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F

idelity'sg

uidetoEL

SS

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W

hatyouneed

toknow

abouttaxsavi

ngs

Asrespon

siblecitizens,ourdutyist

omeetourtaxobligation

severyyear.So,there'sn

oescapefrom

tax.However,

thegovernmenthasmadecertainsavings'tax-deductible'andweoweittoourselvestobenefitfrom

theseoptio

ns,

whichcou

ldtranslateintosavingsfo

rthefuture.

Thisguide

willtellyouwhatthenew

taxrulesareandhow

yo

ucanbenefitfrom

them.

3

Gettoknowyourtaxbracket

Howmuchca

nyousave?

Whichtaxsav

erisrightforyou?

TheELSSadv

antage

1.2.

3.

4.

5.

Youdon'tneedtoinvestanentirelakhtocutyourtaxbill

Page

4

Page

5

Page

7

Page

9

Page10

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1.

Gett

oknow

your

taxbracket

Forexam

ple,if

yourtaxableincome

isRs,00,000for

theyear,

y

ouwouldfallwithintheRs

,0,001to

Rs,0,00

0taxbracket.Youwouldh

avetopaythe

fixedsum

forthisslab,whichisRs

plus20%of

theamountthatexceedsRs,0,000

.Inyourcase,this

excessam

ountwouldbeRs

0,000

.So,yourtotal

incometa

xfortheyearwouldbeRs

,000+Rs0,000

=Rs

,00

0.

Youcan'm

ove'intoalowertaxbrac

ketbyinvestingin

ataxsavin

ginstrument.Howdoesthiswork?Readon.

4

30

50

14

,000

30

1,0

14

2

34

4

0

Rs1,60,000

Nil

Rs1,60,001

Rs3,00,000

10%ofinco

meinexcessofRs1,60,0

00

Rs3,00,001

Rs5,00,000

20%ofinco

meinexcessofRs3,00,0

00

Rs5,00,001

30%ofinco

meinexcessofRs5,00,0

00

Lowe

rLimit

UpperL

imit

TaxPayable

Noupper

limit

Everybodywhoearnsanincomefa

llsundera'taxbracket'.Itisim

portanttokeepin

mindthatyour'taxableincome',

orincome

afterdeductions,defines

yourtaxbracketwhichcouldactuallybelowerthantheamountofmoneyyouhave

earnedovertheyear.Thecurrentincometaxlawhasdeterminedfourmaintaxbrackets,whichareasfollows:

Source:Indiabudget.nic.in.Unionbudget,July20

09.Thesearetheslabratesforan

individual(exceptwomenandsenio

rcitizenswhogetsomeconcessions),HUF,

AssociationofPersons,BodyofIndividuals,whethe

rincorporatedornot.Theseratesdo

notincludeapplicableeducationcess.

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Your

annua

l

taxable

income

(Rs)

Your

applicable

taxbefore

investment

(Rs)

Amount

invested

undersection

80C

(Rs)

Your

'new'taxable

income

(Rs)

Your

applicabletax

after

investment

(Rs)

You

r

Savin

gs

(Rs)

2.

How

much

c

an

you

save?

5

Thegovern

menthasmadeahostofindividualsavings'tax-ded

uctible'underoneumbrellacalledSection80Canda

simplenew

rulehasemerged-ifyou

investuptoRs1lakhinataxsavinginstrumentorev

enacombinationofthem

,you

effectivelyreduceyourtaxableincom

ebyuptoRs1lakh.Thism

eansyoucouldsaveuptoRs30,000intaxes.

Thechartb

elowshowshowthishapp

ens:

1,70,00

0

1,000

1,00,000

70,000

0

1,000

2,00,00

0

4,000

1,00,000

1,00,000

0

4,000

2,60,00

0

10,000

1,00,000

1,60,000

0

10,000

3,00,00

0

14,000

1,00,000

2,00,000

4,000

10,000

4,00,00

0

34,000

1,00,000

3,00,000

14,000

20,000

5,00,00

0

54,000

1,00,000

4,00,000

34,000

20,000

7,00,00

0

1,14,000

1,00,000

6,00,000

84,000

30,000

9,00,00

0

1,74,000

1,00,000

8,00,000

1,44,000

30,000

Calculationsb

asedonincomeslabsforFY2009-10.Taxamountsindicateddon

otincludeanyapplicableeducationcess.Itisassumedthatthetotal

taxableincomespecifiedaboveisafterconsideringalldeductions-exceptdeductionsunderSection80CoftheIncomeTaxAct,1961.Theaboveexam

ple

isusedonlyasanillustration.

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Thechart

belowshowstheoptimala

mountyoucouldinvestto

reduceyourtaxes.Asyou

willsee,youdon'thaveto

investanentirelakh!

7

You

r

annualta

xable

incom

e

(Rs)

Your

applicabletax

beforeinvestment

(Rs)

Optimal

amount

toinvest

(Rs)

Your'new'

taxable

income

(Rs)

Your

applicabletax

afterinvestment

(Rs)

You

r

savings

(Rs)

3.Youdon'tneed

toinves

t

anentir

elakhtocuty

ourtax

bill

1,70,000

1,000

10,000

1,60,000

0

1,0

00

2,00,000

4,000

40,000

1,60,000

0

4,0

00

2,60,000

10,000

1,00,000

1,60,000

0

10,0

00

3,00,000

14,000

1,00,000

2,00,000

4,000

10,0

00

4,00,000

34,000

1,00,000

3,00,000

14,000

20,0

00

5,00,000

54,000

1,00,000

4,00,000

34,000

20,0

00

7,00,000

1,14,000

1,00,000

6,00,000

84,000

30,0

00

9,00,000

1,74,000

1,00,000

8,00,000

1,44,000

30,0

00

Calculationsb

asedonincomeslabsforFY2009

-10.Taxamountsindicateddonotincludeanyapplicableeducation

cess.Itisassumedthatthetotalt

axable

incomespecifiedaboveisafterconsideringalld

eductions-exceptdeductionsunderSection80CoftheIncomeTaxAct1961.Theaboveexampleisusedonly

asanillustration.

So,ifyour

taxableincomeisRs1,70,000duringFY2009-10,you

wouldneedtoinvestjustRs10,000inataxsavertor

educe

yourtaxab

leincometoRs1,60,000a

nddropyourtaxtozero.W

henputtingmoneyaside

foryourfuture,itmakesse

nseto

makeuseofallthetaxbenefitsofferedtoyou.

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Provide

ntFund(PF)

PublicP

rovidentFund(PPF)

LifeInsurance

Pension

funds

NationalSavin

gs

Certificates(NSC)

EquityLinkedSavingsSchemes(ELSS)

Tuitionfees

Housingloanre

p

ayments

Section80Coffersawideran

geoftaxsavin

goptions.Yourtaxadvisercantake

youthroughthe

entirelist

butherearesomeofthemostpopularones:8

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4

.Whic

htax

saveris

rightfory

ou?

9

Section80

Coffersyoutheflexibility

tooffsetupto

Rs1lakho

fyourannualincomeagainstlongterm

commitmentsincludinglifeinsurancepremiums,

housinglo

anrepaymentsandeduca

tionfees.

Alternatively,youcanchoosetomak

einvestmentsfor

yourfuture.Or,combineboth!Ifyou

areoptingto

invest,the

keyistochoosetheroute

thatsuitsyour

personalc

ircumstancesandattitude

towardsrisk.

Here'sanoverviewofsomepopular

taxsavers:

earnafixedrateofin

teresteveryyear

(oreverys

ixmonths,asthecasemaybe).These

optionsar

econsidered'safe',sincetheyarebackedby

thegovernment.However,noneoft

heseinstruments

aresafefrominflation!PPFcurrently

provides8%ayear

andNSCs

fetchyouareturnofaround8%ayear

(interestearnedissubjecttotax).Afteraccountingfor

inflation,realreturnsontheseinvestmentsmaynotbe

veryhigh.

gene

rallyreturnapre-determin

ed

amountonmaturity.Ho

wever,someunitlinkedp

lans

areanexception,butth

eyarenotactuallyinvestm

ents

inthestrictsense-apa

rtoftheamountgoes

towardsprovidinginsurancecover-whichdoesno

t

earnyouareturn,while

thebalancegoesintolong

term

investments.

Whilefixedratesavings

andinsuranceareusefulin

theirownrightandshou

ldbepartofawell-balanc

ed

portfolio,ifyouarelook

ingfortaxbenefitscouple

d

withtheearningpotentialofequities,thenconsideran

PPF

N

SC

Insurancepolicies

ELSSorEquityLinkedSavingsScheme

and

.

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Ify

ouarelooking

atinvestingsomemoney

th

atyouwon't

need

inthenearfuture,andare

willingtoridetheups

andd

ownsofthemarket,youm

ayfindELSS

anideal

tax-s

avingoption.

5.TheE

LSS

advanta

ge

Equityfundscanbevolatileintheshortrun,buthave

beenknow

ntobeatinflationandcre

atewealthoverthe

lon

grun.If

youarelookin

gatinvestingsomemoney

thatyouwon'tneedinthenearfuture,andarewillin

g

toridethe

upsanddownsofthemarket,

youmayfind

ELSSanidealtaxsavin

goption.

Thegra

ph

oppositeshowsthreeseparateinvestments

ofRs1,000

eachmadein

Two

investorsinvestedRs.1,000intoNSCs

andPPF.

Alon

gside,anotherinvestorinvested

Rs.1,000inan

ELSS.

Asyoucansee,theELSS

investmentexperienced

greatervolatilitythantheotheroptionsoverthesh

ort

term.Butovertime,its

performanceprovedtobe

farstron

ger.

Now,here'stheeyeope

ner:

Septembe

r

September

1999.

TheRs.1,000invested

in

anELSSin

1999wouldbeworthover

Rs.4,507today.Insharp

contrast,thefixedratesavings

wouldbeworthapproximatelyRs.2,300.

10

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10

ELSS-morethanjustataxsave

r

AnELSSfu

ndisverysimilartoaneq

uityfund.Themaindiffere

ncehoweverisathree-yearlock-inperiod,whichme

ans

youcannotwithdrawyourmoneyfor

thefirstthreeyears.Thism

ayseemharsh,butthelock-inperiodcanworktoyo

ur

advantage

.How?Thefundmanagerdoesnotneedto

,but

holdlar

geamountsofcashtoserviceredemptions

can

devotealargerportionoftheportfoliotoequities,whichhave

thepotentialtoperformbetteroverthelongterm.

11

InvestmentofRs1000indifferentTaxSavers:1999-2009

0

2000

4000

6000

8000

10000

12000S

ep-99

Apr-01

Nov-02

Jun-04

Jan-06

Aug-07

Mar-09

Value (Rs)

PPF

NSC

ELSSF

undsComposite

PPF:2286

NSC:2325

ELSSComposite:4507

Sources:ELSSdata-VerityAnalytics.PPF,NSCData-IndianPublicFinanceStatistics07

-08,MinistryofFinance(Departmen

tofEconomicAffairs).TorepresentELSS,

wehaveconsid

eredtheperformanceofthetenlarg

estELSSfundsthatpublishedtheirfirstNAVsonorbeforeSeptember30,1999.AssumesaninvestmentofRs

1000

begunonSeptember30,1999.PPF-AssumesRs10

00investedinthePublicProvidentF

und.Forthepurposesofsimplicity,r

atechangesannouncedanytimeduringa

monthareassu

medtobeeffectivefortheentiremo

nthforthepurposesofcalculatinga

ccruedinterestattheendofthemonth.Interestforthemonthiscalculatedby

dividingtheeffectiveannualPPFrateby12.Forthep

urposesofsimplicity,interestisassum

edtoaccrueonmonthlybalanceinthePPFaccount.Portfoliovalueshown

here

isnotionalvaluebasedonaccruedinteresttillMarch

31,2009only.NSC-AssumesRs1000

investedinNSCattheprevailinginte

restrate.Assumeshalf-yearcompounding

atprevailingint

erestrate.Pastperformancemayorm

aynotbesustainedinfuture.Theminimumamountactuallyrequiredfortheseinvestmentsmaybemoreorlessthan

Rs1000.Thisgraphisforillustrativepurposesonly.En

dingvaluesareroundedoff.

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