Come February and most salaried employees, scamper to the nearest investment center or their chartered accountant to make necessary investments in order to minimize their tax liability. The law provides for a taxpayer to plan his taxes in such a manner that his tax liability is nominal. With proper tax planning you can reduce your tax outgo, plus invest in a structured manner towards achievement of your financial goals. The government accepts the fact that investing is a good exercise, and to encourage such activities, gives beneficial tax treatment to certain investments.
But the task force on income tax formed under Vijay Kelkar, advisor to the finance minister, thinks otherwise. The Kelkar committee report suggests the removal of deductions and rebates under the Income-tax Act. The suggestion to scrap Section 88, which offers tax breaks to the salaried class and encourages savings, would critically affect the savings pattern of the salaried middle class investor. The rebates available under Section 88 for investments was basically a mechanism intended to provide a kind of monetary security to senior citizens and also induce an investment habit in the general investor, which would prove useful during emergencies. This was especially beneficial for the retired individual, particularly in the absence of a social security.
To put forth our point, we have also enclosed a computation for a middle class individual, who earns an annual salary income of Rs 3,00,000, and has invested in a house (also because of tax sops - taking a cost benefit of the rental payments that he was making vis a vis the interest payment), and has some investments. As you will note, the tax liability of the person goes up at least 4 times from Rs 10,557 to Rs 40,524, due to the removal of the beneficial provisions being currently provided. (Please refer to Table in the next page)
For Pankaj Sharma, tax rebate is a great incentive for making investments, “last year I invested Rs 50,000 in National Saving Certificate (NSC), for the sole reason of getting a tax rebate of 20 per cent under Section 88. It is not a very attractive scheme due to its extended lock-in period of six years, and no liquidity of your money. But if Section 88 is scrapped, as the Kelkar Committee proposes, schemes like NSC/NSS would not be availed off by any investor.”

“One can understand had the task force recommended a single lock-in period of, say, ten years and restricted Section 88 rebate to only investments in infrastructure bonds. But what it has suggested is scrapping Section 88 rebate altogether. The idea being that tax rebates does not induce investments. However, the long queues witnessed in post offices and notified banks during the last weeks of March every year counter this notion,” observes Ritika Khanna, a chartered accountant.
The law, in certain plans, provides a reduction of a specified percentage of the total investment from the tax payable by you. These are referred to in tax parlance as Section 88 investments, since the investments are specified under that section of the tax law.

The following table shows the rate of rebate available under Section 88 for Financial Year 2002-03

Rebate U/S 88
Gross Total incomebefore deduction	Rate of rebate
Up top 1.5 lakhs	20%
1.5 lakhs to 5lakhs	15 %
Above 5 lakhs	Nil

There is a limit of Rs 1,00,000 for savings, which qualify for tax rebates under Section 88 of the Income-tax Act. If the taxpayer’s gross total income is up to Rs 1,50,000, then he receives a tax rebate of 20% under Section 88. (If the gross total income does not exceed Rs 1,00,000, and 90% of it constitutes his salary then a tax rebate of 30% is available.) The maximum limit (Rs 1,00,000) includes minimum investment of Rs 30,000 for infrastructure bonds and a maximum sum of Rs 70,000 for items like PPF, Life insurance premium etc. Alternatively, the entire Rs 1,00,000 can be invested in infrastructural bonds. This break-up is important because a person may invest, say, Rs 90,000 in a year comprising of Rs 60,000 in PPF, Rs 20,000 in life insurance premium and Rs 10,000 in infrastructure bonds. In this situation even though the total payment is higher, benefit of rebate will be available only to the extent of Rs 80,000 because it has to conform to the internal breakup of the two limits.

If a taxpayer’s income is between Rs 1.5 lakh to Rs 5 lakhs, he can avail a tax rebate of 15 percent on the amount invested in various instruments under Section 88 up to Rs 1,00,000. Income above Rs 5 lakhs does not qualify for rebate under section 88.
Essentially as an investor you need to look at different items (instruments) within Section 88 to use your Rs 70,000 limit. Apart from PPF, other avenues include life insurance premium paid, a sum paid towards National Savings Certificates (NSC), contribution towards Unit-Linked Insurance Plan of UTI (ULIP), and contribution towards notified Equity-Linked Savings Scheme (up to Rs 10,000). Apart from this, you could invest in Infrastructure bonds floated by Financial Institutions like ICICI, IDBI. These collectively offer a 20 per cent tax rebate on investments up to Rs 1,00,000 in a given financial year.

Income Tax Slabs Prevelent Today (February 2003)	Income Tax Slabs as proposed by KELKAR COMMITTEE REPORT
FINANCIAL YEAR 2002-2003 Income (Rs) Rate Up to Rs 50,000 Nil Rs 50,000-Rs 60,000 10% Rs 60,000- b v Rs 1,50,000 20% Above Rs 1, 50,000 30%	FINANCIAL YEAR 2002-2003 Income (Rs) Rate Up to Rs 50,000 Nil Rs 50,000-Rs 60,000 10% Rs 60,000-Rs 1,50,000 20% Above Rs 1, 50,000 30%

Comparative Tax Status
Particulars	Existing (Rs)	Post Kelkar Implementation (Rs) (period after 3 years)
Income from Salaries
Gross Salary	300,000	300,000
Less: Standard Deduction	25,000	0
Taxable Salary	275,000	300,000
Income from House property
Annual Value (Self Occupied)	NIL	NIL
Less: Interest on Housiong Loans	(100,000)	0
Income from house property	(100,000)	0
Income from other sources
Dividends (Tax Free proposed)	3,000	3,000
NSC Interest	2,720	2,720
Interest from Banks	5,250	5,250
Income from other sources	10,970	7,970
Gross Total Income	185,970	307,970
Less: Deductions
80D (premium paid Rs 15,000)	(10,000)	0
80L	(10,970)	0
Total Deductions	(20,970)
Gross Taxable Income	165,000	307,970
Tax thereon	23,500	41,594
Rebates u/s 88 / New
PPF	30,000
PF	30,000
	30,000
Infrastructure Bonds
Medical Insurance	0	3,000
Total Tax payable	10,000	38,594
Add: Surcharge @5%	500	1,930
TAX PAYABLE	10,500	40,524

Let us explore each of these instruments in detail to get a clearer picture of their suitability for you.

PUBLIC PROVIDENT FUND
Most popular of all tax-saving schemes, the Public Provident Fund (PPF) provides you with a rebate of 20 % on an investment of Rs 70,000. Tax expert’s advice that a salaried employee must invest the maximum amount in a PPF scheme. According to Khanna, “The PPF doubles up as an retirement investment scheme plus a tax saving instrument.” She explains, “A rebate of 20 % is available on the investment in a PPF scheme under section 88. If you invest a sum of
Rs 70,000 you can get a rebate of Rs 14,000. Also according to Section 10 of the IT Act, the interest on this income is totally exempt from tax. As a retirement instrument, it provides a lump sum amount at maturity.”
A PPF account can be opened with a minimum deposit of Rs 500 at any post office. The government fixes the interest rate of a PPF account periodically. At present, it is 9 % compounded annually. What’s more, the interest accruals and withdrawals are exempt from income tax, and the balance in your account is exempt from wealth tax. The only drawback with a PPF scheme is that it has a minimum lock-in period of 15 years. But when planning for a retirement corpus, a longer lock-in period is not a deterrent. One can make a partial withdrawal from the seventh year onwards. An amount not exceeding 50 percent of the amount that stands to your credit at the end of the fourth year, immediately preceding the year of withdrawal is the maximum amount that can be withdrawn. A simple way to work out how much you can invest in a PPF account is to calculate what level of monthly cash flow you are comfortable with. You can also deposit up to Rs 70,000 in the name of your child (minor or major) to claim tax rebate for yourself.

Suitability: PPF is an attractive option due to its tax concessions for a young professional, also for someone with long-term retirement planning in their minds. You should open a PPF account even if you are not a taxpayer, and keep it alive by depositing at least Rs 500 a year. Step up the contributions towards maturity for a bigger savings corpus.

NATIONAL SAVINGS CERTIFICATE
National Savings Certificates can be purchased by cash, cheque, pay order or demand draft, POSB withdrawal form and old matured certificates. The government maintains this scheme and the certificates are sold by post offices.
A few key features of National Savings Certificates (VIII) are that they possess a lock-in period of 6 years, bearing an interest rate of
9 % that is compounded twice a year. Say for example, you invest Rs 10,000 today in NSC, after six years the amount grows to Rs 16,950.
They can be purchased from any local post office. The amount paid towards the purchase of National Savings Certificates (VIII) is entitled to 20 % tax rebate under Section 88 while the interest earned qualifies for an exemption up to a maximum limit of Rs 9,000 under Section 80 (L). The interest that accrues during the year is deemed reinvested (except in the last year) and qualifies for a rebate under Section 88.
Certificates are issued to a single holder or jointly to two adult holders, the latter that is payable to either both or the survivor. An adult can also purchase them on behalf of a minor. But any contribution made out of the chargeable income of the guardian is not eligible for the rebate. NSC certificates are available in the denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs10,000.
An NSC can be encashed only on maturity (after 6 years). Premature encashment is allowed under specific circumstances like death of the holder or court order.
Usually contractors who need to provide security find it convenient to purchase NSCs and pledge them to the appropriate authority. The double benefit they avail of is that their investment earns interest while providing security.

Suitability: National Savings Certificates are best suited for conservative investors who want steady growth of their investments. These earn interest for you at a higher rate than the rate earned by a bank fixed deposit.

ULIP
Unit Linked Insurance Plan (ULIP) is a scheme from the Unit Trust of India, offering insurance cover along with tax benefits. ULIP can be taken as a 10 or 15 year plan. The sum assured is known as the Target Amount. Premium is payable half yearly. This amount is used to pay a small premium to the Life Insurance Corporation and the rest is invested in units that earns an income and is re-invested every year.
To describe it loosely, ULIP is a combination of an open-ended tax-saver and an insurance plan. The contribution by a ULIP investor varies; annually, it is one-tenth or one-fifteenth, while half-yearly, it is one-twentieth or one-thirtieth of the target amount. The minimum amount required is Rs 40,000 and the maximum amount that can be invested is Rs 2,50,000. There is a bonus as well: five per cent or 7.5 per cent of the target on maturity (that is, either on the 10-year plan or 15-year plan). The extent of life insurance cover is equal to the target amount secured under the plan.
Tax rebate under Section 88 of the IT Act, 1961, is available on every contribution.

Suitability: UTI’s Unit Linked Insurance Plan (ULIP) is best suited for moderate investors have invested in other instruments to take care of their retirement corpus.

LIFE INSURANCE PREMIUM
People invest in life insurance owing to a few key reasons, namely —
• Insurance creates financial provisions for the deceased's dependents.
• Insurance provides for the policyholder’s old age after his earning power diminishes. After all, interest rates may fall and invested holdings may lose value and stop gaining dividends, but the value of an insurance policy once set, never reduces.
• Insurance also provide a legally authorised 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 taxpayers if they choose to opt for life insurance policies.
In order to derive maximum advantage of Rebates against Section 88 of the Income Tax Act, you should carefully peruse the relevant provisions and plan your savings portfolio accordingly. All Life insurance policies offer Section 88 benefits.
The gross qualifying amount under Section 88 is the aggregate amount also includes:
• Life Insurance premium paid by a person to effect or to keep in force a life insurance policy. The insurance policy can be taken on the life of an individual, his or her spouse or any major / minor child of the individual (irrespective of marital status) in the case of HUF, any member of the HUF
• Payment by a person in respect of non-commutable deferred annuity
• Any sum deducted from the salary payable by or on behalf of the government to an individual for securing a Deferred Annuity policy and making a provision for his wife or children provided the amount so deducted does not exceed 20 percent of the salary
• Any amount paid to effect or to keep in force a contract for such annuity plan of LIC.
Agreed, insurance may not be the best place to invest your hard-earned money. But there are sufficient reasons for one to believe that it can be a highly lucrative avenue to facilitate savings. People often talk about yield on investment and tend to compare their values with those available on various insurance schemes. This is particularly typical within India where one conveniently forgets the element of risk covered by life insurance.
It is extremely unfair to compare the performance of insurance against other investments without considering the core features of insurance. The very essence of insurance is to protect your family from the uncertainty of your life.

Suitability: A life insurance policy is suitable for all investors, be they conservative or moderate or aggressive. One should buy insurance specifically for the life cover that it offers and then consider the returns and tax benefit available under the policy.

EQUITY LINKED SAVING SCHEMES
Equity Linked Saving Schemes (ELSS) is by far the most exciting of all the Tax saving instruments discussed.
In respect of Individuals and HUFs Section 88 of the Income Tax Act, 1961 allows a deduction, from income tax, of an amount equal to 20% of the investment made in certain instruments subject to certain investment limits in each such instrument. The instruments available for such investments, inter alia, includes the units of any Mutual Fund notified under clause 23(D) of section 10 of the Act provided such units are offered under a plan formulated in accordance with such scheme notified by the Central Government.
Under Section 88 of the I.T. Act, 1961, one gets a tax rebate of up to 20% of the amount contributed to ELSS schemes subject to a maximum investment of Rs 10,000 within the allowable limit under Section 88. Also these schemes generally diversify the equity risk by investing in a wider array of stocks across sectors.
All Equity Linked Saving Schemes are subject to a lock-in-period of 3 years from the date of allotment of units. Accordingly, the unit holder cannot redeem, transfer, assign or pledge the units before the completion of 3 years from the date of allotment of units.
As described above, tax benefits are restricted to an investment amount of Rs. 10,000. However, any investments made in excess of Rs 10,000 would also be locked in for a period of 3 years as required by the conditions of ELSS.
However, in the event of the death of the assessee, the nominee or legal heir, shall be able to withdraw the investment only after the completion of one year from the date of allotment of units to the assessee or anytime thereafter.
Major saving schemes available under ELSS are —
• Alliance Capital Tax Relief
• Birla Tax Plan
• Zurich India Tax Saver Fund
• Prudential ICICI Tax Plan
• Tata Tax Saving Fund

Suitability: ELSS is best suited for young investors who have an aggressive risk profile.

INFRASTRUCTURE BONDS
Some bonds have a special provision that allows the investor to save on tax. These are termed as Tax-Saving Bonds, and are widely used by individual investors as a tax-saving tool.
Examples of such bonds are:
a) Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
b) Capital Gains Bonds under Section 54EC of the Income Tax Act, 1961
c) RBI Tax Relief Bonds
Infrastructure bonds are available through issues of ICICI and IDBI, brought out in the name of ICICI Safety Bonds or ICICI Tax Saving Bonds and IDBI Flexibonds. These provide tax-saving benefits under Section 88 of the Income Tax Act, 1961, for the investor.
Lets explore the details of the last tax saving bond issued by ICICI.

ICICI Bank Tax Saving Bond: Everyone was entitled to apply but only individuals and HUFs were entitled for a rebate in tax payment under Section 88 at the rate of 20 per cent (if gross total income is up to Rs 1.5 lakh), 15 per cent (if total income is between Rs 50,000 and Rs 5 lakh). As per the Income Tax Act, only taxpayers with an income less than Rs 5 lakh per annum are entitled to this rebate for an investment made up to Rs one lakh. To avail of the rebate, the investment had to be held for at least three years. Coupon rate was lowest ever at 7 per cent and 7.25 per cent for three and five years respectively, paid annually. There were two more options in the nature of Deep Discount Bonds (DDB) available with a maturity of three years, four months and five years four months. Under this, Rs 5,000 becomes Rs 6,250 and Rs 7,250 correspondingly, a yield of 6.9 per cent and 7.2 per cent.
The ICICI Bank issue opened on January 6 and closed on January 27. ICICI Bank was offering an interest rate of 7 per cent per annum payable annually for three years or 7.25 per cent per annum payable annually for five years under the annual interest option.
Deep Discount Bonds are also suitable for an increase in your investment. These bonds, which are sold at a discount on their face value, are redeemed at their face value on maturity of the instrument, the difference being your gain.
According to Section 88 of the Income Tax Act, 1961, 20 per cent of the amount invested in Infrastructure Bonds qualifies for tax rebates. For instance, if you buy Rs 40,000 worth of tax-saving bonds, and your tax liability is Rs 10,000, then 20 per cent of Rs 40,000, i.e., Rs 8,000 will be deducted from your tax liability. In that case, instead of paying Rs 10,000, you will now pay Rs 2,000 only to the Income Tax Department.

Suitability: Infrastructure bonds are best suited for individuals contem-plating retirement in a few years or have already taken retirement.