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TAX PLANNING & INSURANCE
I- WHAT IS INSURANCE?
I dont need insurance. Its a brave refrain of the uninsured, one that glosses over the unpredictability of life, which, stealthily & silently, accompanies you at every step of life. Stop for a moment & ponder over some uncomfortable, yet necessary, questions. What if an accident felled you? How will your loved ones will maintain their current lifestyle & meet their financial goals? Or, what if a fire raised the house you so painstakingly built with money saved over half-a-lifetime? What if a loony driver rammed into your precious set of four wheels, & damaged it beyond repair? What if Disasters dont usually announce their arrival. They strike unnoticed, often with dire consequences that scar your world & play havoc with your personal finances. You can take greatest care in the world with all things precious, but you will never eliminate the possibility of harm befalling them. What you can do is mitigate the effect of such eventualities on your familys finances, especially if they are finely balanced, by buying insurance.
Insurance then is man's answer to the vagaries of life. If you cannot beat manmade and natural calamities, well, at least be prepared for them and their aftermath. But here the question comes, What we really mean by INSURANCE?
MEANING:
Insurance is a contract between two parties - the insurer (the insurance company) and the insured (the person or entity seeking the cover) - wherein the insurer agrees to pay the insured for financial losses arising out of any unforeseen events in return for a regular payment of "premium".
TAX PLANNING & INSURANCE These unforeseen events are defined as "risk" and that is why insurance is called a risk cover. Hence, insurance is essentially the means to financially compensate for losses that life throws at people - corporate and otherwise.
Young adult
A ROAD MAP FOR INSURANCE AGE LIFE INSURANCE NON LIFE INSURANCE 20s Buy only if you have Buy accident & health dependants insurance, requisite asset cover Subtract existing assets Extend health insurance to from future expenses & family, continue accident cover the difference Maintain covers & asset covers to Extend health insurance to
Young family
30s
Mature family
40s
balance the shortfall in family, continue accident Empty nesters 50s existing assets & asset covers Maintain cover till you Top up health cover for are earning Retired self & spouse, continue
asset cover 60 & No life cover needed, Continue health cover for over unless dependants you have self & spouse, continue asset cover
NEED FOR INSURANCE :

All of us claim to know what insurance is all about. But the crux of the matter is that none of us really understand its true value thanks to the sheltered and pampered lifestyles that we lead. Most of us perceive insurance as a tax-saving device. Some of us think of insurance as an investment tool that enables us to accumulate wealth gradually. For the rest, insurance seems to be nothing but a necessary nuisance.
TAX PLANNING & INSURANCE A careless taxi driver might smash into your parked Matiz, pulverizing it completely. Now your only mode of transport through the metros over-laden rush hour is cooling its flanks at the dealers workshop A natural calamity like floods, earthquake or a tsunami had suddenly hit your area and takes away your livelihood and the beautiful home of yours. Insurance can be soothing ailment at least for the financial loss, and above all insured money will also help in the rehabilitation process. Your mother-in-law slips inside the bathroom, landing on her side. After fracturing her hipbone, she has to be operated upon and spends over bedridden four weeks at the local nursing home
All of these circumstances share a significant financial loss besides the enormous considerations and inconvenience that you might have to suffer. Suppose there was an insurance policy covering each or any of these instances? At least the financial turmoil could have been neutralized to a very large extent. Nothing and no one can accurately predict or foresee an impending disaster that might fall into your self-centered existence. And nothing and no one can replace the value and commitment that might be wasted upon the occurrence of such a disaster, except insurance. It is Insurance that protects you against the financial repercussions of a loss
The major types of insurance that are needed by an individual include life, disability and health, home/shop and auto insurance, although there are various other types. Each of these types of insurance insures you against a specific kind of financial loss.
II- LIFE INSURANCE: AN OVERIEW

INTRODUCTION:
A financial planner once said this about life insurance buying habits of Indians: they dont buy life insurance; its sold to them. Unfortunate, but true. Individual awareness and understanding of life insurance products is extremely low. Thus, people should be financially literate, and have at least, an elementary understanding of what life insurance is all about. This means being aware of the various types of insurance products on offer in the market, as well as having the ability to understand ones life insurance needs and find appropriate fits.
Life insurance is chiefly a risk management tool, meant to offer financial protection to your dependents in the unfortunate event of your death. If you are adequately insured, your life insurance should enable your dependents (spouse, children, parents) to maintain their current lifestyle and pursue their life goals till such time as they are in a position to setup an alternative income stream by themselves. Thats the basic purpose of life insurance.
But in India, as in most other developing markets, life insurance has come to represent more than just risk cover. The best-selling insurance products in the market double as investment options & offer attractive tax breaks. In fact, its because of this two-in-one profile that they appeal to the average individual who seeks convenience in personal financial matters.
4 REASONS FOR BUYING LIFE INSURANCE PRODUCTS
TAX PLANNING & INSURANCE Ask individuals wanting to buy life insurance, about how they do their tax planning and the first reply will be - insurance policy. Such is the nature of life insurance. It is bought by almost everyone right from the bigwigs of the business world to small retail investors. And most buy it for one core reason - to save tax. Apart from tax benefits and financial security, following are some of the reasons for buying life insurance 1.
Passing away early:

No one on this earth knows when he will die. Life and future is
very unpredictable and uncertain. Thus, Individuals need to insure themselves to secure the future of those who are dependant on them; especially so if they happen to be the sole breadwinners. You wouldn't want them to go through hardships or rely on others/relatives, etc. This, in fact, is the prime reason why one should buy an insurance policy. By buying life insurance, you buy peace of mind and are prepared to face any financial demand that would hit the family in case of an untimely demise.
2. Living too long:

It is generally observed that individuals who tend to live way beyond their earning years like say, till the age of 85 or 90, usually face a problem coming to terms with increasing costs of living. Insurance, if bought at the right time for the right amount, acts as a saviour in such times. Individuals could opt for a pension plan offered by insurance companies, which suits their profile in terms of income, proposed retirement age and proposed expenses post-retirement. Such plans provide an annuity, which means that individuals keep getting a fixed sum every month/year after they have retired.
3.
Painful existence:
If an individual suffers from a health problem in his old age and the remedy to
this ailment were to cost him a sum beyond his financial capacity, life insurance can 6
TAX PLANNING & INSURANCE act as the saving grace in two ways. One, by way of a medical rider like the accidental death benefit rider, permanent disability benefit rider, critical illness benefit rider. These riders are taken along with the life insurance plan and help cover the medical expenses. And secondly by allowing the individual to surrender the insurance policy. Surrendering the policy will help in the generation of a lump sum amount that can be used for covering the high cost of medical expenses.
4. Tax benefits:
Do we need to elaborate on this any further? Traditionally, life insurance has always been bought more for tax benefits than for what it is actually purported to do; i.e. insure human life. But the role of life insurance in an individual's tax planning cannot, in any way, be undermined. Under the new regime, individuals can now invest upto Rs 100,000 in insurance premia to avail of a deduction from taxable income. The tax sops provided on insurance help `increase' the individual's disposable income and make him consider taking a life insurance plan, which he otherwise may not have done.
ROLE OF LIFE INSURANCE

Risks and uncertainties are part of life's great adventure -- accident, illness, theft, natural disaster - they're all built into the working of the Universe, waiting to happen.
Role 1: Life insurance as "Investment":

Insurance is an attractive option for investment. While most people recognize the risk hedging and tax saving potential of insurance, many are not aware of its advantages as an investment option as well. Insurance products yield more compared
TAX PLANNING & INSURANCE to regular investment options, and this is besides the added incentives offered by insurers. You cannot compare an insurance product with other investment schemes for the simple reason that it offers financial protection from risks, something that is missing in non-insurance products. In life insurance, unlike non-life products, you get maturity benefits on survival at the end of the term. In other words, if you take a life insurance policy for 20 years and survive the term, the amount invested as premium in the policy will come back to you with added returns. In the unfortunate event of death within the tenure of the policy, the family of the deceased will receive the sum assured. Thus insurance is a unique investment avenue that delivers sound returns in addition to protection
Role 2: Life insurance as "Tax planning":

Life Insurance is one of the most popular savings/ investment vehicles in India. Ironically, it is probably the least understood too. Insurance serves as an excellent tax saving mechanism too. The Government of India has offered tax incentives to life insurance products in order to facilitate the flow of funds into productive assets. Under Section 88 of Income Tax Act 1961, an individual is entitled to a rebate of 20 per cent on the annual premium payable on his/her life and life of his/her children or adult children. The rebate is deductible from tax payable by the individual or a Hindu Undivided Family. This rebate is can be availed upto a maximum of Rs 12,000 on payment of yearly premium of Rs 60,000. By paying Rs 60,000 a year, you can buy anything upwards of Rs 10 lakhs in sum assured. (Depending upon the age of the insured and term of the policy) This means that you get Rs 12,000 tax benefit. The rebate is deductible from the tax payable by an individual or a Hindu Undivided Family.
III- MEDICAL INSURANCE: A 'MUST HAVE'

Individuals, while conducting their tax planning exercise for the year, should always keep in mind their financial objectives. One objective should be to insure themselves against any unforeseen medical/health expenses. A medical/health insurance policy helps in achieving this goal. This note explains what the policy is and how it proves to be useful while carrying out the financial as well as the tax planning exercise.
Simply put, a health insurance policy, also popularly known as 'Mediclaim', helps an individual cover the expenses incurred due to an injury/hospitalization. Not only does it cover expenses sustained during hospitalization but also during the pre as well as post hospitalization stages. An added attraction of these policies is that the individual gets certain tax benefits, which are separate from the Section 80C benefits available on traditional tax-saving instruments. An illustration will help in understanding things better.
Medical insurance: Small costs, huge benefits

Age (Yrs) Amount to be insured (Rs) United India Insurance Co. Ltd New India Assurance Co. Ltd (NOTE: The premium quotes are as shown on websites of the respective insurance companies. 30 200,000 2,720 30 200,000 Annual Premium (Rs) 2,469
TAX PLANNING & INSURANCE Taxes as applicable may be levied on the quotes given above. Individuals are advised to contact the insurance companies for further details. )
Let us assume that an individual aged 30 years, wants to cover himself for a sum of Rs 200,000. As the table shows, if he decides to buy a Mediclaim policy from United India Insurance, the annual premium for the same works out to approximately Rs 2,469 p.a. Conversely, if the policy were to be purchased from New India Assurance, other factors remaining the same, the premium the individual would have to pay would be approximately Rs 2,720 p.a.
In case the individual has to undergo hospitalization due to an injury/accident, then the expenses incurred by him will be covered by the policy. The cover will be to the extent of the sum insured. In this example, the insurance company will pay for expenses upto Rs 200,000. This cover will also include pre and post hospitalization expenses like money spent for conducting medical tests and buying medicines.
Of course, the payment will be subject to certain conditions. For example, the insurance company will want the individual to undergo treatment from a hospital that has a tie-up with the company. Also, the insurance company will ask for all the necessary documents pertaining to the hospitalization charges, the medicines bought and other related papers.
A host of added benefits are also available on Mediclaim policies. If suppose, an individual continues to buy a Mediclaim policy from a certain company and has a claim free year, then the company increases his sum insured in the next year. Alternatively, some companies reduce the premium charged to the individual. Most
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TAX PLANNING & INSURANCE companies also give a discount on the premium being charged in case individuals want to insure their entire family.
Individuals also have the option of covering themselves for medical expenses by opting for the 'Critical Illness (CI)' rider available with life insurance policies. Life insurance companies have their own list of critical illnesses as defined by them. If an individual suffers from an illness that is defined by the company in its list of critical illnesses, then he stands to benefit by way of this rider. Section 80D benefits are available on such riders as well.
However, medical insurance differs from these riders in one key aspect. In case of a CI rider, on the occurrence of a 'critical illness' during the policy tenure, an amount as proposed in the policy will be paid out to the individual. This is irrespective of the expenses incurred by the individual on hospitalization, medicines and other such costs. As opposed to this, in case of Mediclaim, the individual is covered only to the extent of the actual expenses incurred subject to the maximum limit as defined by the 'sum insured'.
Medical insurance has also seen a lot of innovation being brought in with the passage of time. Nowadays, you have 'cashless hospitalization'. This is where individuals do not have to pay for their hospital bills in case of hospitalization; the insurance company settles the bill directly. Of course, certain conditions like those already mentioned earlier have to be met- the hospital needs to have a tie-up with the insurance company, the documents need to be in order and so on. Some companies also offer what they call 'floating cover' which can be best understood by an example. Under a floating cover, an individual can either cover himself for say, an amount of Rs 300,000 or cover his family of say 3 individuals, for Rs 100,000 each. This again, will be subject to the conditions laid down by the insurance company.
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TAX PLANNING & INSURANCE However, what needs to be understood is that individuals have a wider choice now with more general insurance companies entering the fray.
With the costs associated with medicine and medical treatment having gone up, individuals need to plan their finances better. They shouldn't be caught in a scenario where they are staring at a huge medical bill and haven't planned for it. That apart, although they might have the money at that point in time, their long term financial planning might go awry. It is in such cases that medical insurance proves its worth all the more. All said and done therefore, a medical insurance policy should always form a part of any individual's financial planning as well as the tax planning exercise
TAX BENEFITS:
SECTION-80D
Mediclaim policies attract tax benefits under Section 80D. Deduction under this section is available if the premium is paid by cheque. It is Available to Individual and HUF assessees The maximum amount of deduction available under this section is Rs 10,000. This limit stands enhanced to Rs 15,000 in case an individual is a senior citizen. Tax benefits are also available in case individuals pay for their parents and children who are dependant on them.
Accordingly a person who is under/in 30% tax bracket can save income tax up to Rs 3,060 (or Rs. 3366 if annual income exceeds Rs 10,00,000) by paying Rs 10,000 as premium in "Mediclaim" policy in a year.
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HANDICAPPED DEPENDENT: SEC. 80DD

LIC has also made special provisions for the relatives of a handicapped policyholder. Section 80 DD provides relief to individual resident taxpayer who has a handicapped dependant person to support. Such an individual can pay or deposit with any scheme framed by LIC in this behalf for any scheme framed by LIC in this behalf for maintenance of handicapped dependant. Sec. 80DD stipulated that a resident individual or a member of HUF having a dependent relative who suffers from a permanent physical disability (including blindness) or mental retardation was entitled to a deduction of Rs. 20,000 in a year for medical treatment, training or rehabilitation. Payment to LICs Jeevan Aadhar and UTIs Special Plan for the Handicapped specially designed for such persons was covered by Sec. 80DDA, offering a deduction of Rs. 15,000. Deduction under section 80DD is statutory in nature and is allowed in full, irrespective of the actual expenditure incurred on medical treatment. Following the merger of Sec. 80DDA with 80DD, the total deductible amount was raised from Rs. 35,000 to Rs. 40,000. The maximum fixed deduction of Rs.40,000/- is allowed under this plan. LICs jeevan aadhar provides this maintenance.
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I- TAX PLANNING-A LEGAL MEASURE

Relax. Paying the right amount of tax is easy!
We pay taxes whatever be our occupation - service, business, self-employed, or a professional. What is important is whether such payment represents right amount of tax. With changing legislations and complicated tax laws, it becomes imperative that one stays abreast of the various tax provisions and inculcates tax planning to take the best advantage.
INTRODUCTION:
Avoidance of tax liability by so arranging the commercial affairs that charge of tax is mitigated, is tax planning. Under the law, the taxpayer is legitimately entitled to plan his taxes in such a manner that his tax liability is minimal. Tax Planning can be defined as an arrangement of the financial affairs within the scope of law in a manner that derives maximum benefit of the exemptions, deductions, rebates and relief and reduces the tax liability to minimal. As long as you are within the framework of law, you can plan your financial affairs. Tax planning is, therefore, a device within the four corners of the taxation laws aimed at minimizing the tax liability of a taxpayer.
However, in the name of tax planning, you cannot indulge in Tax Evasion. And the line between Tax Planning and Tax Evasion is very thin, so you need to tread carefully. When financial transactions are arranged in a way that it becomes obvious that they were entered with a malafide intention of either not paying taxes or with a view to defeat the genuine spirit of law, they can not be accepted as legitimate Tax Planning. Twisting of facts or taking a very strict and literal interpretation of law without understanding the basic purpose of the law can only lead to punishable Tax Avoidance and not Tax Planning
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Tax
planning
is
legal,
tax
evasion
is
illegal.
Tax
planning
is
legitimate provided it is within the framework of law. Colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by resorting to dubious methods.
Tax planning is not a one-time exercise. Tax planning is more of an ongoing process linked to your income and your expenses/investments. The objective is to maximize your interests/net inflows over a lifetime and successfully achieving your financial goals/needs. The whole exercise needs to be done in an ethical manner with full discloser of income and genuine representation of expenses.
PARAMETERS FOR TAX PLANNING:

The following are the important parameters/rates of tax that one has to look at before he/she deploys his/her savings: a) b) c) Long-term Capital Gains Short-term Capital Gains Taxation on Income from such investments
(Interest/Dividends) d) e) Benefits at time of Investment into such avenues Wealth Tax
The product/avenue under consideration would determine which of the above would be applicable. One can create a matrix with savings/investments on one side and the above parameters on the other, to get an ideal reference or comparison chart. Adding parameters like ideal purpose (or objective) of the product/avenue, lock-in 16
TAX PLANNING & INSURANCE period, benefits and risks, payments options, amount needed, etc would give a complete picture.
STEPS IN TAX PLANNING:

Proper tax planning is a basic duty of every person which should be carried out religiously. Basically, there are three steps in tax planning exercise. These three steps in tax planning are: 1. Calculate your taxable income under all heads ie, Income from Salary, House Property, Business & Profession, Capital Gains and Income from Other Sources. 2. Calculate tax payable on gross taxable income for whole financial year (i.e., From 1st April to 31st March) using a simple tax rate table, given on next page. 3. After you have calculated the amount of your tax liability. You have two options to choose from: a. Pay your tax (No tax planning required) b. Minimize your tax through prudent tax planning.
Most people rightly choose Option 'B'. Here you have to compare the advantages of several tax saving schemes and depending upon your age, social liabilities, tax slabs and personal preferences, decide upon a right mix of investments, which shall reduce your tax liability to zero or the minimum possible.
Every citizen has a fundamental right to avail all the tax incentives provided by the Government. Therefore, through prudent tax planning not only income-tax liability is reduced but also a better future is ensured due to compulsory savings in highly safe Government schemes. We sincerely advise all our readers and clients to
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TAX PLANNING & INSURANCE plan their investments in such a way, that the post-tax yield is the highest possible keeping in view the basic parameters of safety and liquidity.
SAVINGS & INVESTMENT:
Savings and investments are interconnected. Before making investments the person has to consider various factors such as:
Liquidity-when he requires the amount to meet the educational expenses of children, for marriage, house construction or for a secure future after retirement
Security of the investment The return and tax on income on such investments.
This varies from person to person. A person by investing in NSC saves on his tax. However, the interest on the investment is taxable. Again, if the investment is made in PPF, he is not liable to pay the income tax on interest. But the period of NSC is six years whereas in the case of PPF the period of repayment is 5 years. However, a portion can be claimed after 7years. Thus the person who makes the investment has to consider whether he requires the amount after 5 years or he can wait for a longer period.
To make investments there should be savings. A lower income person also wants to save, but his gross income and day-to-day expenses don't leave him anything to save. For example, if he has to save Rs 20 from tax by investment in NSC, he has to invest Rs 100. Sometimes considering his financial needs he will be prepared to pay the tax of Rs 20, so that Rs 80 is there for his other needs. Therefore, the capacity of savings is also very relevant. To increase savings one
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TAX PLANNING & INSURANCE should make investments that give reasonable returns. Again this return becomes a saving if invested.
SHATTERING MYTHS ON TAX PLANNING:

Tax planning is not a device to reduce tax burden. In fact, it helps savings by investments in government securities. Savings reduce extravagance, and correspondingly inflation. Tax savings are permitted only for investment made i:n government securities and bonds of priority sectors which ultimately help the nation. Therefore, the savings in tax help the Central and state governments to mobilizes funds by way of investments and as such the government earns much by way of other benefits, by sacrificing small amount of tax. The Supreme Court in one case observed that "Tax planning may be legitimate provided it is within the framework of Law". By tax planning, the government is equally benefited.
The task of a tax planner is gigantic and it involves a high talented approach by persons well-versed with the taxation laws and other laws having an important bearing on the subject. Therefore, tax planning necessitates full knowledge of the intricacies of the taxation laws and other allied laws.
Thus, Tax planning may look cumbersome, but if done intelligently, it is the simplest way of lessening your tax load. So when you are not sure of the tax provisions, taking advice of professionals is the right approach. While a tax consultant will advise on investments that help avoid taxes, a good investment advisor will add value in terms of making the right investment choice that will save on taxes and grow in value over a period of time.
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TAX PLANNING & INSURANCE Tax planning is an integral activity in the management of your income and finance. Inefficient tax management or an absence of tax planning can jeopardize your finance management, irrespective of your status. It is important to plan intelligently in a way that can maximize your residual income without compromising your dues to the country
II- TAX PLANNING-A SMART WAY

GET YOUR ALLOCATION RIGHT
For most individuals, financial planning and tax planning are two mutually exclusive exercises. While planning our investments we spend considerable amount of time evaluating various options and determining which suits us best. But when it comes to planning our investments from a tax-saving perspective, more often than not, we simply go the traditional way and do the exact same thing that we did in the earlier years. Well, in case you were not aware the guidelines governing such investments are a lot different this year. And lethargy on your part to rework your investment plan could cost you dear.
For a lot of investors planning for taxation can be quite impulsive. The public provident fund (PPF), national savings certificate (NSC), infrastructure bonds and life insurance are obvious choices and the proportion is decided arbitrarily without much thought to asset allocation, the risk-return equation, the investment objective of the product and whether it matches your own and such other evaluative yardsticks.
While on the face of it, all fixed income instruments (PPF, NSC, infrastructure bonds) fall largely within the fixed income category, there are different features,
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TAX PLANNING & INSURANCE dynamics, yields, lock-in periods associated with each tax-saving product. Often investors tend to ignore the nuances and invest in a product for the wrong reasons.
Before you start planning for taxation, you must understand that at the end of the day, it is just another investment you are making. All factors that are closely related to investments like the risk-return equation and asset allocation are also related to tax-planning.
To understand this better let us understand this with the help of an example. Lets say you have Rs 100,000 and want to invest the amount to maximise returns within a reasonable risk limit. You will take some concrete and decisive steps to achieve that investment objective. You will choose the right instrument, plan your asset allocation, understand the risk-return profile of the instrument and see if it matches your own. At no stage will you deviate from the financial course that you have chalked out for yourself and give vent to recklessness for short-term gains.
Likewise, when you have Rs 100,000 with the primary objective of investing for saving tax, all the factors outlined above like asset allocation, risk-return, etc hold good. The only difference is while investing to save tax, you have a limited range of products and not the entire investment universe, so your options are restricted to that extent.
INVESTMENT AS PER AGE PROFILE

To understand how you can better allocate assets within the entire gamut of tax-saving instruments the tax-paying community is divided into 3 distinct age profiles. The reason we have chosen age as the distinguishing criteria is because
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TAX PLANNING & INSURANCE appetite for risk and therefore the expected return, flows largely from ones age lower the age, higher the risk appetite and the potential return. IF YOU ARE BETWEEN 25-35 YEARS OF AGE:
You are young and probably married, maybe even with kids. If you are the sole breadwinner in the family then your position in the family assumes even more importance. You need to ensure that your dependents are not put at risk in your absence. Insurance is your most pressing need at this age. While the lure of taxation need not be the real reason for taking life insurance, if you are getting tax benefits along the way why complain? How much insurance and what kind of insurance plans do you need to take? That is something that is best laid out to you by your insurance consultant. But one thing is for sure, life insurance should form a large, if not the largest chunk of your investments for tax-saving. This is because in the 25-35 age bracket the need is acute and remember insurance is bought best at a younger age when it is cheaper.
Being young, you have time on your side and can take on some risk. In this age bracket, you probably have a high appetite for risk. Your disposable surplus maybe small (as you could be paying your home loan installments), but the savings that you have can be set aside for a long period of time. Your children, if any, still have many years before they go to college; or retirement is still further away. You therefore should invest a large chunk of your surplus in tax-saving funds (equity funds). as equities are very attractive investment option for you. A product like a tax-saving mutual fund/an equity-linked savings scheme (ELSS) is something that fits very nicely into your risk profile. Invest up to the entire Rs 10,000 limit. Again, it is the investors good fortune that he can invest in equities and even get a tax rebate on it!
You can put smaller amounts in PPF and NSC. However, of the two, NSC is preferable because the cut in the interest rate (which has been happening with alarming frequency and intensity over the years)
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TAX PLANNING & INSURANCE applies to PPF with prospective effect. In other words, if you have taken an NSC at 9% coupon rate last year, you will continue to draw that interest amount even in this year despite a cut in interest rate to 8%. On the other hand, had you invested in PPF at 9% last year, you will now get 8% after the rate cut this year.
You can give a miss to infrastructure bonds. The yield is unattractive and you are better off paying tax and investing in debt funds with steady track records.
The employee provident fund deduction happens from your salary and therefore you have little control over it. Regarding life insurance, go in for pure term insurance to start with. Such policies are very affordable and can extend for upto 30 years. The rest of your funds (net of the home loan principal repayment) can be parked in NSC/PPF.
IF YOU ARE BETWEEN 35-45 YEARS OF AGE: At this age, you are probably insured, so there is a lower need on that front. However, the moot point is - are you adequately insured? You probably got insured at a time when you had fewer needs, a conservative lifestyle and a lower salary. If this scenario has changed with more needs and a better lifestyle, you may need to step up the insurance amount so that you/your family can maintain this lifestyle comfortably in the future. Again, you dont need the tax carrot to underscore the need for an enhanced insurance cover, but you could use that tax rebate.
While you arent exactly young, you arent alarmingly old either. Your appetite for risk will gradually decline over this age bracket as a result of which your exposure to the stock markets will need to be adjusted accordingly. As your compensation increases, so will your contribution to the EPF.
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The life insurance component can be maintained at the same level; assuming that you would have already taken adequate life insurance and there is no need to add to it. In keeping with your reducing risk appetite, your contribution to PPF/NSC increases. One benefit of the higher contribution to PPF will be that your account will be maturing (you probably opened an account when you started to earn) and will yield you tax free income (this can help you fund your children's college education).
You can take equity exposure up to Rs 10,000 to get a kicker in your investments that only equities can provide.Likewise prefer debt funds to infrastructure bonds.
IF YOU ARE OVER 45 YEARS OF AGE: You are now nearing retirement. To that extent it is critical that you fill in any shortfall that may exist in your retirement nest egg.
At 45 years or above, your insurance needs are probably taken care of already. If they arent then, you can bridge the shortfall by taking some additional insurance (preferably pure risk, which is cheaper) after consulting your agent.
You can invest in an ELSS provided you arent too close to retirement (around 60 years), in which case the risk-return profile of the mutual fund scheme would work against your own.
Again, you can invest some portion of your money in NSC as opposed to PPF. If you havent exhausted the Rs 100,000 limit, that is not a cause for concern. Pay the tax and invest in debt funds instead, which over a period of time will give you a better return and will compensate for the tax you have paid. As we mentioned earlier, it is better to invest with the clarity and foresight of clocking long term growth as opposed
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TAX PLANNING & INSURANCE to investing with the short-term benefit of saving tax.
You do not want to jeopardize your pool of savings by taking any extraordinary risk. The allocation will therefore continue to move away from risky assets like stocks, to safer ones line the NSC. However, it is important that you continue to allocate some money to stocks. The reason being that even at age 55, you probably have 15 - 20 years of retired life; therefore having some portion of your money invested for longer durations, in the high risk - high return category, will help in building your nest egg for the latter part of your retired life.
IF YOU ARE OVER 55 YEARS OF AGE: You are to retire in a few years; then you will have to depend on your investments for meeting your expenses. Therefore the money that you have to invest under Section 80C must be allocated in a manner that serves both near term income requirements as well as long-term growth needs. Most of the funds are therefore allocated to NSC. Your PPF account probably will mature early into your retirement (if you started another account at about age 40 years). You continue to allocate some money to equity to provide for the latter part of your retired life. Once you are retired however, since you will not have income there is no need to worry about Section 80C. You should consider investing in the Senior Citizens Savings Scheme, which offers an assured return of 9% pa; interest is payable quarterly. Another investment you should consider are Post Office Monthly Income Scheme.
VARIOUS POINTERS FOR INVESTORS
Investing the Rs 100,000 in a manner that saves both taxes as well as helps you achieve your long-term financial objectives is not a difficult exercise. All it
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TAX PLANNING & INSURANCE requires is for you to give it some thought, draw up a plan that suits you best and then be disciplined in executing the same. Following are some of the important pointers for investors:
Make sure you have exhausted the Rs 100,000 investment limit with your insurance needs first.
ELSS can be considered depending on your age. If you are over 60 years you can give it a miss.
NSC and PPF interest rates arent sustainable over the long term given the existing yields on market-linked government securities. You can invest moderate amounts, preferably in NSC.
Infrastructure bonds can be ignored. Pay the tax instead and invest prudently in debt funds that have the potential to give you a higher return and be quite tax- efficient at the same time.
Invest with prudence to maximise growth with saving tax is the secondary objective. If the tax-saving instruments cannot help you maximise growth, then pay the tax and invest in instruments that can help you maximise growth.
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III- GENERAL TAX PLANNING HINTS

SALARIED INDIVIDUAL
1) The employee should ensure that dearness allowance forms part of basic salary or is considered for determining retirement benefits under the terms of employment. This will reduce tax liability on items such as house rent allowance, gratuity, employer's contribution to a recognized provident fund, etc
2) Since recurring pension is always taxable, employees should get their pension commuted. Accordingly, the employee can take the benefit of exemption of commuted pension.
3) Instead of obtaining medical allowance on a monthly basis, the employee should opt for reimbursement of medical expenses against bill up to Rs15, 000 per annum since such reimbursements are not taxable.
4) The employee may obtain a part of his remuneration by way of employer's contribution to a provident fund since such contributions are not taxed in the hands of the employee. In case of a recognized provident fund, such contribution should not exceed 12 per cent of salary.
5) The employee may obtain a part of his remuneration by way of subsidized lunch or provision of telephone at residence since such perquisites are not taxable.
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TAX PLANNING & INSURANCE 6) Generally, it is more advantageous to obtain perquisites than to obtain allowance for the same benefit. eg Free housing accommodation vis-avis house rent allowance.
PROFITS BUSINESS
&
GAINS
FROM
Business includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce of manufacturing. Income from illegal business such as smuggling is also taxable under the Income Tax Act ie taxability of income has no connection whether the income is legal or illegal.
The general rule of determining taxable business or professional income is that from the gross income or gross receipts or gross sales, expenses incurred for earning that income will be allowed as a deduction. The balance of profit remaining after claiming all the allowable expenses as a deduction will be the taxable income.
HINTS FOR TAX PLANNING

1. Since depreciation for the whole year is allowed only if the asset is purchased prior to October of the relevant previous year, depreciable assets must be purchased in the first half of the year. Otherwise only 50 per cent of the depreciation will be allowed as deduction. 2. Expenses falling u/s 43 B such as taxes, duties, cess payable to the government, interest on borrowings from financial institutions, etc taxes which are allowed as a deduction only on payment basis must be paid on or before the prescribed time for making payment.
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TAX PLANNING & INSURANCE 3. Since only 80 per cent of the total expenditure paid otherwise than by account payee cheque or bank draft is allowed as a deduction, cash payments in excess of Rs20,000 must be avoided. 4. Since long-term capital gains invites a lower tax rate, transfer of short-term capital assets must be avoided.
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I- TAX STRUCTURE
An attempt is made in the following pages to present a bird eye's view of the Indian Income Tax laws and so that you can take advantage of the available legal avenues for tax planning, reduce your tax liability.
To begin with lets understand the structure of tax regime in the country. Taxes are the basic source of revenue to the government. Revenue so raised is utilised for meeting the expenses of government as well as to carry out developmental works.
There are basically two types of taxes, Direct and Indirect taxes. Direct taxes are those, which are, collected by the government directly from the taxpayer through levies such as income tax, wealth tax and interest tax. Whereas indirect taxes comprise of excise duty, sales tax, customs duty and value added tax. While direct taxes form 30 per cent of government's revenue indirect taxes contribute a larger chunk of 70 per cent.
THE INCOME TAX ACT, 1961

The Indian constitution has empowered only the Central Government to levy and collect Income Tax. The Income Tax Act was enacted in 1961. The Act come into force from the 1st of April 1962 and extends to the whole of India. It consists of over 400 sections and 12 schedules. The Income Tax Act determines which persons are liable to pay tax and in respect of which income. The various sections lay down the law of income tax and the schedules elucidate certain procedures and give certain lists, which are referred to, in the sections. However, the Act does not prescribe the rates of Income Tax.
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TAX PLANNING & INSURANCE These rates are prescribed every year by the Finance Act (popularly known as "The Budget") This is done mainly to give incentives for investment in priority sectors, to discourage tax evasion, to remove loopholes in the law and to synchronise the law with the existing economic situation.
Some of the terms commonly used while computing taxes are as follows:
1. ASSESSEE:
An Assessee is a person by whom any tax or any other sum of money (for example interest, penalty, fine, etc) is payable under the Income Tax Act 2.ASSESSMENT YEAR: Assessment year (AY) means the period of 12 months commencing on the 1st day of April each year. 3.PREVIOUS YEAR Previous year (PY) means the financial year immediately preceding the assessment year. It is essential to understand the difference between assessment year and previous year. The income, which is earned in the previous year, is charged to income tax in the assessment years at the rates applicable for that assessment year. Thus if income of Rs1,00,000 is earned in PY. 1997-98 (which commences on 1/4/97 and ends on 31/3/98), this income is charged to income tax in AY 1998-99 at the rates applicable for AY 1998-99. Similarly income earned in PY. 1998-99 is charged to income tax in AY. 1999-2000, at the rates applicable for that AY.
4.ASSESSMENT
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TAX PLANNING & INSURANCE Assessment includes re-assessment. It is the process of determining the income of an assessee earned during any previous year and finding out the income tax, interest or other sum payable under the Act.
DEDUCTIONS FROM INCOME TAX

The aggregate of income under all heads will give the "Gross Total Income" of the assessee for that previous year. From this GTI, there are certain deductions available to the assessee, provided certain conditions are satisfied. The net income remaining after claiming the available deductions will give the "Net Taxable Income" on which income tax is payable.
REBATE FROM INCOME TAX

Once net income is calculated and the income tax is determined, from the tax liability, a further deduction of rebate can be claimed if certain conditions are satisfied. Rebate is a reduction from income tax payable and not a deduction from income.
II- TAX RATES
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TAX PLANNING & INSURANCE Following rates are applicable for computing tax liability for the current Financial Year ending on March 31 2006, (Assessment Year 2006-07).
FOR RESIDENT WOMEN BELOW 65 YEARS OF AGE
Net Income Range Up to Rs. 1,35,000 Rs. 1,35,001 to Rs. 1,50,000 Rs 1,50,001 to Rs. 2,50,000 Rs. 2,50,001 to Rs. 10,00,000 Above Rs. 10,00,000
Income Tax Nil 10% of the income above Rs. 1,35,000 Rs. 1,500 + 20% of the income above Rs. 1,50,000 Rs. 21,500 + 30% of the income above Rs. 2,50,000
Plus Surcharge Nil
Plus Education Cess Nil
Nil
2% of income tax
Nil
2% of income tax
Nil
2% of income tax 2% of income tax and surcharge
Rs. 2,46,500 + 30% of the 10% of income above Rs. 10,00,000 income tax
FOR RESIDENT SENIOR CITIZENS
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TAX PLANNING & INSURANCE (65 years of age and above, including those who turn 65 at any time during the Financial Year 2005-06)
Net Income Range Up to Rs. 1,85,000 Rs. 1,85,001 to Rs. 2,50,000 Rs. 2,50,001 to Rs. 10,00,000
Income Tax Nil 20% of the income above Rs. 1,85,000 Rs. 13,000 + 30% of the income above Rs. 2,50,000 Rs. 2,38,000 + 30% of the income above Rs. 10,00,000
Plus Surcharge Nil
Nil
2% of income tax
Nil
2% of income tax
Above Rs. 10,00,000
10% of income tax
2% of income tax and surcharge
Note: The rules for "Senior Citizens" are the same for 'Men' as well as 'Women'. Any person who turns 65 years on any day prior to or on March 31, 2006 will be treated as Senior Citizen.
FOR ANY OTHER RESIDENT INDIVIDUAL OR HUF

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Net Income Range Up to Rs. 1,00,000 Rs. 1,00,001 to Rs. 1,50,000
Income Tax Nil 10% of income above Rs. 1,00,000
Plus Surcharge Nil
Nil
2% of income tax
Rs 1,50,001 to Rs. 2,50,000
Rs. 5,000 + 20% of the income above Rs. Nil 1,50,000
2% of income tax
Rs. 2,50,001 to Rs. 10,00,000
Rs. 25,000 + 30% of income above Rs. 2,50,000
Nil
2% of income tax
Above Rs. 10,00,000
Rs. 2,50,000 + 30% of 10% of the income above Rs. income tax 10,00,000
2% of income tax and surcharge
FILING OF INCOME TAX RETURN
1.
Filing of income tax is compulsory for all individuals whose gross
annual income exceeds the maximum amount which is not chargeable to income-tax i.e. Rs. 1,35,000 for Resident Women, Rs. 1,85,000 for Senior Citizens and Rs. 1,00,000 for any other individual or HUF. 2. The last date of filing income tax return is July 31 in case of
individuals who are not covered in point 3 below. 3. If the income includes business or professional income requiring tax
audit (turnover Rs. 40 lakhs), the last date for filing the return is October 31.
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TAX PLANNING & INSURANCE 4. 5. Form 2 E (Naya Saral) can be used to file the income tax return. Cellular/Mobile Phone subscribers now need not file income tax return
under the One by Six Scheme. However, those who have incurred an expenditure of Rs. 50,000 or more towards consumption of electricity during the previous year, now have to furnish the income tax return.
[THE PENALTY FOR NON-FILING OF INCOME-TAX RETURN IS RS. 5000.]
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37
I- TAX PROVISIONS FOR INSURANCE

Insurance provide a legally authorized way to reduce the incidence of Income Tax. With a view to promote savings and increase awareness regarding insurance, the government has provided certain benefits through the Income Tax Act for tax payers if they choose to opt for life insurance policies.
If you plan for your future in a prudent manner, you can maximize the returns on your insurance portfolio. Shouldn't you know the features of the Income Tax Act with reference to their effect on Life Insurance policies?
SPECIAL PROVISIONS
SUM RECEIVED FROM LIFE INSURANCE POLICY According to Sec. 10 (10D), any sum received under a life insurance policy, including a sum allocated by the way of bonus on such policy, shall not be included in the total income of the person. The exemption is, however, not available in respect of such policy which is specified under Sec. 80 DDA (3)or under a key man insurance policy.
SECTION 10(10A)
Under Section 10(10A) (iii) of the Income Tax Act, any payment received by way of commutations of pension out of the Jeevan Suraksha annuity plans is exempt from tax.
SECTION 10(13)
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TAX PLANNING & INSURANCE Under Section 10(13), the following payments are exempt from income tax received from an approved Superannuation Fund made On the death of a beneficiary To an employee in lieu of or in commutations of an annuity on his retirement or after a specified age. By way of refund of contributions on the death of a beneficiary, etc.
SECTION 80C
New section 80c has been inserted. Accordingly, deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc., will be allowed upto Rs.1,00,000/- (details in chapter-Finance act 2005)
SECTION 80CCC(3)
Under the existing provisions contained in section 80CCC, an assessee being an individual, is allowed a deduction up to ten thousand rupees in the computation of his total income, of the amount paid or deposited by him to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the fund. (details in chapter-Finance act 2005)
SECTION 10(23AAB) Any income of a fund set up by the LIC of India or any other approved insurer under a Pension Scheme is exempt. [Section 10(23AAB)]
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TAX PLANNING & INSURANCE The fund should be such: To which contribution is made by any person for the purpose of receiving pension from such fund; Which is approved by the Controller of Insurance or the Insurance Development and Regulatory Authority
KEYMAN INSURANCE SEC 37(1)

The premium paid by the company is allowed as a 100% deductible business expenditure u/s 37(1) of the Income Tax Act. The proceeds received by the company at the time of the maturity or death of the key man is treated as income of the company and will be subjected to the tax.
When the company assigns policy to key man for "No consideration" as a retirement benefit, the surrender value proceeds received by the key man is treated as additional salary and hence tax has to be paid by the key man.
PARTNERSHIP INSURANCE
The insurance premium under partnership insurance on the lives of the partners is allowed as 100% business expenditure u/s 37 (1) of the Act. However, the policy proceeds on the death claims will be treated as an income of the firm and is subjected to tax.
LIMITATIONS FOR PROVISIONS

TERMINATION OF THE ULIP.
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TAX PLANNING & INSURANCE Where a member participating in the unit linked plan terminates his participation before making contribution for a period of 5 years. No tax deductions will be allowed in respect of contributions made in such year. Moreover, an amount equal to an aggregate of tax deductions allowed in respect of the contributions to the plan in the past years shall be deemed as tax payable by the assessee of the previous year in which he terminates his participation in the plan.
DISCONTINUATION OF THE INSURANCE PLAN

Where a taxpayer discontinues a policy of the life insurance, before the premium for 2 years have been paid, no tax deductions will be allowed in respect of any premium paid on that policy in the year in which the policy is terminated. Further, the amount of tax deduction allowed in respect of the premium paid in respect of the policy in the year preceding that year will be deemed to be the tax payable by the assess of the year in which the policy is terminated.
In case of the single premium policy, if such policy is surrendered with two years of the date of the commencement of insurance, the amount of deduction of income tax allowed earlier shall be deemed to be the tax payable in the year of surrender.
NON LIFE INSURANCE

MEDICAL INSURANCE PREMIUM - SEC. 80 D
Mediclaim policies attract tax benefits up to Rs.10,000. (Details in chapter-medical insurance-a must have)
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HANDICAPPED DEPENDENT - SEC 80DD

Section 80 DD provides relief to individual resident taxpayer who has a handicapped dependant person to support. (Details in chapter-medical insurance-a must have)
INSURANCE CLAIM RECEIVED - [SEE. 45 (1A)]

The insurance claim received on account of destruction of asset is not chargeable to tax, as "destruction" does not amount to transfer. The newly inserted sub-, section (1A) provides that where any person receives any money or other assets under any insurance from an insurer on account of damage to or destruction of any capital asset, as a result of flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature, riot or civil disturbance, accidental fire or explosion or because of actions by the enemy or actions taken in combating the enemy, then any profits or gains arising from receipts of such money or other assets shall be chargeable to income tax under the head "Capital Gains" and shall be deemed to be the income of such person in the previous year in which such money or other asset is received. Let us understand the expenses which are allowable in computing the taxable business / professional income (In context to insurance) Insurance premium paid or payable for business premises or insuring them against damage will be allowed as a deduction in determining business or professional profits.
Any expenditure incurred by way of insurance of machinery, plant and furniture used for the purpose of business or profession will also be allowed as deductions.
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OTHER DEDUCTIONS UNDER SECTION 36

There are various other expenses, which are allowed as deduction for obtaining the taxable profits. They are briefly described below:-
Insurance Premium [Sec. 36 (l)(i) The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores, used for purposes of business or profession, is allowed as deduction.
Insurance Premium paid by a Federal Milk Cooperative Society [Sec. 36 (i) (ia)] Insurance premium paid by the federal milk co-operative society on the lives of cattle, owned by the members of a primary milk co-operative society affiliated to it, is allowable as deduction.
36 [l(ib)]
Premia for Insurance on Health of Employees [Sec.
An employer can claim deduction in respect of premia paid by him by cheque for insurance on the health of his employees in accordance with the scheme framed by the General Insurance Corporation and approved by the Central Government.
In the last budget there was a proposal to charge service tax to the insurance premium paid by the insured. The service tax for the insurance premium was proposed to be 43
TAX PLANNING & INSURANCE levied at a rate of 5%. This could act as a serious impediment to the growing insurance business. However it was later on agreed not to charge any service tax on insurance premia.
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II- WEALTH TAX AND LIFE INSURANCE POLICIES
INTRODUCTION:
Wealth Tax was introduced to remove inequalities of wealth and to achieve the objective of a socialistic pattern of society in the country. The wealth Tax Act 1957 came into force form 1.4.57. It is charged for every assessment year in respect of net wealth of every individual and company at the rate of 1% of the amount by which net wealth exceeds Rs. 15 lacs. 'Net Wealth - can be defined as the combined value on the valuation date of all assets (like land, building, car, house, jewellery, cash-inhand etc) in excess of the debts outstanding on such assets. Where a person makes a gift to another by mere book entries or at consideration lower than the market value, the actual value of such gifts shall be included in the net wealth of the person who gives the gift.
SAVING IN WEALTH TAX:
Life Insurance policies are not included under the term "assets" and they are not subjected to wealth tax as long as the premiums are payable for a period of 10 years or more. Life insurance plans therefore offer one way of avoiding substantial wealth tax.
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III- INSURE YOUR CHILD & SAVE TAX

Life Insurance can be used as a tax tool in many ways and the most popular route is to save for tax deductions as eligible savings. But there are many other methods by which life insurance could be made use of as tax tools and one of those methods is discussed here under.
It is a common knowledge that under section 64 of the Income Tax, 1961 any income arising or accruing to a minor child would be clubbed in the hands of the-parent whose income is greater. Similarly, the wealth of the minor would also be clubbed in the hands of the parent. Suppose one keeps rupees one lakh in a bank deposit carrying an interest at the rate of say eight per cent per annum in the name of a minor. The interest thereon of rupees eight thousand would be clubbed in the hands of the parent. There is no escape from this and the entire gamut of asset transfer is covered in one way or the other.
The notable exception as it stands to day is that of life insurance. What does this mean? This would simply mean that wealth could be transferred to the minor child without attracting the clubbing provision. Consider the case of an individual who takes out a life policy in the name of his minor son in such a way that the policy will mature after the minor attains majority. In this case, the parent will continue to pay the premium and as is well known would continue to avail of the deduction for payment of premium from his income subject to the provisions of Income Tax Act, 1961 as amended from time to time. The bonus declared by the corporation, being tax exempt under clause lO (D) of Section 10 of the Income Tax Act, 1961, there is no amount to be clubbed in the hands of the parent. The policy will mature after the minor attaining majority and hence the clubbing provisions will not be applicable on the income to be earned on the monies invested out of the proceeds of the policy consequent upon maturity. Similarly, the same would not enter into the Wealth Tax net too.
46
TAX PLANNING & INSURANCE The individual year premiums could be treated even as gifts as a matter of abundant caution and this would not have any tax implication. Thus this method paves the way for transfer of assets from the parent to child without much of a hassle.
Let us consider the case of Mr. X who has taken a policy as under: PLAN 102 (LIC)___________________ POLICY AMOUNT INSURED: DOB: DATE OF COMMENCEMENT: 1-4-1993 MATURITY: PREMIUM: 1-4-2009 Rs. 29,676 P.A. Rs.5, 00,000 MINOR CHILD 1-4-1983
The premium will be allowed as a deduction in the hands of the parent and would ensure substantial tax savings. The policy will mature after the child-attaining majority. Since the bonus declared is tax free, nothing will be taxed in the hands of the parent every year unlike investment in other instruments. The parent can treat every year premium as a gift without tax.
On 1-4-2009, a sum of more than Rs.10, 00,000 will be transferred in the name of the child. The child who is a major can invest the said proceeds in any instruments and the income thereon will not be clubbed in the hands of the parent. Assuming an interest @8%-RBI Bonds, the interest of Rs.80 000 will be taxed in the hands of the child, if at all it is outside the taxable limits Generally, the parent will be in the higher slab of tax at this stage as he will be having accumulated savings and the child will be on a nil or lower slab of tax. The gains will be substantially higher. In the above example, if policy was taken still earlier, the gains will be much more, since the premium will also be lower and the plan also could be for a longer duration. 47
This is where the insurance works as a tax tool. The gains are manifold. The child's life is insured as a matter of primary objective. The transfer of money would ensure that much needed money is made available to the child upon attaining major status, be it for higher education, going abroad, buying of dwelling unit, celebration of marriage or for simple investment for the future.
The notable feature is that the child can freely invest the proceeds of the policy and the subsequent income thereon would not be liable to be clubbed in the hands of the parent. The savings would be substantial if one reckons the fact that the accumulated savings in the hands of the parent at that time would be very high. The income on certain savings such PF, PPF, etc. are not liable to / be taxed. But consequent upon withdrawal or maturity, the reinvestment of the said sum into any other form of savings pushes up the tax liability in the hands of the parent as the return thereon becomes liable to be taxed.
A planned methodical transfer of wealth to the children may reduce the future tax liability a lot. Here is where the life insurance lends in its helping hand as stated earlier. Of course, this could be even affected by single premium policies.
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49
I- RELEVANT SECTIONS
EFFECTIVE DATE OF AMENDMENT: 1-4-2006
SECTION 80C
Nature of amendment: Shall be inserted Effect of amendment: Section 80C, relating to deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc., shall be inserted. Sub-section (1) provides that in computing the total income of an individual or a Hindu undivided family, a deduction not exceeding one lakh rupees shall be allowed with respect to the amounts paid or deposited, in the previous year, in the schemes or plans referred to in sub-section (2) of the said section. Sub-section (2) provides that the amount paid or deposited in the previous year as 1. Life insurance Premiums 2. Contributions to Employees Provident Fund/GPF 3. Public Provident Fund (maximum Rs 70,000 in a year) 4. NSC (National Saving Certificate) 5. Unit Linked Insurance Plan (ULIP) 6. Repayment of Housing Loan (Principal) 7. Equity Linked Savings Scheme (ELSS) 8. Tuition Fees including admission fees or college fees paid for Full-time education of any two children of the assessee (Any Development fees or donation or payment of similar nature shall not be eligible for deduction). 9. Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, and PFC etc.
50
TAX PLANNING & INSURANCE 10. Interest accrued in respect of NSC VIII issue 11. subscription to equity shares or debentures forming part of any eligible issue of capital of a public company or a public financial institution Sub-section (3) provides that the provisions of sub-section (2) shall apply only to so much of any premium or other payment made on an insurance policy other than a contract for a deferred annuity as is not in excess of twenty per cent of the actual capital sum assured. It is also clarified by the Explanation to sub-section (3) that in calculating any such actual capital sum, no account shall be taken of the value of any premiums agreed to be returned, or of any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person. Sub-section (4) specifies the persons in whose name the investments can be made. Sub-section (5) provides the consequences in the event of termination of contract of insurance before the expiry of two years or transfer of the house property referred to in clause (xviii) of sub-section (2) before the expiry of five years. Sub-section (6) provides the consequences in the event of transfer of equity shares or debentures within a period of three years from the date of their acquisition. Sub-section (7) provides that insurance, deferred annuity, provident fund, superannuation fund, unit-linked insurance plan, etc., mentioned in sub-section (2) of section 88 shall be eligible for deduction under the new section 80C. Sub-section (8) defines certain terms such as contribution, insurance, security, transfer, etc., for the purposes of new section.
51
TAX PLANNING & INSURANCE Because the deduction is allowed from taxable income, the exact savings in tax will depend upon the tax slab of the individual. Thus, a person in 30% tax stab can save income tax up to Rs. 30,600 (or Rs. 33,660 if annual income exceeds Rs. 10,00,000) by investing Rs. 1,00,000 in the specified schemes u/s 80C.
SECTION 80CCC(3)
Nature of amendment: Shall be substituted Effect of amendment: Under the existing provisions contained in section 80CCC, an assessee being an individual, is allowed a deduction up to ten thousand rupees in the computation of his total income, of the amount paid or deposited by him to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the fund referred to in clause (23AAB) of section 10. Sub-section (3) of section 80CCC provides that where any amount paid or deposited by the assessee, has been allowed as a deduction under this section, a rebate with reference to such amount shall not be allowed under section 88. Sub-section (3) shall be substituted so as to provide that where any amount paid or deposited by the assessee, has been allowed as a deduction under the aforesaid section, a deduction with reference to such amount shall not be allowed under new section 80C. The amendment is consequential in nature. Available to Individual Assessee only Accordingly, a person who is in 30% tax bracket can save income tax of Rs 3,060 (or Rs. 3366 if annual income exceeds Rs 10,00,000) by contributing Rs 10,000 towards Pension plan in a year. Some of the popular pension plans are Jeevan Suraksha by LIC, Life Time Pension By ICICI Prudential Life Insurance, Aviva Life - Pension Plus by Aviva
52
TAX PLANNING & INSURANCE Life Insurance, Max-Easy Life policy by Max New York Life, Nirvana Plus by Tata AIG Insurance Etc.
SECTION 80CCE
Nature of amendment: Shall be inserted Effect of amendment: New section 80CCE provides that the aggregate amount of deductions under section 80C, section 80CCC and section 80CCD shall not, in any case, exceed one lakh rupees.
SECTION 80(9)
Nature of amendment: Shall be inserted Effect of amendment: Section 80C, relating to deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc., shall be inserted with effect from 1-4-2006. Sub-section (9) shall, therefore be inserted in section 88 so as to provide that no deduction from the amount of income-tax under section 88 shall be allowed to any assessee for the assessment year beginning on 1-4-2006 and subsequent years.
SECTION 88
53
Nature of amendment: Shall be omitted Contents of section: In respect of Certain Investments and Deposits available to individual and HUF assessees only. In Respect of: Investments, deposits and payments made in the following items:
In respect of an individual assessee, Life Insurance Premium paid on the policy for self-spouse children but not parents.
Own contribution is statutory or recognized provident Fund. PPF contribution Deposit in 10 year Account under post office saving bank cumulative time deposit rules 1959 [CTD]
Contribution of ULIP, Dhanraksha plan or LIC Mutual Fund equity linked saving scheme of mutual fund.
Repayment at loan from a public financial institution in respect of a residential accommodation or cost of construction but the maximum eligible amount Rs20, 000 for a previous year.
Deposit in NSS Investment in notified infrastructure bonds, debentures, mutual fund and shares
Premium paid for an insurance policy whose premium exceeds 20% of the capital sum assured (excluding bonus, other benefits, etc) would not be eligible for rebate.
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TAX PLANNING & INSURANCE Any payment made by an individual for full time education of any two children of such individual, as tuition fees to university, college, school or other education institution situated within India, subject to maximum of Rs. 12,000/- per child, subject to maximum of two children and is to be included in the gross qualifying amount of Rs. 70,000/-.
TABLE The rebate allowable for all categories of individuals & HUF is as follows:
GROSS TOTAL INCOME (in Rs.) Up to 1,50,000/Between 1,50,000/- to 5 lacs Exceeding 5 lacs
REBATE 20% 15% NIL
However in respect of individuals whose salary income is less than Rs.1 lakh before claiming deduction u/s 16 and whose salary comprises at least than 90 % of his gross total income, rebate will be @ 30 %.
Maximum qualifying amount is Rs. 1,00,000/- out of which limit of Rs.30,000/- or more can be utilized for infrastructure bonds.
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II- SEC-80C: A RELIEF OR CONFUSION
Finally, the government is treating you like an adult. It is no longer interested in dictating where to invest to save taxes. This years budget proposals to include bank fixed deposits under Section 80 C and scrap the cap of Rs 10,000 exclusively available to pension plans would testify to that. However, an overcrowded section 80C is going to make life confusing for the adults, as it may increasingly become difficult to choose the right vehicle from the options available. And a cap of Rs 1 lakh makes the process even harder, says financial advisors.
"Unless the upper limit is raised, it is meaningless to add more products to the 80C list. It only makes the selection process confusing. A wrong choice of products can have serious consequences," says a financial consultant. For the uninitiated, if you are ready to invest money in certain instruments for a specified period, you cant claim tax deduction of up to Rs 1 lakh under section 80C. The list of instruments that qualify for tax deduction include Employer's Provident Fund, Public Provident Fund, National Savings Scheme, life insurance premium and equity-linked saving schemes (ELSS), among others. Joining the list is fixed deposits with a minimum tenure of five years and pension plans from life insurance companies.
The best way to go is to put down an objective first and then choose the product. For example, if you have a medium-term goal, you should pick ELSS or fixed deposit. If you are looking for a long-term investment avenue and assured returns, you should consider PPF. Also, you should mentally exclude items like life
56
TAX PLANNING & INSURANCE insurance from the list if you don't have any descendants.
Another thumb rule, according to him, is to bank on safe, assured returns schemes if you have a short-term goal. Alternatively, one should always look at equity as long-term investment, he adds. The new entrantsFD and pension plans don't have many takers in the financial community. Fixed deposits always give you negative returns. So, It wouldn't be advisable to put money in a 5-year FD. As for pensions, It would rather be better to wait for the government to come out with detailed guidelines on pension funds. Until then, one should keep money in ELSS.
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SEC 88 V/S SEC 80C

The annual tax-planning exercise for most investors tends to be divorced from their financial planning process. As a result factors like risk appetite, investment objective and tenure of investment are often overlooked when tax-planning investments are made. While apathy or lack of awareness on the investors' part could be partly 'credited' for this, the restrictive nature of Section 88 of the Income Tax Act should also shoulder the blame.
SECTION 88
In the erstwhile tax-regime (prior to Finance Bill 2005), provisions for the purpose of tax sops fell under the gamut of Section 88. Investors were required to make investments in stipulated tax-saving instruments for claiming tax rebates under the given section. Tax rebates under Section 88 Annual Income Upto Rs 150,000 Rs 150,000 to Rs 500,000 Over Rs 500,000 Tax Rebate 20% 15% Nil
As can be seen from the table above, the investor's income level was the key in determining the rebate he was entitled to; a higher income level translated into lower rebates. Investments eligible for the purpose of claiming tax benefits included Public Provident Fund (PPF), National Savings Certificate (NSC) and tax-saving funds among others. The upper limit (in monetary terms) for the purpose of tax-saving investments was pegged at Rs 100,000.
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TAX PLANNING & INSURANCE However the hitch was that 'sectoral caps' existed on the various investment avenues. For example investments in tax-saving funds (also referred to as ELSS) of upto Rs 10,000 were eligible for claiming tax benefits. Similarly investments in instruments like PPF, NSC, tax-saving funds and avenues like insurance premium, repayment of home loan (principal component of the EMI only) among others accounted only for a Rs 70,000 benefit. The balance Rs 30,000 (Rs 100,000 less Rs 70,000) was reserved for infrastructure bond investments.
Effectively, the investor had little choice in selecting the tax-saving investments. Instead it was Section 88 which determined how each individual would make his investments. An investor with a high risk appetite had to choose the same investment avenues as a low risk investor because of Section 88's restrictive nature.
ENTER SECTION 80C

Section 88 was scrapped in Finance Bill 2005, instead Section 80C was introduced. All avenues which were eligible for tax benefits under Section 88 were brought under the Section 80C fold. However instead of offering tax rebates, investments (upto Rs 100,000) under Section 80C qualified for deduction from gross total income. Hence a new system of claiming tax benefits was introduced; furthermore a new tax structure was introduced as well.
The biggest advantage Section 80C offered was that sectoral caps on taxsaving instruments were removed. As a result investors were given the freedom to select investment avenues of their choice for tax-planning purpose.
WHY
SECTION
80C
SCORES
OVER
SECTION 88
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TAX PLANNING & INSURANCE Section 80C has come as a boon to investors who have an appetite for risk. Investing in line with one's risk appetite is a tenet of financial planning and Section 80C promotes the same. Removal of sectoral caps on investments for the purpose of tax-planning means investors can invest in line with their risk appetites and needs.
Until the previous year, investment in tax-saving funds (otherwise known as Equity Linked Savings Schemes) for the purpose of availing a tax benefit was restricted to Rs 10,000 pa. In the current year all such restrictions have been done away with; an individual assessee now has the flexibility to invest the Rs 100,000 that is allowed under Section 80C in any proportion that he wishes (only in PPF is there an upper limit of Rs 70,000 pa) in specified instruments. A risk-taking investor can invest his entire corpus of Rs 100,000 in a high risk instrument like ELSS; conversely a risk-averse investor can select small savings schemes like PPF and NSC. As a result, every investor's tax-saving portfolio can now reflect his individual preferences.
Another advantage Section 80C offers is for investors whose gross total income is greater that Rs 500,000. Under the earlier tax regime, these investors were not eligible for Section 88 tax rebates. However Section 80C has done away with this disparity and investors across tax brackets can claim the Rs 100,000 deduction.
ILLUSTRATION:
As we all know that under new section 80C, deduction is allowed where as under section 88, rebate is given. The below given illustration will make it clear that deduction is more advantageous than rebate for a taxpayer. Suppose, Mr. Amitabh bachchan is earning gross income as Rs. 1,75,000 & if he gets Rs.10,000 as deduction, then
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TAX PLANNING & INSURANCE Gross income less: Deduction Net Income tax payable (30%-26,000) But, if rebate is given for rs.10, 000, then Gross income less: Deduction Net Income tax payable (30%-26,000) less: rebate tax payable 25000 1500 net 1,75,000 0 1,75,000 26500 1,75,000 10,000 1,65,000 23500
Thus, deduction has given the benefit of Rs.1500 to the assessee. Therefore sec 80C is better than sec 88.
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I- ISSUE OF TAXING LIFE INSURANCE SECTOR

ISSUE:
With the opening of Insurance sectors for private player taxation of Insurance undertakings has become a major issue. The issue relates to taxation of policyholders and shareholders. The first category includes 1) Tax treatment of premiums and contribution; 2) Taxation of policyholder funds; and 3) Taxation of benefits received and latter category includes taxation of transfers between policyholders funds and 4) Shareholders funds and taxation of shareholders funds.
Currently the Life Insurance industry is taxed on the Valuation Surplus that emerges during the most recent inter-valuation period, and the investment profit on shareholders' funds. All other types companies are taxed on shareholders' profits.
The emerging valuation surplus is distributed as bonuses to policyholders and profits to shareholders. Taxing this way (Valuation surplus) imposes a tax on both shareholders and policyholders. Now with the opening up of the insurance sector to private sector participation, a fresh approach needed to be adopted to tax the life insurance segment. Central Board of Direct Taxes (CBDT) has constituted an expert committee on the Taxation of Life Insurance Sectors under the Chairmanship of V.U. Eradi.
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TAX PLANNING & INSURANCE The issues of concern are also the rate of tax, losses of life insurance business not being allowed to the carry forward and set off against surpluses in future and transfers from shareholders funds to policy holders fund (life fund) to meet the cost of bonuses in the early years, till the emergence of surplus in the policy holder fund, to meet the cost of bonuses to the policy holders getting taxed in the normal course.
While it is correct to tax that part of the surplus that represents shareholders' profits, it was not reasonable to tax policyholders on the full value of bonuses distributed to them, since a major source of these bonuses are the premiums paid by the policyholders themselves. This was recognized when the current tax rate of 12.5% was first set. This figure was based on a calculation performed at that time on the Life Insurance Corporation of India (LIC) and was meant to represent an effective tax rate which when applied to the emerging valuation surplus would be equivalent to the full corporate tax rate being applied to those parts of the surplus that should be taxed
BACKGROUND:
Section 44 of the Income Tax act 1961, read with first schedule of the act deals with taxation of life Insurance business. Till 1976, Life Insurance business was taxed on the higher of Profit on investment income less expenses or Valuation surplus (excluding prior years surplus or deficit) less 80% of bonuses declared or amounts reserved for policyholders. In the Budget of 1976 government abandoned higher of the two system and adopted the annual average of the surplus disclosed by the actuarial valuation under the Insurance act, 1938, after excluding from it any surplus or deficit included therein relating to any earlier inter-valuation period. The taxable income so determined is taxed at a flat rate of 12.5 % prescribed under the first Schedule of the IT Act. This rate is not affected by the Annual acts and has remained unchanged since 1977.
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TAX PLANNING & INSURANCE Nevertheless, in the matter of taxation of life insurance companies, the Indian standard is not only on par with the international one, but is also one of the simplest.
Current system of Taxation was workable when there was only one life insurance company and was of the view that it would not work in the new environment where many insurance companies are going to enter the Indian market. The rate of 12.5 % will not be the correct figure for the new Insurance companies, because for each company the shareholders profits will be a different proportion of the emerging Valuation surplus.
INTERNATIONAL PRACTICE:
There is no singular system of Taxation worldwide - it varies over country to country. Some country like Japan, Philippines, Hong Kong, Macau have premiumbased taxation of life Insurance business. Whereas in some countries like Malaysia, Insurer are taxed on Investment income and capital gains either in lieu of or in addition to a premium based tax. In some countries like Great Britain have adopted a system where insurers have to pay tax on Investment income less expense.
SUGGESTION:
It is proposed that instead of taxing al emerging surplus at one rate of tax, it be taxed according to the recipient of the surplus. The surplus transferred to the shareholders fund represents shareholders profits and therefore they should be taxed at the full corporate tax rate of 38.5% including surcharge. These can be achieved by not directly taxing that part of the surplus transferred to the shareholders fund. Instead the transfer would go through the shareholders profit and loss account, where it would directly contribute to the shareholders profits along with the profits on the shareholders investments.
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The total shareholders profits would be taxed at the full corporate tax rate. In the case of the surplus distributed to policyholders as bonuses, there is strong demand for having lower taxation for life insurance policyholders. The current rate of 12.5 % was set when the corporate tax rate was 52.5%. Now when the corporate tax rate has been brought down to 35% there is reasonable case of reducing the tax rate on surplus distributed to policyholders to around 8%. In the case of Surplus retained within the policyholder's fund, it is proposed that no tax should be levied on surplus retained within the policyholders fund; such surplus will be either transferred to shareholders or distributed to policyholders as bonuses. In this regard different Chamber of commerce have submitted their paper to Eradi committee, which is likely to table its report within few days.
The Confederation of Indian Industries (CII) has suggested five pronged strategies to tax in a paper submitted to the Expert Committee on the Taxation of the Life Insurance Sector.
CII has proposed that instead of taxing all emerging surpluses at one rate of tax, the same may be taxed according to the recipient of the surplus. CII has suggested a 5-pronged approach to taxing the life insurance sector. In the case of surplus transferred to shareholders, CII has proposed that there should be no direct taxation. The transfer should be included in shareholders' profit and loss account and taxed as part of shareholders' total profits at the full corporate tax rate. Whereas in the case of surplus distributed to policyholders as bonuses, these should be taxed at the time of distribution at a rate of 8%, plus surcharge, if any. The tax should not be levied on the surplus distributed when a transfer from the shareholders funds has funded this surplus.
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TAX PLANNING & INSURANCE CII has recommended that in the case of surplus retained within the policyholders' fund, there should also be no direct taxation. These should be taxed when they are transferred or distributed. In the case of profits on shareholders' investments, these should also not be subject to direct taxation. The profits on shareholders' investments should be included in shareholders' profit and loss account and taxed as part of shareholders' total profits at the full corporate tax rate. On the issue of Shareholders losses CII has suggested that Shareholders losses should be allowed to be carried forward to the offset future shareholders profits, including losses by transfers from shareholders to the policyholders fund.
According to CII, there is an enormous scope to increase the insurance coverage in India. It is for this reason, CII has suggested that in the long term, the government should set a low tax rate which will stimulate the required growth of insurance coverage and enable long term investment in the economy, including the infrastructure sector. This, CII believes, would also result in a far greater tax income from life insurance over the long term. CII believes that these suggestions, if implemented, would go a long way in providing the appropriate incentives to foster the growth of this important sector of the economy.
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II- TAXATION OF GENERAL INSURANCE COMPANIES INTRODUCTION

Triton Insurance Co. Ltd. was the first general insurance company to be established in India in 1850, whose shares were mainly held by the British. The first general insurance company to be set up by an Indian was Indian Mercantile Insurance Co. Ltd., which was established in 1907. There emerged many a player on the Indian scene thereafter.
The general insurance business was nationalized after the promulgation of General Insurance Business (Nationalisation) Act, 1972. The post-nationalization general insurance business was undertaken by the General Insurance Corporation of India (GIC) and its 4 subsidiaries: 1. 2. 3. 4. Oriental Insurance Company Limited; New India Assurance Company Limited; National Insurance Company Limited; and United India Insurance Company Limited.
Towards the end of 2000, the relation ceased to exist and the four companies are, at present, operating as independent companies.
TAXATION OF GENERAL INSURANCE COMPANIES

There has not been any notable special treatment for the taxation of a general insurance company. It is taxed as a normal trading company. The general insurance contracts are usually for one year or less and profit under general insurance business is arrived at or is estimated at the end of this contract period.
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The premium charged for the risk cover and the contract period fall in two successive accounting periods. In accordance with the mercantile system of accounting, the premium, claims and expenses have to be appropriated to the correct accounting year. This requires that the premium is allocated to the year of issue in proportion to the period of risk falling in that year, assuming that the risk is uniformly spread over the period of the contract. The amount of premium for the unexpired portion of the contract is carried forward to the following year. This carried forward amount is known as the Unexpired Premium Reserve. Where the risk of claim is not uniform over the contract period, the allocation between the year of issue and the following year is effected on actuarial principles. A certificate by the actuary is to be appended to the revenue account for this purpose. Most of the countries in the Europe, including the UK, allow a further amount to be set up as reserve, where such unearned premium reserve is felt not adequate to cover the risk. In these countries, this additional amount is taken into account while arriving at the unexpired premium reserve to be set up.
In India, the IRDA regulations allow for provisions for the Unexpired Risk Reserve (URR) as a percentage of premium for different classes of business (which includes the above unexpired premium reserve). However, if an insurer feels that this is not adequate in specific cases and is able to establish the same scientifically, a provision for transferring the additional amount required from the pre-taxed profits could be considered in the regulations. Although most of the general insurance contracts are for a period of one year or less, there is a noticeable trend towards longer-term contracts in recent years. Deferred health insurance contracts, under which the cover commences between ages 55 and 60 of the life assured and then span his/her balance lifetime is a typical example. The project insurance that provides comprehensive cover against all the risks associated with the execution of big projects, is another example. The contractor's all risk cover (CAR) and the marine cum erection risk cover (MCE) that are increasingly becoming popular are also components of project insurance. These 69
TAX PLANNING & INSURANCE contracts cover the risk for periods ranging from 6 months to 5 years. Under these contracts, the required premium is collected either in a single installment or in multiple installments. While arriving at the premium to be charged for the risk cover, future cash flows in respect of claims payable and the estimated future expenses are discounted at an appropriate rate of interest. At the end of the year, while that portion of the premiums covering the risk in future come under the unexpired premium reserve, the interest earned on the unexpired premium reserve is not added to the unexpired premium reserve but credited to the shareholders' account. These contracts are similar to long-term life insurance contracts. The unexpired premium reserve method of reserving for the liability is inadequate in such cases and the liability has to be estimated by actuarial techniques, in the same way as in case of life insurance contracts. To address this, general insurance companies could be allowed to set up appropriate reserves on this basis.
The IRDA regulations also provide for a transfer out of the policyholders' revenue account to a catastrophe reserve, on an annual basis, up to a specified aggregate amount. This reserve is over and above the reinsurance cover arranged by the general insurance office for covering the catastrophe claims after payment of a suitable premium. The need for such a reserve has been recognised by many countries in Europe, including the UK, and the reserve has been allowed to be set up, or added to, out of pre-tax profits. In India too, the importance of providing for catastrophe reserve has been duly recognised by the IRDA and the Government. However, the transfer to this reserve has to be made from profit after tax. As in other countries, the transfer to this reserve could be allowed to be made out of pre-taxed profits. In the matter of taxation of general insurance companies, the Indian standard is marginally below that of the international one.
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III- GEN INSURANCE: PROFIT FROM SALE OF INVESTMENT MAY BE TAX-FREE

The Government is likely to incorporate a specific provision in the income-tax law to exempt from tax the profit earned by general insurance companies from sale of investments. The amendment may be proposed in the forthcoming Union Budget.
Currently, under the I-T law, general insurance companies are assessed under a dedicated set of provisions that they feel have put them at a disadvantage vis--vis other assessees in respect of tax treatment of profits from sale of investments.
The insurers have approached the Finance Ministry to bring about a levelplaying field by clearly spelling out that such profits would be tax-exempt.
General insurance companies are keen to benefit from the amendments in the Budget of 2004-05 which provided that long-term capital gains from sale of equity shares (where securities transaction tax has been charged) would be tax-exempt from assessment year 2005-06.
Despite other companies enjoying the benefit, general insurers apprehend that they do not benefit from the exemption since they are governed under separate provisions. From the financial year 2001-02 (when the Insurance Regulation and Development Authority (IRDA) regulations became mandatory), the profit on sale of
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TAX PLANNING & INSURANCE investments are taxed at the hands of the general insurers by the tax authorities on the plea that there is no specific provision exempting such profits from tax.
The IRDA had required general insurance companies to route their profits on sale of investments through the profit and loss (P&L) accounts and revenue accounts. Prior to the IRDA requirement, the general insurance companies were adjusting the gains against the reserves.
Confirming that the insurance industry had raised the issue with the Finance Ministry, the Chairman and Managing Director, Oriental Insurance Co, M. Ramadoss, said there has been a collective demand that profit from sale of investments should be tax exempt for non-life insurers too.
"All companies other than insurance companies get benefit on exemption from long-term capital gains. This is because of the peculiar nature of taxation for insurance companies under the present laws. We have said that profit made by us from sale of investment should also be tax-free," Ramadoss said.
He said while companies have individually taken up the issue, the matter has also been raised through the collective forum such as the General Insurance Public Sector Association. Ramadoss said the IRDA has also supported the cause of the nonlife insurers.
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IV- TAX PLANNING FOR AGENTS INTRODUCTION

The insurance agents can earn commission by procuring business. Agency Commission earned by an agent is like any other business income for which an agent can claim reasonable expenses incurred before arriving at Profit/ Loss for this business. An agent is required to maintain proper records of his 'Income & Expenditure so as to satisfy the I.T.O. that the expenses claimed are supported by relevant vouchers. The nature of expenses could be: a. b. c. d. e. f. Conveyance expenses including drivers salary if any Office rent and maintenance expense including salary of staff/peons etc. Depreciation on Car, Computer etc. Stationery, Visiting Card expense Telephone expense Entertainment expense
The commission, generally, is in nature of first year commission, renewal commission and bonus commission. The commission earned is an income, which may be taxable depending on the total income. If the income from all sources including LIC commission does not exceed Rs. 50,000 per annum, then one is not liable to pay income tax as it is below taxable limit.
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SECTION 37- (DEDUCTION)

However there is a specific provision under Section 37 of income Tax 1961 for an adhoc deduction from agency commission income (without maintaining records) as mentioned below: If the commission earned from LIC is below Rs. 60,000 per annum and if no separate books of accounts is maintained, then the entitlement for deduction is as follows: (a) First year Commission - 50% (b) Renewal Commission - 15% Subject to maximum of Rs.20, 000
However, if separate bifurcation could be made then LIC agent is entitled to a flat deduction of 331/3% of total commission.
The LIC commission after claiming deduction as mentioned above will be included with other source of income for tax purposes.
In case gross commission earned by an agent from LIC exceeds Rs. 60,000 per annum then he cannot claim deduction referred above.
INCOME FROM OTHER SOURCES - SEC. 56(2)

As per the provisions of Sec. 56(2) of the Act, income received in the form of insurance commission is chargeable to tax under the head of "Income from other sources." Income chargeable under this head is computed in accordance with the method of accounting regularly employed by the assessee. This head of income can be evoked only if all the following conditions are met:
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TAX PLANNING & INSURANCE There is an income; That income is not exempt from tax under Sec. 10 to 13A; That income is neither salary income, nor rental income from house property, nor income from business/profession, nor capital gains.
TDS FROM INSURANCE COMMISSION. [SEC. 194 (D)]

A person responsible for paying to a resident any income by the way of remuneration or reward, whether by the way of commission or otherwise, for soliciting or procuring insurance business including business relating to the continuance, renewal or revival of policies of insurance, is required to deduct income tax thereon at the rates in force (10% for the A.Y. 2002-03). Tax shall be deducted at the time of credit of such income to the account of the payee or the payment thereof (by whatever mode), whichever is earlier. No tax is required to be deducted at source if the insurance commission credited or paid during the financial year does not exceed Rs. 5,OOO/-. The person receiving insurance commission can make an application in Form No. 13 to the concerned Assessing Officer and obtain a certificate authorizing the person responsible for making payments, by the way of insurance commission, to deduct tax at a lower rate or to deduct no tax, as may be appropriate.
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BUDGET 2006: ITS IMPLICATIONS ON TAXATION
As P.Chidambaram presented Budget 2006, his speech was more about the benefits he has showered upon his countrymen. As always, the party has begun soon thereafter. The worst, however, lay be yet to come, which typically happens when experts go past the broad proposals and start working out the implications of the Finance Bill that is released along with the Budget. But for now, there's some good news, some that's neither here nor there, and a little that qualifies as bad news.
TAXATION: THE HIGHS

There were several issues to cheer about in Budget 2006, such as:
TAX RATES UNCHANGEDIndividual and corporate tax rates have remained unchanged and no new taxes are being imposed. That's a big relief to the common man as well as to industry.
ONE-IN-SIX SCHEME ABOLISHEDThe one-in-six scheme of filing tax returns on income is now being abolished. The scheme was only increasing the workload of the tax department and was serving no good purpose as the required data is in any case now being collected through various other sources and reports. BANK FDS QUALIFIED UNDER SECTION 80CInvestments in fixed deposits of scheduled banks for more than five years would now be covered u/s 80C. That's good news for
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TAX PLANNING & INSURANCE banks that felt left out after Section 80L, which provided deduction on account of certain interest income, was withdrawn last year. The proceeds would, however, be taxable at the time of maturity.
SECTION 80CCC'S CEILING OF RS 10,000 REMOVEDThe removal of the ceiling of Rs 10,000 u/s 80CCC would enable a person to invest in pension funds alone up to Rs 1 lakh, the limit prescribed u/s 80CCE. Section 80CCE states that the total deduction under Sections 80C, 80CCC and 80CCD cannot exceed Rs 1 lakh in a year. This demand had been pending for a long time, since people whose investment in retirement planning depended on the tax breaks available could invest only Rs 10,000 in a year for their old age support.
OPEN-ENDED & CLOSED-ENDED MUTUAL FUNDS Open-ended and closed-end equity-oriented schemes would now be treated at par for the purpose of exemption from dividend distribution tax. In fact, both will now be exempt from the dividend distribution tax.
SERVICE TAX RATES HIKES Service tax, which is expected to contribute 54 per cent of the GDP, is now CENVAT. So you can now claim the credit of input in your output service tax or excise duty liability. As a result of the positive impact, it has now been raised from 10 to 12 per cent. Including education cess, the raise is from 10.2 to 12.24 per cent. New services now covered under Service Tax include: ATM operations, maintenance and management; Registrars, share transfer agents, bankers to an issue; Sale of ad space or time, other than in the print media; Sponsorship of events, other than sports events, by companies; International air travel (excluding economy class);
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TAX PLANNING & INSURANCE Container services on rail, excluding freight charges; Business support services; Auctioneering; Recovery agents; Ship management services; Travel on cruise ships, and; Public relations management services. There is also a proposal to expand the coverage of certain services currently subject to service tax.
EMPLOYEES' HEALTH INSURANCE SCHEMES The definition of perquisites for calculating taxable salary has been amended to exclude premiums paid for employees' health insurance under those schemes approved by the IRDA from the definition of perquisites.
NEW TAX RETURN PREPARERS' SCHEMEThe new Section 139B refers to a scheme for submission of returns through 'tax return preparers', under which certain individuals would be authorized as preparers as per the scheme to be framed by the CBDT, who will help particular classes of taxpayers to fill and file their return of income, and affix their signatures on such returns. Inter-linking of IT departments all over India (through IT) continues.
TAXATION: THE LOWS

But the following instances are evidence that taxman will bite.
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TAX PLANNING & INSURANCE PAN (PERMANENT ACCOUNT NUMBER) The various AIRs (Annual Information Returns), which had been instituted to track various expenses, have not been of much help since PAN numbers arent quoted at all in 60 percent of relevant transactions. In such a case, the Income Tax department would have suo motu powers to allot to allot the PAN. The powers would also include directing a person to apply for PAN in certain cases, even if s/he is not liable to pay income tax.
BCCT & FBT STAYSBCCT (Banking Cash Transaction Tax) has been a huge success, at least according to the FM, with the authorities being able to unearth a huge amount of black money and the money laundering process. Hence, this is going stay till the AIRs take over the purpose the BCCT is serving today. Fringe benefit tax or FBT, for which there has been huge demand for withdrawal, stays.
STT (SECURITIES TRANSACTION TAX)The rates of Securities Transaction Tax or the SIT have been increased by 25 per cent across the board. This rise will not affect any transaction immediately, though. The rates come into effect from June 1 this year. CAPITALIZATION OF INTEREST Under Section 43B, certain payments are allowed as deduction only when they're actually paid. For example, interest on a loan deductible only if it is actually paid during the year. An amendment to this clause says that where the interest component of a loan is converted into a new loan, the interest so converted won't be deemed to be an actual payment. This is bound to the schemes of revival of sick units, where the outstanding loan
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TAX PLANNING & INSURANCE and interest thereon is usually converted into a new loan, so that the unit is partially relieved of the interest demand on the loan, and the loan isn't treated as a non-performing asset (NPA).
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PAY TAX & GET INSURANCE FREE!
INGENIOUS BMC PROPOSAL

BUY one, get one free. The BMC has thought up ah ingenious marketing strategy. Having failed to make the tax defaulters fall in line, the civic authorities have decided to offer them insurance cover.
According to a proposal passed in the standing committee of the BMC on Wednesday, all Mumbaikars within BMC jurisdiction will be provided with Rs one lakh personal accident cover, if they pay the civic taxes on time.
Over the last couple of years, the BMC authorities have not been meeting their projected annual tax revenue targets. The insurance exercise is aimed at encouraging the residents to cough up their taxes on time.
The tax-insurance scheme will cover husband, wife and two unmarried children below 25 years of age. The scheme envisages 100 per cent insurance cover in both fatal accidental cases and those resulting in permanent disability. The civic officer said that the proposal would serve as an incentive to shell out tax dues regularly and on time. In this way, it would augment tax collection. As per the proposal, all taxpayers who are residing, in the limits of the BMC would be covered. However, the taxpayer should be residing either in his own house or a cooperative society. Although the property tax bill is issued in the name of the society, all members of this society would be treated as individual taxpayers for the purpose of insurance cover.
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If the tax payer is residing in tenanted building, he too would be entitled to the risk cover, the civic body's official added.
The BMC has entered into an agreement with the National insurance Company for the purpose of this scheme.
An accident will include accidental death and permanent disability, including the partial loss of eye, hand and feet or both. A total of 50 lakh regular taxpayers would be covered under the scheme. Each year, the BMC earn Rs 1,540 crore as tax under various heads. However, it still wants more.
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CONCLUSION
OPINION:
Change is perhaps, the only static constant within the dynamics of life and risks always move in tandem within a changing environment. Insurance, in its purest form, is a risk management tool, a security blanket. It is more of a hedging mechanism that eliminates risks primarily by transferring the risk from the insured to the insurer. Although it came into existence to compensate the losses due to perils of sea but the journey doesnt ends here. Nowadays, the benefits of insurance are widespread starting from a hedging device to a tax saving investment.
However, though Insurance 'investments', and the returns on them, have a tax edge. But that's the wrong reason to buy cover. The basic motive of insurance is risk cover and that should be kept in mind while opting for an insurance policy. It should cater the personal needs of the buyer of policy.
After the introduction of section 80C, which provides tax benefit for many investment options along with life insurance schemes, buying insurance as such doesnt have any standalone tax benefit for an assesse. (Other than claim exemption).
But the contradicting viewpoint is that the limit of Rs. 70,000 under sec 88 has been raised to Rs. 1,00,000 under sec 80C. Thus, it has widened the scope of insurance, a person can pay insurance premium up to 1,00,000 if he wishes so.
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TAX PLANNING & INSURANCE Apart from this, the dual advantages of insurance are protection against uncertainty and also tax benefits. This fact gives an edge to insurance above the other investment avenues.
SUGGESTIONS:
In India the number of people insured is very meager. This is due to lack of awareness in rural villages and availability of many better investment options for urban people. Thus, Awareness must be created among the people about the importance of insurance; Government should make insurance more attractive by giving some unique tax benefits and incentives to encourage people to buy the insurance. Considering the significance of the insurance, insurance must be kept one step ahead of all other investment opportunities.
MORAL OF THE PROJECT:

DONT EVADE TAXES BUT LEARN HOW TO MANAGE THEM
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TAX PLANNING & INSURANCE

TAX PLANNING & INSURANCE

NEED FOR INSURANCE :

TAX PLANNING & INSURANCE

II- LIFE INSURANCE: AN OVERIEW

4 REASONS FOR BUYING LIFE INSURANCE PRODUCTS

Passing away early:

2. Living too long:

ROLE OF LIFE INSURANCE

Role 1: Life insurance as "Investment":

Role 2: Life insurance as "Tax planning":

TAX PLANNING & INSURANCE

III- MEDICAL INSURANCE: A 'MUST HAVE'

Medical insurance: Small costs, huge benefits

TAX PLANNING & INSURANCE

HANDICAPPED DEPENDENT: SEC. 80DD

TAX PLANNING & INSURANCE

TAX PLANNING & INSURANCE

I- TAX PLANNING-A LEGAL MEASURE

TAX PLANNING & INSURANCE

PARAMETERS FOR TAX PLANNING:

(Interest/Dividends) d) e) Benefits at time of Investment into such avenues Wealth Tax

STEPS IN TAX PLANNING:

SAVINGS & INVESTMENT:

SHATTERING MYTHS ON TAX PLANNING:

II- TAX PLANNING-A SMART WAY

INVESTMENT AS PER AGE PROFILE

TAX PLANNING & INSURANCE

VARIOUS POINTERS FOR INVESTORS

TAX PLANNING & INSURANCE

III- GENERAL TAX PLANNING HINTS

HINTS FOR TAX PLANNING

TAX PLANNING & INSURANCE

THE INCOME TAX ACT, 1961

DEDUCTIONS FROM INCOME TAX

REBATE FROM INCOME TAX

II- TAX RATES

FOR RESIDENT WOMEN BELOW 65 YEARS OF AGE

Plus Surcharge Nil

Plus Education Cess Nil

2% of income tax 2% of income tax and surcharge

FOR RESIDENT SENIOR CITIZENS

Plus Surcharge Nil

Plus Education Cess Nil

Above Rs. 10,00,000

10% of income tax

2% of income tax and surcharge

FOR ANY OTHER RESIDENT INDIVIDUAL OR HUF

TAX PLANNING & INSURANCE

Net Income Range Up to Rs. 1,00,000 Rs. 1,00,001 to Rs. 1,50,000

Income Tax Nil 10% of income above Rs. 1,00,000

Plus Surcharge Nil

Plus Education Cess Nil

Rs 1,50,001 to Rs. 2,50,000

Rs. 5,000 + 20% of the income above Rs. Nil 1,50,000

Rs. 2,50,001 to Rs. 10,00,000

Rs. 25,000 + 30% of income above Rs. 2,50,000

Above Rs. 10,00,000

2% of income tax and surcharge

FILING OF INCOME TAX RETURN

Filing of income tax is compulsory for all individuals whose gross

[THE PENALTY FOR NON-FILING OF INCOME-TAX RETURN IS RS. 5000.]

TAX PLANNING & INSURANCE

TAX PLANNING & INSURANCE