuals of the age of 80 years and above
Income tax rates for the tax year 2010-11 applicable for individuals, Hindu Undivided Families, Association of Persons and Body of Individuals, can be tabulated as follows:
| Total Income | Tax Rates |
| Up to Rs 180,000 (for individuals other than women below age of 60 years) | Nil |
| Rs 190,000 (for women below 60 years of age). |
| Rs 250,000 (for resident individuals of 60 years or above and below 80 years) |
| Rs 500,000 (for resident individuals of the age of 80 years and above). |
| 180,001 – 500,000 | 10% |
| 500,001 – 800,000 | 20% |
| 800,001 upwards* | 30% |
Note:
- Education cess is applicable at a rate of 3 per cent on income tax (inclusive of surcharge, if any)
- Marginal relief may be provided under specific conditions
Income Tax Implication for Mutual Fund Unit Holders
No matter what tax bracket you fall under, Section 80 C of the Income Tax Act acts as a saviour, outlining deductions that can be made from your taxable income.
- Section 80 C allows certain investments and expenditures to be exempted from tax.
- You need to invest in the instruments specified under this Section and deduct that amount from your gross income. You are liable to pay tax only on the income derived after this deduction.
- Investments up to a maximum of Rs 1,00,000 only are set for deduction for any tax bracket.
What are Tax saving options available ? | Tax-saving options under Section 80C |
| Provident Fund (PF) contribution |
| Public Provident Fund (PPF) up to Rs 70,000 in a year |
| Premium for Life insurance policy or Unit-linked Insurance Plan |
| Tax saving Fixed deposits with Banks |
| Equity Linked Saving Schemes (ELSS)of mutual funds |
| Infrastructure bonds |
| National Savings Certificate (NSC) |
| Senior Citizens Saving Scheme |
| Post Office Five Year Term Deposit Account |
| Payment towards principal amount of home loan |
| Pension Plans |
| Note: An additional deduction of Rs 15,000 under Section 80D has been allowed to an individual who pays medical insurance premium for his/her parent(s). |
Other deductions:
In 2008, Senior Citizens Saving Scheme 2004 and the Post Office Five Year Term Deposit Account have also been brought under the purview of this Section an additional deduction of Rs 15,000 allowed under Section 80 D to individuals paying medical insurance premium for his/her parent(s).
What are Equity Linked Saving Schemes?
Equity linked savings schemes (ELSS) are mutual funds that help you gain the twin advantage of earning equity-linked returns with the additional benefit of saving tax. ELSS have a lock-in period of 3 years, which encourages long term investing among investors and gives ample time for the fund manager to manage a portfolio of stocks that can outperform over a period of time.
Why is the Equity Linked Savings Scheme a winner ?
Over a longer horizon, it has ben witnessed that equities outperform most other asset classes in terms of returns.
Advantages of ELSS
- Investments in equity delivers higher returns over a longer period, surpassing returns from other tax saving instruments
- A lock-in of 3 years ensures you stay invested for a longer period, thus allowing your money to grow over a period of time.
- ELSS will endeavour to provide higher returns with tax-efficiency
- One has the option of investing small amounts of Rs 500 each month in ELSS through Systematic Investment Plans (SIPs)
| Comparison of risk and returns vis-a-vis other tax saving instruments |
| Instruments | Lock-in Period (years) | Risk Level | Returns ( per cent per annum) CAGR | Minimum investment (Rs) | Maximum investment (Rs) | Tax status on returns |
| Public Provident Fund (PPF) | 15 | Low | 8 | 500 | 70,000 | Tax free |
| National Savings Certificate (NSC) | 6 | Low | 8 | 100 | 1,00,000 | Taxable |
| Bank Fixed deposits | 5 | Low | 11 | 10,000 | 1,00,000 | Taxable |
| Equity Linked Savings Schemes (ELSS) | 3 | High | Market linked | 500 | 1,00,000 | Tax free |
| Unit Linked Insurance Policy (ULIP) | 3 | High | Market linked | 10,000 (as annual premium) | 1,00,000 | Tax free |
Disclaimer:
Past performance may or may not be sustained in future. All rates of return except ICICIPru Tax Plan are from RBI, Handbook of Statistics on Indian Economy, 1999, 00 and 04, SBI and www.indiapost.gov.in. Some of these instruments are not liquid, so the value is only indicative computed using the return as on 19/8/1999 on a compounded annual growth rate basis. ICICI Prudential Mutual Fund Tax Plan returns are CAGR and are based on NAV on 19/8/99, which was Rs.10 and NAV on Nov 28, 2008 (29-Nov-08 & 30-Nov-08 were non business days), which was Rs. 50.81 No loads are considered in the computation. Past performance may or may not be sustained in the future. PPF interest rates were modified to 11% on 15 Jan 2000, 9.50% on 1 March 2001, 9% on 1 March 2002 and 8% on 1 March 2003.