Time to start your tax planning

The other day I was chatting with a friend and the conversation drifted to how soon this year flew by.

And, with just a little more than three months to the end of the financial year (March 31, 2006), it finally landed at taxes.

My friend was asking me if ICICI Bank or IDBI Bank were going to issue any tax saving bonds that he could invest in. I asked him why on earth he wanted to invest in bonds?

His retort: Because it is mandatory for tax saving.

That's when I realised that he was still referring to the Section 88 rebate.

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This year it is Section 80C!

No longer is Section 88 valid. Now think Section 80C only.

Section 88 offered a rebate. A rebate is when the government gives you a concession on your income if you invest in certain instruments.

Section 80C does not offer a rebate but a deduction from taxable income. The good news: you get a higher tax benefit.

You save more under Section 80C

The upper limit under both, Section 88 and Section 80C is Rs 1,00,000.

But that is where the similarity ends.

Under Section 88

Since the maximum amount that could be invested under Section 88 was Rs 1,00,000, the maximum tax that could be saved was upto Rs 20,000.

Let's put figures to this:

You had to pay tax = Rs 28,000
Your rebate = 20%
You invested Rs 1,00,000 in the instruments eligible for a rebate.
Your savings = Rs 20,000 of your tax (20% of Rs 1,00,000).
So instead of paying tax of Rs 28,000, you pay a tax of Rs 8,000 (Rs 28,000 – Rs 20,000).

Under Section 80C

Let's say your taxable income is Rs 100,000.

You invest Rs 70,000 in the Public Provident Fund. Your taxable income drops to Rs 30,000 (Rs 1,00,000 - Rs 70,000).

So if you up to Rs 1,00,000 invest in the relevant instruments, you save tax upto that amount.

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Section 80C is for everyone

That's right. No more discrimination.

Under Section 88, the rebate varied depending on the income slab.

• If your gross total income did not exceed Rs 150,000 = 20% rebate.
• If your gross total income did not exceed Rs 150,000 = 15% rebate.
• If your gross total income exceeded Rs 500,000 = Section 88 not applicable.

Now you don't have to worry about which income category you fall under.

Anyone and everyone, irrespective of the income they earn, can avail of the benefit under Section 80C.

Section 80C gives more investment flexibility

No more sub-caps.

The maximum amount under Section 88 (Rs 1,00,000) has several sub-caps.

For instance, a maximum of Rs 10,000 in Equity Linked Savings Schemes. These are diversified mutual funds with a tax benefit. They invest in the shares of various companies of various sectors.

Then there was a minimum of Rs 30,000 that had to be invested in infrastructure bonds. These were the bonds that were issued by financial institutions like ICICI and IDBI.

These restrictions do not exist anymore. There is much more freedom to select where to invest under Section 80C. You can decide how much percentage of your income can go in which investment. So, if you want to invest the entire Rs 1,00,000 in ELSS, no one is there to stop you.

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Get cracking

You don't have much time for the financial year to end. Don't wait for the last minute to do your investments. Specially if you want to invest in ELSS.

Here you buy the mutual funds units depending on the current Net Asset Value (price of a unit of a fund). And the NAV could rise or fall depending on the stock market.

You can space out your investments over four months (December, January, February and March) to avoid timing the market. Decide how much you want to invest in the funds for this financial year, break it up into four installments and start investing via a Systematic Investment Plan right away.

Illustration: Rajesh Karkera