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Home > Business > Budget 2003-2004 > Special

Ease your tax burden

Vikram Srivastava | March 03, 2003

This year's Budget has been quite kind to taxpayers. The finance minister has removed the surcharge for many in the low- and middle-income brackets.

This is besides opening up several new areas for taxpayers to reduce their tax liabilities.

The bad news, however, is that the rate of interest on tax saving instruments -- namely the public provident fund and other small savings instruments has been brought down, making many of them less attractive.

So what can you do to minimise the incidence of tax this time around, while maximising your post-tax returns?

Despite the efforts to increase tax collection, there is still scope for people to reduce their tax incidence to nil. Take a look at the adjoining table (Tax incidence).

If the full use of tax rebates is taken into account, the tax incidence for people earning Rs 1,95,000 can be reduced to zero.

Of course, the benefit of a rebate available for children's education would have helped their cause. This clause would especially benefit people in the lower tax brackets who may not be able to save much.

Look at government papers favourably: From the coming fiscal there will be no tax on interest income up to Rs 12,000, and on an additional Rs 3,000 if it comes from government securities.

This is despite the fact that dividend income has been made tax-free in the hands of investors and the tax incidence on people has been reduced.

With retail trade now allowed in government securities, people can also look at them as a means of earning tax-efficient returns.

Take a look at the yields on government paper. As on February 28, 2003, the yield in the secondary market on 10-year paper was 6.25 per cent.

This means that on a pre-tax basis the yield for people in the highest tax bracket works out to 8.93 per cent, and for people in a 20 per cent tax bracket works out to 7.81 per cent.

In contrast, fixed deposits offered by HDFC and Hudco currently offer you only 6.05 per cent and 7.50 per cent. So, if you have exhausted the Rs 12,000 interest limit, you can look at investing in government bonds favourably.

Invest in PPF: People with taxable income above Rs 5 lakh are not eligible for rebate under Section 88.

But it makes sense even for them to invest the maximum eligible amount in PPF given that the interest on PPF is tax-free.

Granted that interest rates on these schemes have been falling, but it still offers a good pre-tax return of 11.43 per cent for those in the top-income bracket.

Under PPF you are eligible to invest up to Rs 70,000 per account.

After PPF, the avenue that an investor can look to earn tax free returns are RBI Relief Bonds and Governments Relief Bonds. These bonds come with a maturity period of five and six years respectively.

The exemption of long-term capital gains on listed equity has provided another option for high-net-worth individuals and people with a healthy risk appetite.

So you can  go ahead and buy stocks this year and the capital gains arising out of the acquisition any time after a year will be exempt from tax.

Besides this, the Budget has restored the status quo on dividend tax that existed prior to last year's Budget. As of now it is not clear if capital gains tax is exempt on equity-based mutual funds.

Henceforth dividend income shall be tax-free in the hands of individuals though it shall be taxed at 12.5 per cent in the hands of companies or mutual funds.

Here again, investors in the top tax bracket will stand to gain since they will pay less tax net-net.

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Number of User Comments: 6




Sub: expenditure on child's education

It is said in the budget that the expenditure on child's education subject to the limit of 12000 perchild attracts tax rebate under sec88. Please ...


Posted by R.Mohanty





Sub: PPF limit

This article states that up to 70000 can be invested in PPF. When was the limit raised from 60 to 70 thousand


Posted by Suresh Ganapathy





Sub: tax incidence at higher slabs

in public sector, generally salary are high and everything falls under tax slabs, our contribution to PF,LIC at initial years of joining exhausts 60000 now ...


Posted by nitinbhai





Sub: PPF Limit

If I am not mistaken the raise in the limit to 70K was effective 2002 April 01


Posted by Kiran N. Mehta





Sub: comments on ease your tax burden

Where is the 'adjoining table' (tax incidence)?


Posted by Sam.S.Raj




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