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Extracting more from the pay packet

Subhomoy Bhattacharjee | September 23, 2003

When it comes to saving avenues for salaried people, almost everybody has a favourite method.

But in almost all cases the basket of choices is pretty limited.

Whether it is the ubiquitous Section 88 (under Income Tax Act, 1961) group of investments like public provident fund, Life Insurance Corporation's (LIC) endowment plans, specified mutual funds, post office saving accounts, or Unit Trust of India's Unit Linked Insurance Plan (ULIP) combined with contributions to the provident fund, the question that people are usually concerned with is how much of the savings should be allocated to these avenues rather than looking at fresh sources.

But a significant change that has occurred over the past few years is the increasing reluctance of the finance ministry and the Reserve Bank of India to continue with the tax concessions for many of these instruments.

Since the concessions were the chief attraction for investment in these funds, it is time to take a good hard look at one's portfolio if the savings are entirely built with these papers.

As any investment is a long-term commitment, if the tax treatment is going to turn adverse down the years, then one should question the worthiness of the same, especially as the interest rates on these securities are also going down.

For the time being, the Centre, bowing to political compulsions, has decided to keep the tax concessions going, even though the benefit percentage has been reduced to 15 per cent for those with income of above Rs 1.5 lakh (Rs 150,000) per annum with effect from 2002-03.

But no matter which government assumes power in 2005, it is certain that the benefit will disappear soon. Then it will be worthwhile posing the question if these investments have been true value for money.

Of course, the tax concession for interest payment on housing loans may continue as despite the Kelkar report, the government seems to have accepted that this is necessary to ensure that investment in housing continues to be a robust option.

But even if one keeps to the benefits available here, it is probably better to broaden one's portfolio to focus on the new emerging tax niches.

One of the options introduced in this Budget is the deduction of Rs 12,000 for education expense of children, up to a maximum of two children, again under the same section.

The scope of this provision is interesting as it is an expenditure which is being treated as a savings avenue. In the ensuing years more such socially desirable expenditure may make the cut.

If that happens then instead of savings towards the future, individuals may actually be encouraged to spend to earn a tax cut.

The other interesting tax haven for salaried employees is Section 80CCC.

The benefit is meant for contribution to pension funds run by different life insurance companies. This is an emerging area, since the government is committed to developing the pension market.

This means that in the next few years, the overall cap of Rs 10,000 as premium is likely to go up and simultaneously the finance ministry has made it clear that it will introduce a new section to reward contribution to the pension plans which will be launched by new pension fund players.

This makes enormous sense for those with a time span of anywhere above 10 years of salaried life.

Saving for a pension is essential as few companies give a well-rounded pension plan. And a tax shield is a welcome incentive that should become available from the next fiscal.

It might be a prudent idea for employees to start planning for such deductions even by drawing down on other saving schemes like provident funds.

This is because since one benefits more, the longer is the time span of investment in a pension plan, it makes sense to invest more now at higher returns than towards the fag end of one's career.

For those who are already about 55 years of age, there is of course little to match the attraction of the Varishtha Pension Bima Yojana.

This peculiarly named scheme has almost everything one wants including a nine per cent tax-free return. The only catch is the upper limit of the investment, which is Rs 2,66,000 per person.

But if the returns from the scheme are merged with that from traditional sources, where the government has hiked the income tax exemption limit for senior citizens, the scene has actually improved fairly substantially for them.

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