TAX TAMASHA Some strange things have been taxed over time. Though these seem absurd today, they must have made sense when the tax was imposed. Will we be able to look back and consider income tax an absurdity in the next century?• Bachelors (England in 1695 AD, and Missouri in 1820 AD)• Cooking Oil (Ancient Egypt, approximately 2000 BC) • Hats, boots, beehives, basements, chimneys, clothing (Russia, 1682 AD) • Beards (Russia, 1702 AD) Gaurav Jit Singh is very busy. The 22-year-old has a 250 people strong insurance client base and January to March, he says, are the busiest months for his business. Sounds strange, why should people insure their lives in certain months and not in the others. Isn't insurance supposed to protect the dependants of a policy holder in case he passed on? Not if you are an Indian tax payer and use insurance not as a protection device but as an axe to cut your tax. No wonder insurance companies hike their targets by 150 to 200 per cent during this time of the year.The question is: will you be the sacrificial lamb for the insurance agents this year? Will you continue to make the tax planning mistakes you have made in the past or is there another way? Read on for some mistakes that people make at tax planning time and how to avoid them.Buying insurance for the rebateLife insurance has been bought in India for the tax rebate it gets a person and not as an antidote to the risk of premature death of the breadwinner. “Insurance should be a priority the moment you find yourself under covered and not wait for planning your tax at the end of the year,” advises Ashish Mantri, a Mumbai based Chartered Accountant (CA). Do not allow your agent to sell you one more policy that will absorb your Section 88 limit for a tax rebate. There is a large menu of other investment products to choose from that give the same benefit. The Public Provident Fund (PPF) and the National Saving Certificates (NSC) are efficient options to use instead. Buying a pension product for a tax benefitIf you buy a notified pension product, upto Rs 10,000 of your premium is knocked off the assessable income (the income on which the tax will be levied). Getting into a pension plan today, when you are young is a great idea to build a retirement corpus, but contributing a piffling Rs 10,000 a year will get you nowhere near your final retirement corpus target. Your contribution to a pension plan needs to be much higher. Make a proper retirement plan and then use the section to get a rebate as a sweetener. Don't buy the sweetener without the cake. Not taking full advantage of the tax rebatesThere are deductions and rebates available that people are not aware of. Says Delhi based CA A K Nair, “people forget to disclose to their CA that they have a terminally ill patient at home, this costs them a Rs 60,000 deduction.” He says that serious illnesses like Parkinson's disease, AIDS, cancer and chronic renal failure amongst others attract a tax deduction. Check the list and see if you qualify for this benefit. A maximum of Rs 60,000 can get knocked off your assessable income if you can show proof of such an illness in a dependant and medical bills for his care. KANU DOSHI, Partner Doshi Associates The commonest tax planning mistakeOne of the most frequently encountered error tax payers make is in the area of inclusion of 'accrued' income on certain savings instruments including National Savings Certificates VIII Series, 8 per cent Taxable Savings Bonds of RBI (Cumulative Option) and the LIC Varishtha Pension Bima Yojana. The tax payers fail to include these incomes, believing that since these incomes are not actually received by them, they are not to be included or that they are exempt from tax. They treat these as long term capital gains believing that since they have invested, say Rs 1 lakh and get back Rs 1.6 lakh, they have made a capital gain. But tax laws treat this as accrued income and taxes the entire amount of surplus as income of the year of maturity. As a result, the tax payer ends up paying tax at a higher rate because the lump sum of Rs. 60,000 pushes the tax payer in a higher tax bracket. If the such income had been offered for tax from year to year, the tax payer could avoided this bunching of liability and have also availed of deduction under section 80L.) Trying to convert a short term gain to a long term onePeople try and postpone sales of shares by a couple of months to take advantage of the lower long term capital gain. “People don't realise that the value of the assets may go down during the interim period,” says Mantri. This CA remembers a client during the 1991 scam, who lost a notional profit that was five to six times the amount of tax he had tried to postpone. If the share looks overpriced sell it and pay the tax, you've made your money. Not taking the full benefit for the NSC VIII instrument“Most people”, says Mumbai based CA Kanu Doshi, “forget to include the double benefit for this product.” Not only does this instrument qualify you for a tax rebate of 15 per cent under Section 88, if the gross income does not exceed Rs 5 lakh, the accrued interest is eligible for deduction under Section 80L. Error in computing capital gains“This is specially true on the application of indexation to the 'cost' of the assets sold as well as applying the FIFO rule (First In First Out) in case of demat shares,” says Doshi. It is now mandatory under the income tax law that when a tax payer sells demat shares, he is deemed to have sold from his earliest lot and the capital gain and indexation are to be worked out on that basis. Similarly, bonus shares have no cost and hence there is no question of averaging the cost per share, therefore no one can apply any indexation to bonus shares. Many mistakes happen because tax planning is viewed in isolation to the other financial aspects. Look at tax planning as a part of your overall financial plan and most of the above mistakes will disappear.
