Impact of Budget in Tax Planning Relief in Insurance

7/27/2019 Impact of Budget in Tax Planning Relief in Insurance

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IMPACT OF BUDGET IN TAX PLANNING RELIEF IN INSURANCE

Introduction

In a financial planning context the word 'budget' (as a noun) strictly speaking means an

amount of money that is planned to spend on a particularly activity or resource, usually over

a trading year, although budgets apply to shorter and longer periods. An overall

organizational plan therefore contains the budgets within it for all the different departments

and costs held by them. The verb 'to budget' means to calculate and set a budget, although in

a looser context it also means to be careful with money and find reductions (effectively by

setting a lower budgeted level of expenditure). The word budget is also more loosely used by

many people to mean the whole plan. In which context a budget means the same as a plan.

For example in the UK the Government's annual plan is called 'The Budget'. A 'forecast' in

certain contexts means the same as a budget - a planned individual activity/resource cost, or a

whole business/ corporate/organizational plan. A 'forecast' more commonly (and precisely in

my view) means a prediction of performance - costs and/or revenues, or other data such as

headcount, % performance, etc., especially when the 'forecast' is made during the trading

period, and normally after the plan or 'budget' has been approved. In simple terms: budget =

plan or a cost element within a plan; forecast = updated budget or plan. The verb forms are

also used, meaning the act of calculating the budget or forecast.

Definition

A budget is a description of a financial plan. It is a list of estimates of revenues to and

expenditures by an agent for a stated period of time. Normally a budget describes a period in

the future not the past.

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Know what is Budget & how it affects you

We all earn & spend money. Some people spend more, some save for the future. Most of us

allocate money for different needs. For instance, an individual may need money for his/her

marriage, childrens education and for life after retirement. According to individual needs,

everyone allocates money for different things. We can

call this as budget of individuals. Like individuals, even

our country needs to balance the earnings & spending.

Today, our country is spending much more than what it

is earning. That is why we have deficit in our accounts.

Every year, the Union Budget of India tries to allocate

money to important & urgent needs for countrys

growth as well as, it tries to balance the money supply

& earnings.

Budget is generally described as a detailed plan for a measured period, setting goals and

outlining resources to meet those goals. In short, it provides details of the Government's

receipts and payments. It also gives details of tax revenues and other receipts besides a

general breakup of expenditure, allocation of plan outlays by sectors as well as by various

ministries. The Budget also gives information on the transfer of resources from the center to

the states, revenue deficit, primary deficit and fiscal deficit of the center.

Budget is the most important economic event in the country. If you think that Budget does

not concern you, let us assure you that it is otherwise. Budget tells you how the Government

outlines major economic initiatives for the coming year. Take, for instance, corporate taxes,

they will definitely impact you. Budget will either make the goods you buy cheaper or more

expensive. The income tax rates are also declared in the Budget.

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Do we need a Budget?

Being a democracy, the Indian public has a right to know where and on what Government is

spending money. In the Budget, the Government will state how much money it earned fromtaxes and how it spent the money in the previous year. It will also need Parliament's

permission for its proposed taxes and spending for the coming year.

Budget frequency

Once a year Article 112 of the Constitution makes it mandatory that the Central Government

introduces in Parliament a statement of estimated income and expenditure. This must be done

for every financial year. (Financial Year - April 1 to March 31). It is presented in LokSabha

on the last working day of February.

Who makes the Budget?

The Finance Ministry has a Budget Division, which takes responsibility for the Budget. All

Government ministries and departments send the division its proposals and requirement of

funds to the division. This division will then draw up allocations for the various ministries,

and how much goes to each. The Finance Minister and, finally, the Prime Minister will then

approve the budget. Only then, it will be presented in Parliament.

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The steps to approve Budget:

1. The FM introduces the Budget to the LokSabha with a small view on the Budget.

2. FM replies to queries in a general discussion on the Budget.

3. LokSabha discusses each ministry's expenditure proposals and these votes on each.

4. The bills are then introduced in the LokSabha: Appropriation Bill & the Finance Bill.

5. The passing of Appropriation Bill results in the Appropriation Act, and the Finance

Bill as the Finance Act. Thus, the final Budget gets approved.

The Government earns money from various sources like different taxes, investments, etc.

Government keeps all this money in different accounts.

More Budget Terms

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1. Finance Bill:

Finance Bill consists the Governments proposals for the imposition of new taxes,

modification of the existing tax structure or continuance of the existing tax structure beyond

the period approved by the Parliament.

2. Income tax rates

The most obvious way in which the Budget affects us is by any change in the income tax

structure. Keep your eyes open for any change in the income tax rate or in the income slabs.

3. Income tax rebates

Female tax payers get a rebate up to Rs 5,000 or the amount of tax to be paid, whichever is

lower. Senior citizens like your parents get a rebate up to Rs 20,000 or the amount of tax to

be paid, whichever is lower. In addition to the above, a number of investments are entitled to

a rebate under Section 88 of the Income Tax Act.

4. Standard deduction

If you are a salaried employee, look for changes in the standard deduction. A standard

deduction is the base amount of income that is not subject to tax. This benefit is given to

salaried employees.

If the income from salary does not exceed Rs 150,000, a standard deduction of

one-third of the salary or Rs 30,000, whichever is less, is granted.

If the income from salary exceeds Rs 150,000, but not Rs 300,000, the

standard deduction is Rs 25,000.

If the income from salary exceeds Rs 300,000, but not Rs 500,000, the

standard deduction is Rs 20,000.

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Benefits to watch out for

1. If you are repaying a home loan, interest on borrowed capital (your home loan) is

deductible up to Rs 150,000.

2. The principal repayment of the borrowed capital (loan repayment, and not interestpayment), is eligible for rebate up to Rs 20,000 under Section 88.

3. The maximum amount of premium paid on your medical insurance to be considered

for deduction is Rs 10,000. For a senior citizen (above 65 years), it is Rs 15,000.

4. For investments in pension plans, deduction is available for a maximum investment

of Rs 10,000. Watch out for any changes on this front.

How to identify a Good, Bad or Neutral Budget?

Ideal growing economies Budget should increase earnings by achieving high economic

growth & proper management of funds. At the same time, it should manage all expenses

without allowing spending to grow faster than earnings. Today Indias current account deficit

is very high. That means our expenses are far more than our earnings. We have taken big

loans from World Bank & from other money sources. Our country needs money as we are

growing economy and Government should encourage the growth of economy by investing

more major industries. Thats why an ideal Budget should give best possible subsidies where

there is a need like in infrastructure, power, etc. The fine balance between subsidies & tax

structure in the budget could bring back our deficits to lower levels. The good health of

countries economy reflects in each individual. It affects you, me, and everyone. Hope you

will understand Budget better this time.

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Impact of Budget on insurance industry

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The 2005-06 Budget has dampened the spirit of insurance companies. In case of general

insurance segment, the Finance Minister has hardly made any changes. However, changes in

the tax structure may have an adverse impact on life insurers. Life insurance players do not

have much reason to cheer following removal of the Section 88 relief. Last week, we had

discussed wish list of the insurance sector. This week, let us analyze the impact of the Budget

on the insurance industry.

FDI hike in insurance sector

The Budget speech has been silent on the issue. Though the Finance Minister commended

the growth in the insurance sector, there was no mention of the steps being taken for

increasing FDI in insurance sector. There is a dire need to attract more foreign capital in the

sector. Latest reports indicate that the Union Finance Ministry is looking at proposals to

delink the FDI limit from the Insurance Act, when it is amended. This move would empower

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any future government to increase the FDI limit through an executive order without taking

the issue to the Parliament.

Life Insurance

Life insurers are likely to bear the brunt of the recent announcements made in the Budget

2005-06. Lets look at few of the pointers

Removal of Sec 88 tax relief:

The recent announcement in the Budget to remove Section 88 tax relief on life insurance

products has dealt a severe blow to life insurance companies. Removal of tax relief will have

an adverse impact on the flow of investments into life insurance products.

Continuation of Sec 10(10)(d):

The continuation of the Section 10(10)(d) benefit has been a major plus for life insurance

players. However, to avail optimum benefit under this section, life insurance companies need

to change their selling strategy. Till now, life insurers were selling life insurance products

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mostly on tax-benefit grounds. However, now they will have to sell products with an

investment pitch.

It is reported that the investment limit in pension plans is unaltered at Rs 10,000. These plans

may not enjoy the luxury of the expanded limit of Rs 1 lakh allowed for

investments/expenditures that could be claimed as a deduction from income. This is likely to

have an adverse impact on the overall growth of the sector. Pension plans are the only

investment avenue where specific limits continue to apply.

Deductions from income and rebate 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

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available deductions will give the "Net Taxable Income" on which income tax is payable.

The following are the various deductions available:-

Deduction U/s. 80CCC - In respect of contribution to Pension Fund of LIC

In respect of contribution to pension fund of LIC (JeevanSuraksha) or other approved

pension scheme of any other insurer

Available to :- Individual Assessee only

Amount of Deduction: - Amount invested in pension fund subject to maximum of

Rs10,000/- per previous year.

Other points

Amounts received from such funds by the assessee or his nominee on account of surrender of

investment or on account of pension other than commuted pension will be taxable in year of

receipt.

Deduction U/s. 80D - In respect of medical insurance premium

In respect of Medical Insurance Premium. (Not Life Insurance Premium) eg Mediclaim

Available to :- Individual and HUF assessee

Amount of deduction :- Amount of premium paid subject to maximum Rs10,000/- per

year

Conditions

For individual, the deduction is allowed only when it is paid for self, spouse, dependent

parents & children. Premium must be paid by cheque only.

Where such premium is paid for the benefit of the assessee or spouse or dependent parents or

a member of HUF who is more than 65 years of age, deduction will be a maximum of

Rs15,000 instead of Rs10,000 with effect from 1st April, 2000.

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Deduction U/s. 80DD - In respect of maintenance including medical treatment of

handicapped dependent

In Respect of :- Medical expenses on physically handicapped dependent relative and amounts

deposited or invested for their maintenance with LIC or UTI or other insurer in specified

schemes.

Available to :- Resident Individual & HUF Assessees

Amount Deduction :- Amount spent on such treatment and amount so deposited or

invested, subject to a maximum of Rs40,000/-

The scheme referred to above must for payment of annuity or lump sum amount for the

benefit of a handicapped dependent in the event of death of the individual or the member of

the Hindu undivided family in whose name subscription to the scheme has been made.

Meaning of handicapped dependent

a. person who a. is a relative of the individual or, as the case may be, is a member of the

Hindu undivided family and is not dependent on any person other than such individual or

Hindu undivided family for his support or maintenance; and

b. is suffering from a permanent physical disability (including blindness) or is subject to

mental retardation, specified in the rules made by the Board for the purposes of section

80DD, which is certified by a physician, a surgeon, an oculist or a psychiatrist, as the case

may be, working in a Government hospital, and which has the effect of reducing

considerably such person's capacity for normal work or engaging in a gainful employment or

occupation.

If handicapped dependent predeceases the taxpayer

If the handicapped dependent predeceases the individual or the member of the Hindu

undivided family referred to above, an amount equal to the amount paid or deposited under

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section 80DD shall be deemed to be the income of the assessee of the previous year in which

such amount is received by the assessee and shall accordingly be chargeable to tax as the

income of that previous year.

Deduction U/s 80DDB - In respect of medical treatment of Assessee

In respect of:- Medical Treatment of Assessee from specified diseases.

Available to :- Individual or HUF who is resident in India.

Amount of deduction :- Rs40,000/- per previous year (Rs60,000/- in case the assessee

or dependent relative or member of HUF is more than 65 years of age).

Conditions: - Expenses must be for medical treatment of assessee or dependent

relative in case of an individual assessee and any member of an HUF in case of an

HUF assessee.

Any amount received from an insurer for the medical treatment will be reduced from

the aforesaid deduction of Rs40,000/- or Rs60,000/- as the case may be.

Deduction U/s. 80 E

In respect of repayment of loan taken for higher education-

Section 80E provides for relief to students taking loans for higher education. Any repayment

of the principal amount of loan taken for higher studies and interest thereon is allowed as a

deduction from the gross total income up to a maximum amount of Rs25,000 ( Rs. 40,000/-

p.a. w.e.f 1/4/2000 ) in a year, provided the loan is taken from a financial institution or a

charitable organization which is approved for the purposes of section 10(23C) or 80G (2)(a)

This relief is available for those who have undertaken graduate or post-graduates Courses in

any branch of engineering including technology/architecture, medicine, or management, orpost-graduates courses in any university in pure sciences, applied sciences, mathematics or

statistics. The first year in which the deduction is available is the year in which the person

starts repaying the loan. The deduction is allowed for a maximum period of 8 years or until

the principal amount of such loan together with interest is repaid, whichever is earlier.

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Deduction U/s 80G - In respect of certain Donations

1. In respect of :- Certain donations

2. Available to :- Any Assessee

3. Scheme of deduction.

Donations eligible without Restrictions i.e. without limit on the quantum of donation:-

1. Prime Minister's National Relief Fund

2. Prime Minister's Drought Relief Fund

3. Prime Minister's (Armenia Earthquake Relief) Fund

4. National Defence Fund

5. National Children's Fund

6. Jawaharlal Nehru Memorial Trust

7. Indira Gandhi Memorial Trust

8. Rajiv Gandhi Foundation

9. Africa (Public contributions India) Fund

10. National Foundation for Communal Harmony

11. Donation to approved University or educational institution of national eminence.

12. Chief Minister's Earthquake Relief Fund, Maharashtra

13. Zila Saksharta Samiti constituted for promoting literacy & education

14. Any corporation mentioned in section 10(26BB) i.e corporations for protecting

and promoting the interests of minorities

15. National Blood Transfusion Council / State Blood Transfusion Council

16. State Govt. Fund for medical relief to the poor.

17. Army Central Welfare Fund/Indian Naval Benevolent Fund/Air Force CWF.

18. National Illness Assistance Fund

19. Andhra Pradesh Chief Minister's Cyclone Relief Fund

20. Chief Minister's Relief Fund or Lt. Govt. Relief Fund

21. National Sports Fund

22. National Cultural Fund

23. Fund for Technology Development and Application set up by the Central

Government.

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24. Any fund set up by the Gujarat State Government exclusively for providing relief

to the victims of the earthquake in Gujarat.

25. National Trust for Welfare of persons with Autism, Cerebral Palsy, Mental

Retrdadtion and Multiple Disabilities

26. Indian Olympic Assocaition or other approved sports association in India

27. Any trust, institution or fund which complies with the prescribed conditions for

providing relief to the earthquake victims in Gujarat during th eperion 26 January

2001 to 30 September 2001.

Donations eligible with restrictions. i.e. benefit will be given only upto 10% of (Gross

Total Income Less Other deductions u/s 80 series)

1. Donations to recognized charitable or religious trusts

2. Donations for renovation or repair of any temple, mosque, gurdwara, church or other

notified place of archaeological, historic or artistic importance or a place of public

worship of renown

3. Donations for promotion of family planning to the government, local authority or

approved institution

4. Donations to the government or local authority for any other purpose

5. Donations to a town planning or housing development authority Actual Deduction

6. Donations by a company assessee to the Indian Olympic Association or to any other

notified association or institution for the development of sports infrastructure or

sponsorship of sports in India.

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Note:-

Donations in kind are not eligible.

Donations for the benefit of a particular community or religion are not eligible.

The institution to which donation is paid, should be approved.

Deduction u/s 80GG - In respect of Rent Paid

1. In respect of :- Rent paid

2. Available to :- Individuals

3. Amount of deduction :- The least of the following :-

Excess of Rent paid over 10% of [G.T.I. - Other deductions of this chapter]

25% of [G.T.I. - Other deductions of this chapter]

Rs1,000 per month.

4. .Conditions: - Assessee, spouse or minor child or the HUF of which he is member

should not own any accommodation where the assessee stays, carries out business of

profession and the assessee must not own any accommodation at any other place. The

Assessee should not be receiving House Rent Allowance from his employer.

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Deduction u/s 80GGA - In respect of certain donations for scientific research or rural

or urban development

Donations for purposes of rural development, programmes of conservation of natural

resources, afforestation programmes, scientific research, research in statistical data or social

research or donation to National Fund For Rural Development, National Urban Poverty

Eradication Fund and other approved funds are eligible for deduction u/s 80 GGA provided

the assessee is not carrying on any business or profession. If a person is carrying on any

business or profession, then these deductions can be claimed u/s 35CCA, u/s 35CCB, u/s

35AC and u/s 35. The amount of deduction is 100% of such donations.

Deduction For Business Involving Foreign Exchange u/s 80 HHB/ HHC/ HHD/ HHE/

HHF

Different sections deal with exports of different items. In respect Foreign Exports of

computer software, film software, related T. V. software, projects, business services, music

software, or travel services, etc.

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Available to: Any Indian Company OR Any Other Resident assessee. However, benefit u/s

80 HHF available only to an Indian company.

Amount of Deduction

U/s 80 HHB : A deduction of the amount of profits or gains from such business equal to 40

% ( in respect of financial year 2000-2001 ), 30 % ( in respect of financial year 2001-

2002 ), 20 % ( in respect of financial year 2002-2003 ), 10 % ( in respect of financial year

2003-2004 ), 0 % ( in respect of financial year 2004-2005 ) of the profits from the foreign

project provided the money is brought into India in convertible foreign exchange within 6

months from the end of the relevant previous year and transferred to a "Foreign Project

Reserve Account" to be used within 5 years for approved purposes.

U/s 80 HHC : 80 % ( in respect of financial year 2000-2001 ), 70 % ( in respect of

financial year 2001-2002 ), 50 % ( in respect of financial year 2002-2003 ), 30 % ( in

respect of financial year 2003-2004 ), 0 % ( in respect of financial year 2004-2005 ) of the

profits from exports provided the money is brought into India in convertible foreign

exchange within 6 months from the end of the relevant previous year.

U/s 80 HHD : 40 % ( in respect of financial year 2000-2001 ), 30 % ( in respect offinancial year 2001-2002 ), 20 % ( in respect of financial year 2002-2003 ), 10 % ( in


profits from such business of hotels, tour operator or travel agent provided the money is

brought into India in convertible foreign exchange within six months from the end of the

relevant previous year plus amounts transferred to a special Reserve account to be used

within five years for approved purposes.

U/s 80 HHE : 80 % ( in respect of financial year 2000-2001 ), 70 % ( in respect of

financial year 2001-2002 ), 50 % ( in respect of financial year 2002-2003 ), 30 % ( in


profits from export of software provided the money is brought into India in convertible

foreign exchange within six months from the end of the relevant previous year.

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U/s 80 HHF : 80 % ( in respect of financial year 2000-2001 ), 70 % ( in respect of financial

year 2001-2002 ), 50 % ( in respect of financial year 2002-2003 ), 30 % ( in respect of

financial year 2003-2004 ), 0 % ( in respect of financial year 2004-2005 ) of the profits from

exports provided the money is brought into India in convertible foreign exchange within six

months from the end of the relevant previous year.

Notes:-

1. The amount of foreign project reserve u/s 80 HHB & reserve u/s 80 HHD should be

utilized within the next five years for the purpose of business, but not for declaring dividend.

Otherwise the deduction is cancelled in the original year (in respect of Sec. 80HHB) & it

considered as business income in the sixth year (in respect of Sec. 80 HHD)

e.g. A Ltd is engaged in the business of foreign construction projects. Its Income is as

follows for F.Y. 2005-2006 :-

Gross Receipts 50,00,000

Less :

Expenditure -30,00,000

20,00,000

Less : Transferred to Foreign

Projects Reserve A/c -5,00,000

Balance of Profits 15,00,000

Assume that the company could bring into India within the prescribed time limit, only

Rs4mn of foreign exchange.

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Taxable Income of A Ltd will be as follows :-

Profit 15,00,000

Add : Amount transferred to Reserve 5,00,000

Gross Income 20,00,000

Less : Deduction u/s 80 HHB

(40 % of profits or forex brought into

India within time limits or amt transferred

to reserves, whichever is less) -5,00,000

Taxable Income 15,00,000

Deduction u/s 80 O - In respect of certain royalties, commissions, fees for professional

services etc, earned in convertible foreign exchange

Available to : Indian Company or other non-corporate resident assessee In respect of : any

income received by the assessee from the government of a foreign state or a foreign

enterprise in consideration for the use outside India, of any patent, invention, design, or

registered trade mark and such income is received in convertible foreign exchange outside

India and is brought into India within 6 months from the end of the relevant previous year.

Deduction : An amount equal to 40 % ( in respect of financial year 2000-2001 ), 30 % ( in

respect of financial year 2001-2002 ), 20 % ( in respect of financial year 2002-2003 ), 10 %

( in respect of financial year 2003-2004 ), 0 % ( in respect of financial year 2004-2005 ) ofthe income so received in, or brought into, India, in computing the total income of the

assessee. Services rendered or agreed to be rendered outside India shall include services

rendered from India but shall not#include services rendered in India.

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Deductions u/s Sec.80 R Sec. 80 RR Sec.80 RRA

In respect of Professional Remuneration of teachers being Indian Citizens for teachingservices rendered outside India in educational institutions or in respect of authors, artists,

playwrights, musicians, actors, sportspersons being Indian residents for services rendered

outside India or in respcet of technicians being Indian Citizens for services rendered outside

India

Deduction is to the extent of 60 % ( in respect of financial year 2000-2001 ), 45 % ( in

respect of financial year 2001-2002 ), 30 % ( in respect of financial year 2002-2003 ), 15 %

( in respect of financial year 2003-2004 ), 0 % ( in respect of financial year 2004-2005 ) of

such remuneration brought into India within Deduction six months from end of the relevant

P. Y. or within such period as may be extended by the Commissioner or Chief

Commissioner.

Note:-

1. Professionals like sports persons, artists, singers, authors, playwrights, cameramen

etc.

2. Technicians include actuaries, banking, insurance, journalism professionals

Deduction u/s 80L - In respect of certain types of dividend or interest income

Available in respect of certain interest income such as :-

Bank Interest, Dividend from co-operative society, Interest on deposit with Co-

operative society, Interest on NSC and NSS, Interest on Govt. securities, Interest on

deposits with financial corporation engaged in providing long term finance for

industry or construction / purchase of residential houses in India, etc

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Amount of deduction Rs9,000 per year + additional Rs3,000 for interest on Govt.

Securities.

This deduction is not available in respect of interest on deposits with a limited

company or interest on debentures unless the company is engaged in housing

development.

The deduction is considered on net income ie after deducting relevant expenses.

Deductions available to Industrial Undertakings

U/s 80 JJA - In respect of Profits from business of collecting and processing bio-degradable

waste

Available to : Any assessee carrying on the business of collecting and processing or

treating bio-degradable waste for generating power, producing bio-gas, producing bio-

fertilizers or bio-pesticides or other biological agents or making pellets or briquettes or fuel

or organic manure

Deduction : Amount of profits from the aforesaid business for five years beginning with

the year in which the business commences

U/s 80 JJAA - In respect of employment of new workmen

Available to : An Indian Company from profits earned from any industrial undertaking

engaged in the manufacture or production of any article or thing

In respect of : Employment of new workmen

Deduction : An amount equal to 30 % of additional wages paid to new workmen employed

during the previous year for 3 years

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Conditions : The assessee must have employed at least 100 workmen and the increase in

workmen employed is at least 10 % over the earlier year.

U/s 80 HHBA - In respect of profits from housing projects

Available to : Indian Companies and any other resident Assessee

In respect of : Profits from the execution of housing project awarded to the assessee on the

basis of a global tender where the project is aided by the World Bank

Deduction : 40 % ( in respect of financial year 2000-2001 ), 30 % ( in respect of financial

year 2001-2002 ), 20 % ( in respect of financial year 2002-2003 ), 10 % ( in respect of

financial year 2003-2004 ), 0 % ( in respect of financial year 2004-2005 ) of the profits fromsuch business and transferred to a "Housing Project Reserve Account" to be used within 5

years for approved purposes.

Deduction u/s 80 P - In respect of certain incomes of a cooperative society

The following incomes can be claimed as a deduction u/s 80P by a co-operative society

only :-

Income from banking or providing credit facilities to members.

Income from cottage Industry.

Income from marketing agricultural produce of members

Income from purchase of agricultural implements, seeds, livestock or other articles

intended for agriculture for the purpose of supplying them to members.

Income from processing of agricultural produce of members without the aid of power.

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Income from collective disposal of labour of members.

Income from fishing or allied activities including reserving, storing, marketing of fish

or purchase of materials and equipment in connection therewith for supplying them to

members.

In case of a co-operative society which is a primary society engaged in supplying

milk, oil seeds, fruit or vegetables raised by its members to a federal co-operative

society, government local authority, government company or a statutory corporation,

all profits from such activities.

A lumpsum deduction of Rs40,000 in case of a consumers co-operative society

(Rs20,000) in other cases will be allowed to all co-operative societies.

Interest on dividends received by a co-operative society on its investments in another

co-operative society will be deductible.

Income of a co-operative society from letting of godowns or warehouses for storage,

processing or facilitating the marketing of commodities will be deductible.

In case of a co-operative society other than a housing society or an urban consumer's

society or a society carrying on transport business or a society engaged in the performance of

any manufacturing operations with the aid of power, where gross total income does not

exceed Rs20,000 the amount of income by way of interest on securities or income from

house property will be deductible.

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Deduction u/s 80 U - In respect of handicapped assessee

Available to:- Partially or totally blind or physically handicapped (including mentally

handicapped) persons resident in India. The disabilities are prescribed in Rule 11D.

Amount of deduction:- Rs.40,000 p.a.

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 liability and not a deduction from income. Let us consider the

various rebates available.

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U/s 88 - In respect of Certain Investments and Deposits

Available To: Individual and HUF Assessees only

Rebate is @ 20 % of the investemnt / payment / deposit made. However in respect of

indivdivduals 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 inocme, rebate will be @ 30

%.

In Respect of: Investments, deposits and payments made in the following items:-

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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

Upto Rs. 60000, rebate is available on on all eligible investments including infrastructure

bonds. Within this limit, maximum rebate of Rs. 4000 ( i.e investment of Rs.20000 ) will be

allowed on on house loan repayment/ house acquisition. Similarly, maximum rebate of

Rs.2000 will be allowed on investments upto Rs.10000 in MEP schemes of mutual funds.

An additional investment of Rs. 20000 in infrastructure bonds, shares , etc will qualify for a

further rebate of Rs.4000. Accordinly, the maximum rebate which can be claimed will be

Rs.12000+Rs.4000 = Rs.16000.

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U/s 88B - In respect of senior citizens

Available to: Resident Individuals who are more than 65 years of age

Rebate: Income Tax liability or Rs15,000, whichever is lower.

U/s 88C - In respect of women assessees

Available to : Women Assessees resident in India who are below the agre of 65 years

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Rebate: Income Tax liability or Rs5,000, whichever is lower.

The Basics of Tax Planning

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Tax planning is a process of looking at various tax options in order to determine when,

whether, and how to conduct business and personal transactions so that taxes are eliminated

or reduced. As an individual taxpayer, and as a business owner, you will often have the

option of completing a taxable transaction by more than one method. The courts strongly

back your right to choose the course of action that will result in the lowest legal tax liability.

In other words, tax avoidance is entirely proper.

Although tax avoidance planning is legal, tax evasion the reduction of tax through deceit,

subterfuge, or concealment is not. Frequently, what sets tax evasion apart from tax

avoidance is the IRS's finding that there was some fraudulent intent on the part of the

taxpayer. The following are four of the areas most commonly focused on by IRS examiners

as pointing to possible fraud:

A failure to report substantial amounts of income, such as a shareholder's failure toreport dividends, or a store owner's skimming from the cash register without

including it in the daily business receipts.

A claim for fictitious or improper deductions on a return, such as a sales

representative's substantial overstatement of travel expenses, or a taxpayer's claim of

a large deduction for charitable contributions when no verification exists.

Accounting irregularities, such as a business's failure to keep adequate records, or a

discrepancy between amounts reported on a corporation's return and amounts

reported on its financial statements.

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Improper allocation of income to a related taxpayer who is in a lower tax bracket,

such as where a corporation makes distributions to the controlling shareholder's

children.

A business owner may not reduce his or her income taxes by labeling a transaction as

something it is not. So, if payments by a corporation to its stockholders are in fact

dividends, calling them "interest" or otherwise attempting to disguise the payments as

interest will not entitle the corporation to an interest deduction. It is the substance, not

the form, of the transaction that determines its taxability.

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How a tax plan works

There are countless tax planning strategies available, particularly if you own a small

business. Some are aimed at your individual tax situation, some at the business itself. But

regardless of how simple or how complex a tax strategy is, it will be based on structuring thetransaction to accomplish one or more of these often overlapping goals:

1. reducing the amount of taxable income

2. reducing your tax rate

3. controlling the time when the tax must be paid

4. claiming any available tax credits

5. controlling the effects of the Alternative Minimum Tax

6. avoiding the most common tax planning mistakes

In order to plan effectively, you'll need to estimate your personal and business income for the

next few years. This is necessary because many tax planning strategies will save tax dollars

at one income level, but will create a larger tax bill at other income levels. You will want to

avoid having the "right" tax plan made "wrong" by erroneous income projections. Once you

know what your approximate income will be, you can take the next step: estimating your tax

bracket.

The effort to come up with crystal-ball estimates may be difficult and by its nature will be

inexact. On the other hand, the better your estimates, the better the odds that your tax

planning efforts will succeed.

When it comes to investing, a Financial Advisor can help you:

1. Structure capital gains and losses as a long-term tax management strategy

2. Shift some funds into municipal bonds, which offer one of the few remaining

opportunities for federal and possibly state income tax-free investing

3. Create a "ladder" of bond maturity dates that can help reduce taxes

4. Identify tax efficient investments that are suitable for you, such as mutual funds and

certain managed accounts.

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5.

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6.

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Assesses under the Act: The main categories of assessee under the Income Tax Act are

(1) An individual

(2) A Hindu Undivided Family

(3) A company

(4) Associations

Heads of Income:

i) Salary Income

ii) Income from Business/Profession

iii) Income from House property

iv) Capital Gains

v) Income from other sources

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Applicable for income from salary etc. The rate of tax for long term capital gain is lower & it

is either 20% with indexation or 10% without indexation whichever is lower.

Standard Deduction from Salary Income

The government allows a fixed sum to be deducted from Salary Income before tax liability

is calculated. The deduction is known as 'Standard Deduction'.

The table below details the deductions available depending upon the level of salary income

Salary Income

Amount of Deduction

Upto Rs. 5 Lacs 40% gross salary or Rswhichever is less.

30,000

More than Rs. 5 Lacs Rs. 20,000

P R O F E S S I O N T A X p a i d i s a l s o a l l o w e d a s d e d u c t i o n f r o m G r o s s S a l a r y .

Applicable for income from salary etc. The rate of tax for long term capital gain is lower &

it is either 20% with indexation or 10% without indexation whichever is lower.

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Standard Deduction from Salary Income

The government allows a fixed sum to be deducted from Salary Income before tax

liability is calculated. The deduction is known as 'Standard Deduction'.

The table below details the deductions available depending upon the level of salary

income

Salary Income Amount of Deduction

Upto Rs. 5 Lacs 40% gross salary or Rs

whichever is less.

30,000

More than Rs. 5 Lacs Rs. 20,000

PROFESSION TAX paid is also allowed as deduction from Gross Salary.

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TAX BENEFITS FOR INSURANCE POLICIES

In order to, encourage savings and investment, the Government has provided certain tax reliefs

in the form of income exempt from tax, deductions from income, and tax rebates for life

insurance policies.

Income exempt from tax

The Act allows for the exemption of certain types of income while calculating an individual'stax liability, namely

Any sum received under a life insurance policy, including the sum allocated by

way of bonus on such policy shall not be included in the total income of a person,

under Section 10(10) D of IT Act 1961 except claims received under keyman

insurance or when premium paid in any one year exceeds 20% of the sum assured. Commuted

value of pension under Annuity Plan

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Permissible deductionsPremium under notified annuity policy Rs. 10,000(Section 80 CCC)Premium under Mediclaim policy Rs. 8,000(Section 80 D)Bank/post office interest(Section 80 L) maximum permissible Rs. 12.000Total permissible deductions Rs. 30,000

Taxable income (6-7) Rs. 2, 65,000

Calculation of tax payable

Income Rs. 1,50,000 tax payable Rs, 19,000Balance income Rs. 1,15,000taxpayable@30% Rs. 34.500Tax payable Rs. 53,500

Rebate u/s 88PF contribution 30,000Insurance premium 25,000PPF 20.000Total 75,000Rebate on Maximum Qualifying amount Rs. 10,500

70,000 at 15%

Net tax payable (9-10) Rs. 43,000

WEALTH TAX ACT 1957 AND LIFE INSURANCE POLICIESWealth Tax was introduced to remove inequalities of wealth and to achieve the objective o

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 Wealth1

- can be defined as the combined value on the valuation date of all assets (like land, building, car,

house, jewellery, cash-in-hand etc) in excess of the debts outstanding on such assets. Where a

erson makes a ift to another b mere book entries or at considerat ion lower than the market

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Certain conditions to be noted by life insurance policyholders Where, the taxpayer discontinues a life insurance policy, before the premiums for two years

have been paid, no relief will be allowed in respect of such premiums paid during the

previous years and the deduction allowed in respect of earlier premiums (preceding the previous

year) will be withdrawn.

Under certain unit linked plans premiums have to be paid for minimum five years as against

the rule of two years in other life insurance plans for income tax relief.

Premiums paid under the insurance policy effected on the joint life of a husband and

wife are Eligible for deduction under Section 88. However, such relief is not available on

premiums paid on policies on the lives of other relatives.

Rebate under Section 88-BF o r s e n i o r c i t i z e n s a g e d 6 5 y e a r s o r m o r e , r e b a t e o f R s . 2 0 , 0 0 0 7 - i s a l l o w e d . Rebate under Section

88-C F o r l a d i e s b e l o w a g e 6 5 y e a r s r e b a t e o f R s . 5 . 0 0 0 / - i s a l l o w e d . Let's calculate Income Tax l

liability in the following case.Mr. Ramesh has earned a gross income of Rs. 3,02,000 from salary during the last

financial year ended 31-03-2004. He has paid professional tax of Rs. 2,000 during the year. His

other income includes Rs. 25,000 by way of interest on saving bank account/ bank FDRs and

post office deposits. He has made the following investments during the year.Premiums under notified deferred annuity policy - Rs. 10,000Premiums under Mediclaim policy - Rs. 8,000Provident Fund Contribution - Rs. 30,000Insurance premium under money back policy - Rs. 25,000Public Provident fund - Rs. 20,000SolutionHis tax liability would be calculated as under: -1. Gross income from salary Rs. 3,02,000

2. Less Professional tax paid Rs. 2,000

3. Less Standard deduction Rs. 30,000

4. Netsalary income (1-2-3) Rs. 2,70,000

5. Income from other source (bank/post office interest) Rs. 25,000

6. Total Gross Income 4+5 Rs. 2 95 00

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The nature of expenses could be:

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

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:

(a) Under this:

1. First year Com mission

2. Renewal Commission

Subject to a maximum of Rs. 20,000 Or

(b) 1/3 rd of First year & Renewal Commission subject to a maximum of Rs. 20,000

Summary

According to taxation laws, certain benefits are available to life insurance products.

Income Tax Rebates and deductions are allowed on premiums paid. Claim amount is

exempt from tax under section 10 (1QD)

50% of First year Commission

15% Renewal Commission

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CONCLUSION

As India is developing country its economy progress depend upon the budget. Budget

conducts expenses , development in the country , gains from society and corporate sector.The

budget is prepared everyyear for development which include insurance sector .

Tax benefit provide to the society is also included in budget. Tax benefit is provided to

society by government. If taxes are less in insurance sector than more people will interested

to invest in insurance sector. As their will be less premium and more relief to individual.

This will lead to a economy growth of country.

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BIBLOGRAPHY

BOOKS

LIFE INSURANCE BOOKLET

MAGAZINES

MONEY OUTLOOK

WEBSITES

GOOGLE

www. Incometax.com

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Documents

Impact of Budget in Tax Planning Relief in Insurance