A Aashish, mukti1945@hotmail.com
Your father is a resident Indian and his global income is taxable in India. He comes under the DTAA (Double Taxation Avoidance Agreement) between India and the overseas country, if such an agreement exists. Even in the absence of such an agreement, he will get some relief under Section 91. Accordingly, he will be entitled to deduction from Indian income tax of a sum of the tax paid at the Indian rate or the rate of the overseas country, whichever is lower.

1. In one of your write-ups, you have stated that ICICI and IDBI are definitely better than PPF. If I invest Rs 60,000 in PPF, the interest will be totally tax-free, but if I invest Rs 70,000 in infrastructure bonds at 11 per cent interest per annum, the yearly interest will be Rs 7,700, which will be taxed as it exceeds Rs 2,500 in a financial year. How can this be taken care of?

2. Secondly, is Bima Nivesh better than infrastructure bonds of FIs such as ICICI and IDBI because while there is a lock-in of three years in infrastructure bonds, Bima Nivesh has a lock-in of only two years, which is the lowest from among all avenues under Section 88. (I have no idea whether the interest earned under Bima Nivesh is tax free.)

3. In one of your articles, you have advised "buying bonds worth Rs 70,000 for three successive years. In the fourth year, sell the bonds purchased in the first year, invest the capital gains u/s 54EB to save tax on it, invest the capital amount in similar bonds u/s 88 for the fourth year."

Can you illustrate the above example by showing me in detail how the capital gains is calculated and then invested to save tax?

According to my knowledge, tax saving bonds have to be invested compulsorily for three years and annual interest is paid at the rate of 11 per cent or whatever. So, after three years, the amount that is repaid is the capital only-i.e. Rs 70,000. So where is the capital gains that you have mentioned as needing to be invested?

Tempton R Hathiram, MUMBAI
1. The interest on infrastructure bonds comes u/s 80L. Now that the dividends of units and shares have become tax free, most investors find that a large space remains uncovered in Section 80L. Moreover, the lowest lock-in period of three years is so powerful that fully taxable 10.5 per cent (not 11 per cent) of ICICI/IDBI is more beneficial than 11 per cent tax free. The ceiling of Rs 2,500 is only for application of TDS and the returns are not at all affected by whether the tax deducted is at source or not. In any case, if the tax is not deducted at source, you will have to pay advance tax. I fail to understand why any tax paying investor tries to avoid TDS.

2. Returns from Bima Nivesh are tax free. You have observed that the lock-in is two years. You can predate an LIC policy as a strategy to reduce the period of one year and one day. For a single premium policy, the holding period should be one year for eligibility of surrender value and two years for the rebate. For the five-year term, the surrender value after two years is 94 per cent of the sum assured plus the guaranteed addition. This means that the lock-in is only two years to earn the benefit of the rebate and the penalty for early withdrawal is small.

Since it is possible to predate the policy by paying 12 per cent, one can buy Bima Nivesh, even on March 31, predate it to April 1 of the same financial year and hold it for only one year and one day! This is simply great!

3. Contributions to Section 88 have to come out of income chargeable to tax. The trick you play is to use the redemption amount for your household expenses, thereby saving your income for the contribution. ICICI has two options, the term of the first option is three years and the second, three years and four months. It is the second one that has the possibility of giving capital gains, but for this you have to use yet another trick. Since it is a complicated strategy, I am not able to deal with it here.

(The author may be contacted at anshanbhag@yahoo.com.)