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How to save tax and make money
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September 06, 2007

Is there a way by which you can save tax as well as make money? How do you go about doing it? Where should you invest your money to obtain tax advantage as well as decent returns?

Is there a way by which you can bring down your tax liability to zero? How can investments in ULIPs and ELSS mutual funds help you in tax saving?

Do investments in infrastructure bonds help you to save tax? Are the returns tax-free?

In a chat with readers on September 5, Get Ahead tax expert Mahesh Padmanabhan discussed these and other tax-saving and investment issues affecting the taxpayers.

For those of you who missed the chat, here is the transcript. 

Swaraj asked, i joined a company on 23rd august and my salary is in hand so subject me any idea to save tax and make investment, i can hold investment for around 6 months......please help me out.thanks you.

Mahesh Padmanabhan answers, Hi Swaraj, it's good that you have started thinking about saving immediately on starting your career. However, you would need to start looking at longer horizons in terms of tax saving investments and 6 months is not a suitable time frame. The minimum time frame would be 3 years and accordingly you could start with certain ULIP products or tax savings mutual funds.

Nishant asked, Hello Sir, My Salary is Rs 3.2 Lacs per annum, please tell the best option for saving Tax. I don't want to Block my money for more than 3 years, and that's why i don't want to invest in PPF. Thank You Sir.

Mahesh Padmanabhan answers, Hi Nishant, In case you are not looking at a horizon of in excess of 3 years then probably one of the best options to save tax would be to invest in Equity Linked Savings Scheme (ELSS) MFs.

AMit asked, Hi, My salary is Rs 5 lakhs and i wanted to invest in short term period say some 2 or 3 year as I am going for higher study after that. So I wanted to know which is the best option and it also helps me in saving tax and I get my money back after 2 or 3 year with interest free. Help me out. thx.

Mahesh Padmanabhan answers, Hi Amit, in case you are looking at preserving your capital without any risk attached then my suggestion would be to invest in risk free term deposits with banks. However, in case the objective is to save taxes along with capital accumulation then you would need to look at the 5 year term deposits with banks. In case you are an individual willing to take some risk then the minimum period of investment could be 3 years in ELSS MF where you could end up with lower capital in case of a downtrend in the stock market.

123 asked, my company is cutting TDS at 10%. Can i get it back?

Mahesh Padmanabhan answers, It is not very clear as to whether your compensation is in terms of salary or professional fees. In case the TDS is based on salary then your employer would have worked this out based on the tax estimation or in case of TDS on professional fees then this is the stipulated rate of deduction and they would issue you with a certificate of tax deduction in Form 16A. You would need to prepare the profit & loss a/c and see if you could get a refund on the same.

lavanya asked, Hi I intend to purchase a house very shortly and am trying to build a corpus for it. Recently an amount of Rs 2 lakhs that I had invested in a FD has matured and i am wondering where to put it. I am looking at a time period of 6-8 mths to ensure easy liquidity. In this time frame, I would be grateful if you could suggest any good investment option where there is liquidity and capital appreciation. Somebody suggeted FMP but lately the returns there too have reduced and anyways, I have been told that there are presently no good FMPs. Pl advice.

Mahesh Padmanabhan answers, Hi Lavanya, you could possibly invest the same in any term deposits with banks which could possibly fetch you somewhere similar kind of returns (if not better) than FMPs. Senior citizens get a higher rate of interest too.

Ramya asked, Hi Sir, I'm salaried women having Rs 3.6L P A income, please suggest me how much I need to save /invest such that my tax payable is 0 and the most useful way to save this money? Thanks very much!

Mahesh Padmanabhan answers, Hi Ramya, as a detailed breakup of your salary would be needed to understand as-such tax on your salary, we could just highlight the broad amount of tax savings needed to take you to zero tax status. You could invest in section 80C investments upto Rs 1 Lakh and purchase a house with interest payout of Rs 1.25 Lakh would take your tax liability to Nil. asked, what is infrastructure investments? how it helps in tax saving?

Mahesh Padmanabhan answers, Infrastructure bonds are generally issued with fixed interest payouts with timeframes of between 3 and 5 years. These are invested in infrastructure projects. The returns in terms of interest that is taxable in the hands of the investor. Tax is deducted at source and only the net amount is paid. This investment is part of section 80C deduction with the ceiling of Rs. 1 Lakh.

animesh asked, I have just joined a job in Bangalore. My parents live in Indore and I want to build a house for them. Can I take a home-loan and have tax benefits on this?

Mahesh Padmanabhan answers, Hi Animesh, yes you can take benefit of the home loan interest payment and the principal payment. However, the house & home loan should be in your name.

chd asked, what would be tax deduction for salary beyond Rs 10 lacs per annum?

Mahesh Padmanabhan answers, That would depend on the investments you have made and tax efficient structure you have.

esa asked, Hi, I am a consultant getting a lump sum amount per month based on the hours I put in. Can you please give some pointers to how I can save on taxes? Thank you!

Mahesh Padmanabhan answers, As you get professional fees you would have the flexibility of setting off you employment related expenses against the income. You would need to maintain relevant expense bills (such as petrol exps, telephone bills, electricity bills, depreciation on your vehicle). Only the net amount would be taxable and you would need to make tax investments based on such net taxable amount. A detailed consultation with a professional to understand the detailed working would surely help.

oremkay asked, I am working in academic institution and my salary is around Rs 32,000. I came to know that to save 20% i have to invest 100%. is there any tax saving schemes which will give full benefits?

Mahesh Padmanabhan answers, Hi, your understanding is not correct. 20% savings is on the tax amount and not the income. i.e. in case you make an investment of Rs. 100 under section 80C then you get a deduction of the same amount from your income. Suppose your income is Rs. 150 then only the net amount of Rs. 50 is taxable which might be at the applicable tax rate (also zero rate).

shiv asked, hi mahesh, which do you prefer between Share market investment & Mutual Fund interms of returns?

Mahesh Padmanabhan answers, The preference would be based on the individual's risk perception and time at his/her disposal. Mutual funds are generally actively managed by some fund managers and accordingly would come with lot of detailed information on companies, economic trends etc.

However, in case the individual is competent on this aspects and wishes to determine his/her own portfolio then investing in individual shares of certain companies. However, this would take up lot of time and may be a full time activity. The ideal method would be to have major investment in MFs and have reasonable amount of self managed investments, good/stable companies shares that might be for a long term horizon.

raghav asked, Hi mahesh, my father is having a home loan, how can i transfer it to my name to get Tax benefits...?

Mahesh Padmanabhan answers, Hi Raghav, this is not a simple task as mere transfer of home loan does not mean that you would be entitled to home loan deductions but would also require you to own the house. Also, home loan sanctions would in any case not be done to you unless you satisfy the requisite conditions/parameters of the funding institution.

srimaheshm asked, Hello Mahesh! I am planning to buy a house outskirts to the city, but i want to reside in near vicinity of the office. In that case, do i get tax exemption on the interest paid on house loan and on my HR allowance?

Mahesh Padmanabhan answers, If you mean to state the availability of both home loan deduction as well as HRA deduction then the condition to be satisfied would be to reside in a rented premise & pay rent on such premise. It would be a good situation in case you do not have your residence near your office as this would go a long way to prove that the deduction is not a sham transaction just for the purpose of availing double deduction.

Tomorrow: Part II

Mahesh Padmanabhan is principal advisor -- direct taxes group, RelaxWithTax Consultants Pvt Ltd, a Mumbai-based personal taxation and finance solutions provider.

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