It's quite possible to pay only very little, even zero, tax by selecting a careful mix of fixed income investments.

Earlier the Income Tax Act contained Section 80L under which interest income from specified investments was eligible for deduction up to an amount of Rs 12,000 general deduction, and Rs 3,000 additional benefit in respect of interest from government securities.

With the deletion of this section, interest on bank deposits is not lucrative any more since it's now fully taxable with no tax relief whatsoever.

8.5% tax-free SLR power bonds, interest from savings certificates issued by the central government, interest on securities or deposits of the central government, provident fund, post office savings bank account, et cetera now remain the few tax-free fixed income earning investments.

Let us now consider how you can end up achieving a zero income tax status by a judicious mix of those incumbent avenues. You may like to refine and improve upon this to suit your specific needs, in consultation with your tax consultant.

The Broad Plan

1. You will only invest in fixed income securities, like:

• 8.5% tax-free SLR power bonds
• Public Provident Fund (8% p.a.)
• 7% capital investment bonds.
• Post office savings bank account

2. A portion of the income will also be reinvested to save on taxes.

3. The following incomes are exempt from income tax:

We'll take full advantage of all these benefits in planning our fixed income investment portfolio.

Let's consider two cases: an investment portfolio of Rs 17 lakh (Rs 1.7 million), and another one of Rs 20 lakh (Rs 2 million).

Example 1: Investment Portfolio Rs 17 lakh

Of the total income of Rs 127,000 the interest of Rs 7,000 from post office savings bank account are exempt under Section 10 (15). Hence, the balance taxable income is Rs 1,20,000, the tax on which works out to Rs 1,030 (including surcharge).

Thus,

In case you do not immediately need the interest income, you can achieve a zero tax status by investing Rs 20,000 in Public Provident Fund (PPF). You will then be eligible for deduction under 80C on deposits made in PPF, and there will be a no tax liability whatsoever since interest from PPF (Rs 1,600) is tax-free under Section 10.

Thus,

Example 2: Investment Portfolio Rs 20 lakh

Out of the total income of Rs 152,000 you can exclude the income from post office savings bank deposits of Rs 7,000 and from 8.5% Tax-Free SLR Power Bonds (under Section 10). Thus, on the balance of Rs 128,000, the tax works out to 1,854.

You can reduce that to Nil by investing Rs 18,000 in PPF to claim deduction under Section 80C since the interest on PPF is tax-free under Section 10. Thus the post tax return works out to 7.5 % this year.

Excerpt from:

Personal Investment & Tax Planning Yearbook: FY 2007-08

By N J Yasaswy

Publisher: Vision Books

Price: Rs 235

N J Yasaswy is a Founder-Governor of the Institute of Chartered Financial Analysts of India (ICFAI) and ICFAI Business School and has written several books on finance and investments.

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