Quick! Another tax saving option!

f you are kicking yourself for missing the IDBI bond issue, don't worry.

You have one more option as far as your tax planning is concerned.

ICICI Bank has come out with its issue of tax-saving bonds.

Their offer is very plain and to the point (unlike the various options offered by IDBI). Incidentally, the IDBI tax-saving bond issue closes on February 3 (tomorrow!).

In this article, we will list the various options offered by ICICI and what the Section 88 rebate entails.

Tax saving bonds and Section 88

Section 88 of the Income Tax Act, 1961, is well known simply because it lists all the investments that offer a rebate.

A rebate refers to the concession the government gives you on your income.

The actual amount of the rebate varies:

• If your gross total income does not exceed Rs 1,50,000 (Rs 1.5 lakhs), you will get a 20% rebate.
• If your gross total income exceeds Rs 1,50,000, but is under Rs 5,00,000 (Rs 5 lakhs) you will get a 15% rebate.
• If your gross total income exceeds Rs 500,000 lakh, Section 88 will not be applicable.

Say you have to pay Rs 18,000 as tax, and you are entitled to a rebate of 20%.

You invest Rs 50,000 in the instruments eligible for a rebate. That means you save Rs 10,000 of your tax (20% of Rs 50,000).

So, instead of paying tax of Rs 18,000, you pay a tax of Rs 8,000.

The maximum amount that can be invested under Section 88 is Rs 1,00,000 (Rs 1 lakh).

In other words, you can save a maximum tax of Rs 20,000.

Also, the limit of Rs 1,00,000 has several sub-caps which you will find in smart tax-saving solutions.

The investments that fall under Section 88 qualify for a maximum investment of Rs 70,000. Infrastructure bonds claim the balance 30% (Rs 30,000).

Or you could invest the entire Rs 100,000 in infrastructure bonds.

ICICI tax-saving bond issue

Let us now look at the common features of the ICICI tax-saving bond:

~ Each bond can be bought for Rs 5,000.

~ The holding period is five years.

~ You have to apply for a minimum of one bond.

Do you want the money every year?

Then you have the annual interest payment option.

Here, interest is paid to you every year. At the end of five years, Rs 5,000 is returned to you.

Nothing more (remember, you are taking the interest every year).

The return works out to 6% per annum but goes up to 10% if you take the tax benefit into account.*

You don't want the money every year

The Deep Discount Bond should be your choice.

Invest Rs 5,000 for five years and you get nothing during this period.

At the end of this tenure, you will get Rs 6,700 per bond.

The return works out the same as above: at 6% per annum. Take the tax benefit into account and it works out to 9.6%*.

* ICICI Bank has calculated the post-tax return taking into account the tax rebate of 15%, no surcharge, and education cess of 2% of tax payable.

Just looking for a place to park your money?

If you want the interest paid to you every year, opt for either the five-year, seven-year or 10-year bond.

Each costs Rs 5,000, and you have to buy at least three (Rs 15,000). The longer the tenure, the better the return (6.75%, 7% and 7.25% per annum respectively).

If you are not interested in the annual payments, opt for the deep discount bond, where you get the entire lumpsum on maturity.

For some reason, ICICI Bank prefers to call this the Children's Growth Bond.

The rules are the same except that, here, you have to invest in at least two bonds of Rs 5,000 each (Rs 10,000 minimum investment).

Block it for seven or 10 years.

At the end, you will get Rs 8,000 (for seven years) and Rs 10,000 (for 10 years) per bond. The return works out to around 7% per annum.

The final word 

• If you are thinking of a 10-year option, consider it carefully. It is a long time frame. It would be wise to consider locking your money for seven years instead. Interest rates may go up during this time frame and you would have locked in your money for a lesser amount.
  
• If you are keen on fixed-return investments, the National Savings Certificate locks in your money for six years only (this is definitely better having it locked in for seven or 10 years). Besides, it offers 8% interest per annum and you get a tax rebate as well.
  
• Some companies like HDFC also offer fixed deposits; the interest rate will be around the same (5.75% to 6.25%), but you can keep your money with them for smaller durations. For instance, from three years on, you get a rate of 6.25%. There is, of course, no tax rebate. 

If you really are keen on blocking your surplus money for seven to ten years or you need a regular income coming in from your investment, consider these deposits.

If you are convinced you want to invest in ICICI bonds, the issue is open till February 9, giving you a week.

For more details, please visit ICICI Bank's web site.