Tax Issues Regarding Maturity of Insurance and proposed DTC Rules for insurance policies.

There are two pronged benefits on insurance policies. Firstly by way of a deduction under Section 80 C upto Rs. One lac in respect of premium paid on life insurance policy, secondly, on the money received from insurance company with accumulated bonus which is tax free under Section 10 (10D).

There are certain fine points you need to take note of while claiming tax benefits.

You are entitled for tax benefits for premium paid only if the insurance policy covers your life, your spouse’s and child’s life. As a parent you can claim the income tax benefit on the premium paid on the life of your child even though the child is not dependent on you. But if you pay insurance premium on the life of your dependent parent, then you cannot claim the benefit of Section 80 C.The Benefits of 80C is subject to 1 Lacs if Premium amount not exceeds 20% of Sum Assured. Now From Financial year 2012-13 this limit is brought down to 10% of Sum Assured.

Now let us look at the tax aspects of the monies received. Any money received in respect of Life Insurance policy together with the accumulated bonus is exempt fully from income tax under Section 10(10D) presently.

However, money received on your insurance policy together with accumulated bonus in respect of life insurance policy issued after 1^st April, 2003, will be fully taxable if the amount of premium payable on the policy is more than 20% of sum assured for any of the years during the term of the policy as explained above.

But any money received on death of the person insured will be tax free though the premium for any of the year might have been more than 20% of the sum assured of the insurance policy.

But you are entitled for all these benefits only if your policy is not terminated before premium in respect of two years has been paid. Moreover as a policy holder you should not allow the policy to lapse by reason of failure to pay the insurance premium before premiums in respect of two years has been paid. Whereas for ULIPs, the policy should remain in force for at least five years and should not either be terminated or allowed to be lapsed for failure to pay premium.

It is important to know that either in case of Life Insurance policies or ULIPs, if the policy is terminated or allowed to be lapsed, then aggregate of all the deductions allowed in earlier years, will be added to the income of the year in which such policy is terminated or allowed to get lapsed for non-payment.

This way you see that by properly studying your policy will not only benefit your heirs but also benefit you big time while claiming tax benefits. But the essence of this is that you ensure proper and timely payment of your premiums to reap the real fruits of your harvest.

Conclusion: In my opinion Income Tax of India going wrong way. America is changing its tax policy to charge more tax to the rich persons and less tax to poor peoples, but our country is going opposite manner. Taxation of our country is helping rich peoples to getting more richer and poor peoples for getting poorer. Insurance is the only most way for middle class peoples for getting exemption in tax but Income Tax is disappointing peoples by the way of DTC.

Tax Benefits on Education Loan...:))

Higher education is no more the prerogative of the rich and the privileged. To acquire it, all you need is hard work and strong will, and as far as the money part is concerned, there is always an educational loan. After all, educational loans are meant to ensure that there are no limitations on getting the best education. They make several courses affordable for a large number of people. Like other loans,educational loans too carry tax benefits, but they have certain conditions attached to them.

Education Loan:Apply for Education Loan

Is tax benefit available on all educational loans?

Not all educational loans come with the tax benefit; only those loans taken for higher education are eligible for a tax benefit (Section 80E). Higher education means full-time studies for any graduate or postgraduate course in engineering, medicine, management or for a postgraduate course in applied sciences or pure sciences, including mathematics and statistics. While the benefit would be available for all institutes for higher education, there is a restriction on the fact that this benefit is available only for an individual and that the loan should be taken from a financial institution or any approved charitable institution

Highlights

• Education loans for higher education can only get the tax benefit
• The benefit is extended to loans taken for the spouse and children as well
• Only interest amount is allowed as deduction
• The benefit on interest payment can be availed for 8 continuous years

Remember, this benefit is related to the loan and is different from the tuition fee benefit available as a deduction under the Rs 1 lakh limit (Section 80C).

Who can avail the tax benefit?

Earlier, the tax benefit was restricted to the person who had taken the loan for his/her own studies. This meant that a child had to take the loan in his/her own name and then he/she could have the tax benefit.

But now the benefit is extended to persons who take a loan for their relatives' education. Relatives include the spouse and children only. It defines the scope of the coverage clearly. No other person apart from the spouse and children are covered, so loan for brothers or sisters would not get the tax benefit.

What is the benefit?

There are two aspects to an educational loan. One, a regular repayment will have to be done on the loan and two, the tax benefit will be available only on the interest part of the loan.

The repayment will comprise an interest component and the principal repayment component. The benefit can be availed on the interest part that is being repaid to the loan provider. So at the end of the year, the borrower will have to separate the principal from the interest component to get the benefit.

Is there any time limit?

There is a time limit for which the benefit will be available on an educational loan, and it helps determine the total quantum of the benefit. The benefit on interest component is available for 8 continuous years. These 8 years are counted from the year in which the borrower starts repaying interest on the loan.

• If a loan is repaid before this time period then the benefit will be over along with it.
• Time limit puts pressure on the borrower, ensuring that the loan is paid back by this time.
• There is no overall limit for the amount of interest allowed as a deduction. This ensures that the entire loan amount is serviced for the purpose of the benefit.
• An education loan is structured in such a manner that the repayment will start only when the student starts earning after the course is over.
• There is also a time period during which the course is being completed when only the interest working adds to the amount outstanding but there is no repayment taking place during that time. This is different from other loans where the repayment starts immediately.

How to Drive your Money in ELSS for Tax Saving.....!!

The end of the financial year approaches and investors begin a mad scramble for tying up their tax saving investments. Some even wait till the last week before hurriedly investing in something recommended by a colleague or promoted heavily in the media. Tax saving is what is done to save one's tax liability for the current year whereas investing is what is done to build wealth over the long-term.

However such an approach needs an urgent rethink. Your tax saving investments are actually no different than regular investments. The Rs. 1 lakh deduction under Section 80C is available in respect of investments made in bank fixed deposits, post office deposits, senior citizens' saving schemes, PPF, insurance and mutual funds (ELSS), etc. The tax saving is just the icing on the cake. In other words, while tax deduction is an important thing to look at, it is more essential to consider what one would achieve out of that investment. The purpose of the investment is more important than the investment itself.

What is ELSS?

Equity Linked Saving Scheme (ELSS) is an equity mutual fund and has a lock-in period of 3 years. It has a minimum of 80% exposure in equity and upto 20% in debt, money market instruments, cash or even more equity.

Why ELSS?

Keeping in mind the optimal returns criteria, ELSS offers a good bet (although at a higher risk) since it is linked to equity. However, one has the option of investing via the Systematic Investment Plan (SIP), which will not only be easier on the pocket, but will also provide the benefit of rupee cost averaging. These funds have the shortest lock-in among all the tax-saving vehicles (3 years). The NSC or National Saving Certificate has a lock-in of 6 years, PF or Provident Fund (15 years) and KVP or Kisan Vikas Patra (over 7 years). Recently, 5-year bank fixed deposits have also been recognized by the government as one of the tax saving options.

The ELSS Advantage

How does an ELSS give you the two-in-one advantage of saving tax and building wealth? The graph below is an eye opener.

If three separate investments of Rs. 1,000 each were made in March 2000 into NSCs, PPFs and in an ELSS how would they fare?
The Rs. 1,000 invested in an ELSS would have been worth approximately Rs. 4,700 as on 31st March 2010. In sharp contrast, none of the fixed rate savings would have been worth worth more than Rs. 2,300. If you are willing to ride the ups and downs of the market, you find that an ELSS could be an ideal way to save tax and create wealth for your future.

Investment of Rs 1,000 in different Tax Savers: 2000-2010*

Take for example ELSS (Equity Linked Saving Schemes). With these having been all the rage till last year, this time around, investors have been avoiding ELSS and choosing guaranteed return products even for tax saving investments. However, here's another perspective. Everyone agrees that equity presents the best option for building wealth over the long-term. The problem however is that no one wants to undertake the risk of capital loss over the short-term for the sake of appreciation over the long-term. But let's take a step back and think about it. Say you are in the 31% tax bracket (30% + 3% education cess). Now what this means is that the moment you invest Rs. 1 lakh in an ELSS fund, you automatically get a return of 31%! Putting it differently, you will not have to pay tax of Rs. 31,000 due to your investment of Rs. 1 lakh. In other words, you have earned Rs. 31,000 the moment you invest Rs. 1 lakh.

So the capital loss, if any, will only take place if the market (and your investment along with) were to fall by over 31% hereon. As I write this, the Sensex is at 8902. A 31% fall from here would mean a Sensex level of 5542. Therefore, if and only if, the Sensex were to fall to a level below 5542 will you actually incur a capital loss. On the other hand, over the next three years, the possibility of the market recovering - if not to the erstwhile level of 21,000 but at least to a level higher than the present 8902 is more plausible than the other way around. And if this happens, your return would obviously be higher than 31%!

Now, the 31% tax saving translates into an immediate return but any ELSS investment has to be held for at least three years. So, the correct way of looking at this will be to spread the 31% over three years. This would assume that the market remains flat throughout, neither does it fall nor does it rise. In such a case, the rate of return person in the 31% tax bracket would be 13% and that for a person in the 34% tax bracket would be 14.9% p.a. tax-free.

Perhaps your immediate reaction to the above argument would be that this 31% yield due to the tax saving is not limited to an ELSS investment only - one can get the same benefit from any investment that saves taxes like say PPF, Bank FDs, or any of the other instruments enumerated earlier. Quite true. However at this point I will like to take you back to the fact that over the long-term, equity has the potential of delivering the highest return. So, say over a five year period, an ELSS fund should almost certainly give you a much better return than a bank FD or a Post Office deposit.

Conclusion

Overall, ELSS is a good investment vehicle to save tax as well as to grow your investments over the long term. You can reap better returns from appreciation in equity markets over the long term. You can also choose the SIP route to avoid ups and downs of markets. If you really want to reap the rewards of your tax saving investments, think beyond the lock-in period of three years. Over the long-term, returns from equities have always been greater than any other investment. So, what are you waiting for? Drive your money in the ELSS vehicle to save tax as well as create wealth over the long term!

Changes in Tax Planning due to upcoming DTC...here is some TAX Strategies for DTC....:))

Changes are in the air. With a new tax law, Direct Tax Code (DTC), coming in effect from April 2012, investors will have to change their tax strategies. The current DTC draft proposes some elementary changes in current taxation laws. Let’s find out what is changing and how will it impact your choice of tax-saving instruments…

Your saving limit tweaked

Till now, under section 80C, deductions up to Rs 1 lakh are allowed from gross total income. Investments, such as, payment of life insurance premium, tuition fees of children, ELSS (equity-linked savings scheme), ULIPs (unit-linked insurance plans), five-year bank deposits and provident fund contributions fall under this limit. Besides, there are specific deductions allowed for other expenses such as rent paid, donations and payment of premiums for medical insurance.

Government through DTC takes a clear stance of encouraging only long-term investments, i.e., options of investments of Rs 1 lakh has been curtailed to Government Provident Fund (GPF), PPF, Recognized Provided Fund (RPF), Employee Provident Fund (EPF), gratuity and pension scheme overseen by PFRDA. The aforesaid investments fall under EEE (Exempt-Exempt-Exempt — that is, no tax at the time of investing, on the accumulation / returns or on final proceeds on maturity). This means, the existing tax-saving instruments including ELSS, NSC, Fixed Deposits, senior citizen savings schemes, post-office deposits, etc., goes out of tax ambit and will attract tax from April 2012.  All these instruments have short lock-in period and hence have thrown out of the window.

DTC law: Things to note

Your strategy: Re-align tax saving with your long-term goals. The best natural fit of tax-saving option will be retirement since all eligible options are retirement products. Investors should continue investing in these tax-free havens to the extent of Rs 1 lakh annually. You can do this by continue investing Rs 70,000 (maximum cap) in PPF. However, all the above mentioned instruments are debt-focused and one should take an overall asset allocation into account, before investing in debt. For instance, suppose you have Rs 4 lakh to invest in a year and want to put 25 per cent of the amount in debt – it is advisable to invest Rs 70,000 in PPF and the remaining amount in other approved funds.

Proposed changes in investments under section 80C of Income Tax Act:

Existing 80C Deductions (Limit Rs 1 Lakh)	Proposed Under DTC	Your Strategy
-  Equity linked mutual funds (ELSS) -  National Savings Certificate (NSC) -  Five-year bank fixed deposits -  Senior Citizens' Savings Scheme (SCSS) -  Post-office time-deposits -  Principal component of home loan repayment	Tax benefit has been withdrawn, w.e.f., April 1, 2012. Investments in these instruments will now be taxable	Make one-time investment in these instruments during FY 2011-12. Park only the ideal funds after fully utilizing Rs 1 lakh limit
-  Employee Provident Fund -  PPF -  Pension Contribution (including NPS)	Contribution subject to deductions, with a maximum ceiling of Rs 1 lakh. All are available under ‘EEE’ treatment.	Build retirement corpus. Maximize your limit to avoid taxes
-  Life Insurance (including ULIPs) -   Tuition Fees of 2 Children’s -   Health Insurance Premium	An additional deduction of Rs 50,000 is available.	Take a term plan, thereby providing more room for health insurance deduction

If you have surplus cash left to be invested in debt instruments, you can invest in NSCs, FDs, post offices deposits, etc., to meet your short-term goals. On equity side, sadly, there is no eligible instrument left for tax deduction. In the above mentioned example, Rs 3 lakh has to go as per your equity allocation, ignoring the tax aspect of investing. After all, your overall financial planning is worth more than saving taxes for a year.

This is to be noted that tax benefits in NSE, ELSS, etc., are only withdrawn from next year. Investors can still make one-time investments before March 31, 2011 and avail deductions under section 80C this year.

Separate deductions for insurance premium

Besides this, premiums paid for life insurance products (including ULIPs) will now be deductible up to Rs 50,000. Besides this, annual limit would also include the amount paid for tuition fees of children as well as medical insurance. Here, DTC enforces us to look at insurance, not as a financial product, but as an instrument for financial security of the family precisely due to following reasons:

• Combined cap of Rs 50,000 means that the amount claimed as deduction for life insurance premium needs to be lowered to make room for medical insurance and/ or tuition fees.
• A condition that premium paid is deductible, only if, it does not exceed 5 per cent of the capital sum assured (currently it’s capped at 20 per cent), also encourage low premium. To fulfill the condition one has to take insurance for longer duration, i.e., 20-25 years, so that you can claim deductions on your insurance premium

If this condition is not met, not only will you not get any tax deductions on the premium paid but even the income from the policy will be taxable.

Your Strategy: The revised DTC bill does not find a mention of deduction for payments towards annuity and deferred annuity products. We need some more clarity on this. Contribution made to some pension funds and ULIPs are also among those products, where tax exemption rules are not clear. So, the best option is ‘Term Plan Insurance’.

Take a term insurance for longer duration, i.e., at least 25-30 year. These plans are cheapest and would qualify for 5 per cent condition under premiums of insurance. Also, lower premium would leave ample scope to avail deductions on your medical insurance and tuition fee paid. On the contrary, a costly ULIP or a money-back policy insurance policy with a very large premium may eat up the total deduction of Rs 50,000. Plus you might have to pay taxes on maturity as well.

Real Estate: A mixed bag

From April 2012, the principal repayment of your home loan will not be eligible for tax deduction under DTC; however, the interest component will still qualify for tax exemptions. This comes as a huge blow to people paying large home loan EMIs and may now have to look for other tax-savings instruments. However, the loss is somewhat off-set from the gain, which one can derive from the removal of tax on notional rent on second house property. Till now, people who own more than one house are required to pay tax on notional rental income, even if, the second house is lying vacant.

Your strategy: Investment in a second home is now more tax-efficient. If you have sufficient funds, you can invest in a second house property and take advantage of higher interest component in initial years. However, if you are renting out your second house, benefit by taking major chunk (usually 5-6 months) of rent in advance. Under DTC, advance rent received from a tenant will be taxed in the year to which it relates, not when it was received. Advance tax received can be invested in short-term debt funds, partially offsetting the loss from taxability of principal repayment sum.

Mutual funds, stocks, real estate capital gains: Long-term investment brought under tax ambit

At present capital gain is not treated as ordinary income and has different tax rates depending upon the type of investment. For example, long-term capital gains from equity funds are exempted, whereas the same from debt fund is taxed at 10 per cent without indexation (on market rates) or 20 per cent with indexation (on market rates), which is lower. However, current DTC draft doesn’t differentiate between short-term and long-term capital gains and proposes to tax any capital gains after March 31 2012 in the year of withdrawal. Existing laws relating to capital gain tax and proposed under DTC are compared below:

Capital Gain Tax: Existing Vs proposed under DTC

	Equity		Debt
	Present	Proposed Under DTC	Present	Proposed Under DTC
Short-term capital gain	15%	As per Tax-Slabs	As per Tax-Slabs	As per Tax-Slabs
Long-term capital gain	Exempt	As per Tax-Slabs	10%*	As per Tax-Slabs

*without indexation, with indexation it is 20%

Currently, capital gain will be treated as ordinary income and will be taxed as per the applicable income tax rates (tax slabs) after providing for deduction, the quantum of which is yet to be announced.  The deduction will be tax-free. Also, the definition of ‘long term’ has been revised to at least one-year after the financial year, in which the investment took place. So, if any investment is made on October 1, 2010, to qualify as long-term it has to be held at least till March 31, 2012.

Your strategy: Here, you must try to liquidate your long-term holdings before March 31, 2012 to get tax exemptions on it. For fresh investments after DTC implementation, where on one hand, short-term investors will get benefits in lower income bracket; on the other hand, long-term investors will be taxed for what was tax-free earlier. But here, you must not re-align your investments with short-term perspective as you must invest as per your asset allocation.

Getting Maximum Income Tax Benefits On Joint Home Loan EMI’s Get Rebate On Income Tax

One of the positive aspects of a housing loan is it offers several tax benefits to the person taking a loan. These benefits cover the interest as well as capital component of the loan repaid through equal monthly instalments (EMIs) over the tenure. But many a time it is not possible for a single individual to afford and service the loan, which results in two or more individuals jointly taking the loan. In such case how tax benefits will be accorded to the co-borrowers, let's find out.

Home Loans : Apply for Home Loan in India

Joint structure

The term 'joint benefit' in a housing loan refers to a situation where more than one person takes and repays a home loan. Here, the co-applicants are family members, which include husband and wife or father and son or father and daughter or mother and son or mother and daughter as the case may be. In such a situation, tax benefits have to be divided between all co-applicants and hence known as joint benefits. But joint benefits cannot be claimed before fulfilling certain conditions. So, what are these conditions? Let's see one by one.

Highlights

• Tax benefits get divided among co-applicants in case of a joint loan
• The division takes place in the same proportion in which the asset is owned by each co-applicant
• Each co-applicant can claim a maximum tax rebate of up to Rs. 1 lakh for principal repayment and Rs. 1.5 lakh for interest payment

• The very first condition is the house property has to be bought by the individuals jointly, and this should be in their joint names.
• The share of each holder should be clearly mentioned so that there is absolute clarity on the percentage ownership of each co-owner.

For example, a husband and wife jointly buying a property might want ownership in the proportion of 70:30 or 50:50, depending upon their financial condition.

This share is important because the repayment of the loan (EMIs) as well as other payments on the property have to be made in this specific proportion.

• The next step comes in respect to the housing loan. Banks consider joint loan application only when co-owners are the co-applicants. This means co-owners need to jointly take the loan to contribute to their share of the property. Even the repayment through EMIs has to be done jointly in the same proportion in which the asset is owned.

Tax benefits

Overall there are two types of tax benefits that are available on the repayment of a housing loan.

1. Interest paid on the loan is eligible for a deduction up to Rs. 1.5 lakh per annum from the taxable income of the individual under Sec 24 when the property is self-occupied or it is one ownership property lying vacant.
2. The return of the capital of the loan along with the interest up to Rs. 1 lakh is included in the benefit under Sec 80C.

The planning in the entire issue has to be done in such a manner that all the joint holders are able to take the tax benefit and no part of the total repayment goes waste.

What is the advantage for joint home loan takers?

Joint holders can claim the maximum tax benefits individually. This means each holder can get a tax rebate of Rs. 1 lakh for principal repayment under Sec 80C and Rs. 1.5 lakh for interest payment under Sec 24.

Tax calculation

In order to divide tax benefits among the joint holders, there will have to be individual tax calculations for each of them.

Consider this example:

For two co-owners, the annual interest paid on the loan is Rs. 2.6 lakh and the capital repaid is Rs. 65,000.

Both have an equal share, which means they have a 50:50 ownership in the property.
Thus the benefits will also be divided equally between the two, with each of them claiming Rs. 1.3 lakh as a deduction of interest and Rs. 32,500 as capital repayment benefits.

Joint account

The repayment of a joint loan has to be made from a joint account owned by the co-applicants. Each of them needs to contribute his/her share to the account. But there are times when this is not possible and in case the payment is being made from just one person's account then there has to be a method whereby the other individual is contributing his/her share. This will ensure that the benefits are also available in an adequate manner and that there are conditions that are being fulfilled in the process.

Considering New Direct Tax Code

New borrowers need to keep an eye out for developments in the housing loan sector. While planning any housing loan benefit, they have to keep in mind the conditions mentioned in the New Direct Tax Code. This code, coming into effect from April 2011, eliminates the benefit of a housing loan. This means that if the code is passed in its present format, both the benefits on interest payment as well as capital repayment will not be available to co-applicants.