No Investment Ceiling On RBI Savings Bonds

Updated: Sep 21 2003, 05:30am hrs
My taxable salary is Rs 80,000 per month. My company deducts Rs 2500 every month as taxable income. Suggest me how much home loan should I take and how much EMI I should pay every month, so that I can save tax fully.

Ekta Dua,

Actually the amount of home loan and the EMI should not depend only upon taxability but other factors such as whether the house is required, the cost of the house required, the wherewithal and liquidity requirements. Purchasing a house just to save taxes may not be advisable as the maintenance expenses of the house may more than offset the tax saved.

Also, the maximum deduction available is Rs 1,50,000 p.a. on interest payable for the FY. This will save you tax around Rs 45,000 for the year. However, your tax outgo is much more than that. Therefore, choose an amount of loan based on your requirement than purely on tax considerations.

Who would buy a share "cum-bonus," when the LTG is exempt from tax for the shares purchased from the market after 1st April 2003, and the bonus shares are not

I got the answer from my friend - "Anybody who is in 30 per cent tax bracket & has a STCG would buy the cum-bonus share, sell the same ex-bonus & book the STCL against the STCG from other transactions in that year. He may sell the bonus shares after holding for more than 12 months and pay tax @ 10 per cent on the LTG. He will not be a loser in the bargain!"
Sharad Hatekar

FA01 introduced Sec. 14A w.e.f. FY 61-62 i.e., since the inception of ITA, so as to clarify the intention of the legislature that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The dividend, if tax-free, so is the capital gain, since the word used is income and not dividend. Therefore, the loss is also tax-free and it cannot be used for any set off against income of the current year or carried forward for set off against the income of subsequent years. Similarly, if the funds were borrowed for earning tax-free dividend, the interest on borrowed funds cannot be claimed as expenses.

Simultaneously, Sec. 94(7) was inserted and made applicable if the following conditions are satisfied:

Any person buys or acquires any securities, shares, or units within a period of three months before the record date (date fixed by a company or MF for entitlement of to receive dividend) and sells or transfers these within three months after such date. Yes, the dividend or income received or receivable, by such person is exempt. But the loss arising to the taxpayer on account of purchase and sale of securities shares or units to the extent such loss does not exceed the amount of dividend or income, shall be ignored for computing the income chargeable to tax.

The divided was made taxable the very next year in FY 02-03 and both these amendments had became toothless but not dropped. Now that the dividend has been made tax-free once again, these sections have developed fresh teeth and can bite.

I have been offered a VRS by my employer. In case of pension optees is it beneficial or not to opt for commutation of pension Is there any difference in taxability for those opting for commutation and those taking full pension In my case, pension without commutation is Rs 12,000 and after commutation is Rs 8,000. Is there any recent amendment that for those opting for commutation of pension, full pension will not be restored

2) Is there any upper limits for investments in RBI bonds for both tax-free & taxable types
PR Neglur,

1. Commutation is always attractive if you can invest the commuted amount giving more returns than otherwise. Thanks to the process of liberalisation a new avenue serving as panacea for all investment problems has emerged in the form of pure-growth, open-ended, debt-based schemes (PODs) of UTI/MFS.

Being open-ended, these behave like a SB account where you can deposit and withdraw at will. The only difference is that the banks take 5 minutes to effect a withdrawal but MFs take 5 working days or less. Being debt-based, the safety of the capital as well as the income (around 9 per cent+ at this juncture) is implicitly certain but not explicitly assured.

Being pure-growth, these are so much tax efficient that you can earn as much take-home (= tax-free) income as Rs 5 lakh on a corpus of Rs 55 lakh. The last point requires elaboration for better insight.

Instead of paying tax on normal income @10 per cent, 20 per cent or 30 per cent, depending upon the size of the income, it is good to pay it @10 per cent, which is the rate applicable to long-term capital gains. Now suppose you invest Rs 80 lakh in a POD and at the end of one year, it grows to 86.4 lakh (= growth rate of 8 per cent p.a.). You decide to withdraw Rs 6.4 lakh, the capital portion of this withdrawal is Rs 5,92,593 (= (80 / 86.4) x 6.4 lakh), the rest Rs 47,407 being capital gain. The tax on this growth is Rs 4,701 (= 10 per cent of Rs 47,407).

This implies that you have got Rs 6.4 lakh in hand but tax thereon is only Rs 4,701. This works out at 0.73 per cent tax and not 10 per cent, as is the general impression.

Finally, if you have no other income, your total income is Rs 47,407 and this being lower than the tax threshold of Rs 50,000, you do not have to pay any tax. This facility is not available to NRIs, who have to pay tax on capital gains irrespective of the tax threshold.

Incidentally, the same income earned by way of interest, the tax payable is Rs 1,66,000.

2. There is no ceiling on the recent RBI Savings Bonds. You can invest as much as you desire in both the 6.5 per cent tax-free as well as the 8 per cent fully-taxable bonds.

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