Tax Planning & Insurance

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 !ow will your loved ones will maintain their current lifestyle & meet their financial goals "r, what if a fire raised the house you so painsta#ingly 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% &isasters dont usually announce their arrival. 'hey stri#e unnoticed, often with dire consequences that scar your world & play havoc with your personal finances. (ou can ta#e 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 man$ made and natural calamities, well, at least be prepared for them and their aftermath. *ut here the question comes, What we really mean by I+S,-.+/0
M E A NI N G:
Insurance is a contract between two parties $ the insurer 1the insurance company2 and the insured 1the person or entity see#ing the cover2 $ wherein the insurer agrees to pay the insured for financial losses arising out of any unforeseen events in return for a regular payment of 3premium3.
TAX PLANNING & INSURANCE 'hese unforeseen events are defined as 3risk3 and that is why insurance is called a ris# cover. !ence, insurance is essentially the means to financially compensate for losses that life throws at people $ corporate and otherwise.
(oung adult
A ROAD MAP FOR INSURANCE .50 6I70 I+S,-.+/0 +"+ 6I70 I+S,-.+/0 48s *uy only if you have *uy accident & health dependants insurance, requisite asset cover Subtract e:isting assets 0:tend health insurance to from future e:penses & family, continue accident cover the difference ;aintain covers & asset covers to 0:tend health insurance to
(oung family
98s
;ature family
<8s
balance the shortfall in family, continue accident 0mpty nesters =8s e:isting assets & asset covers ;aintain cover till you 'op up health cover for are earning -etired self & spouse, continue
asset cover >8 & +o life cover needed, /ontinue health cover for over unless dependants you have self & spouse, continue asset cover
N E ED F OR IN S U R AN C E ?
.ll of us claim to #now what insurance is all about. *ut the cru: of the matter is that none of us really understand its true value than#s to the sheltered and pampered lifestyles that we lead. ;ost of us perceive insurance as a ta:$saving device. Some of us thin# of insurance as an investment tool that enables us to accumulate wealth gradually. 7or the rest, insurance seems to be nothing but a necessary nuisance.
TAX PLANNING & INSURANCE . careless ta:i driver might smash into your par#ed ;ati@, pulveri@ing it completely. +ow your only mode of transport through the metros over$laden rush hour is cooling its flan#s at the dealers wor#shop . natural calamity li#e floods, earthqua#e or a tsunami had suddenly hit your area and ta#es 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. (our mother$in$law slips inside the bathroom, landing on her side. .fter fracturing her hipbone, she has to be operated upon and spends over bedridden four wee#s at the local nursing home
.ll 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 .t least the financial turmoil could have been neutrali@ed to a very large e:tent. +othing and no one can accurately predict or foresee an impending disaster that might fall into your self$centered e:istence. .nd nothing and no one can replace the value and commitment that might be wasted upon the occurrence of such a disaster, e:cept insurance. It is Insurance that protects you against the financial repercussions of a loss
'he maAor types of insurance that are needed by an individual include life, disability and health, homeBshop and auto insurance, although there are various other types. 0ach of these types of insurance insures you against a specific #ind of financial loss.
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II- LIFE INSURANCE: AN OVERIEW

INTRODUCTION:
. financial planner once said this about life insurance buying habits of Indians? they dont buy life insuranceC its sold to them. ,nfortunate, but true. Individual awareness and understanding of life insurance products is e:tremely low. 'hus, people should be financially literate, and have at least, an elementary understanding of what life insurance is all about. 'his means being aware of the various types of insurance products on offer in the mar#et, as well as having the ability to understand ones life insurance needs and find appropriate fits.
6ife insurance is chiefly a ris# 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 1spouse, children, parents2 to maintain their current lifestyle and pursue their life goals D till such time as they are in a position to setup an alternative income stream by themselves. 'hats the basic purpose of life insurance.
*ut in India, as in most other developing mar#ets, life insurance has come to represent more than Aust ris# cover. 'he best$selling insurance products in the mar#et double as investment options & offer attractive ta: brea#s. In fact, its because of this two$in$one profile that they appeal to the average individual who see#s convenience in personal financial matters.
4 REASONS FOR BUYING LIFE INSURANCE PRODUCTS
TAX PLANNING & INSURANCE .s# individuals wanting to buy life insurance, about how they do their ta: 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. .nd most buy it for one core reason $ to save ta:. .part from ta: benefits and financial security, following are some of the reasons for buying life insurance 1.
Passing awa ear! "

+o one on this earth #nows when he will die. 6ife and future is
very unpredictable and uncertain. 'hus, Individuals need to insure themselves to secure the future of those who are dependant on themC especially so if they happen to be the sole breadwinners. (ou wouldn)t want them to go through hardships or rely on othersBrelatives, etc. 'his, in fact, is the prime reason why one should buy an insurance policy. *y 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.
#. $i%ing too !ong"

It is generally observed that individuals who tend to live way beyond their earning years li#e say, till the age of E= or F8, 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 e:penses post$retirement. Such plans provide an annuity, which means that individuals #eep getting a fi:ed sum every monthByear after they have retired.
&.
Pain'u! e(istence"
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 >
TAX PLANNING & INSURANCE act as the saving grace in two ways. "ne, by way of a medical rider li#e the accidental death benefit rider, permanent disability benefit rider, critical illness benefit rider. 'hese riders are ta#en along with the life insurance plan and help cover the medical e:penses. .nd 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 e:penses.
). *a( +ene'its"
&o we need to elaborate on this any further 'raditionally, life insurance has always been bought more for ta: benefits than for what it is actually purported to doC i.e. insure human life. *ut the role of life insurance in an individual)s ta: planning cannot, in any way, be undermined. ,nder the new regime, individuals can now invest upto -s 188,888 in insurance premia to avail of a deduction from ta:able income. 'he ta: sops provided on insurance help Gincrease) the individual)s disposable income and ma#e him consider ta#ing a life insurance plan, which he otherwise may not have done.
ROLE OF LIFE INSURANCE

-is#s and uncertainties are part of life)s great adventure $$ accident, illness, theft, natural disaster $ they)re all built into the wor#ing of the ,niverse, waiting to happen.
Ro!e 1" $i'e insurance as ,In%estment,"

Insurance is an attractive option for investment. While most people recogni@e the ris# hedging and ta: saving potential of insurance, many are not aware of its advantages as an investment option as well. Insurance products yield more compared H
TAX PLANNING & INSURANCE to regular investment options, and this is besides the added incentives offered by insurers. (ou cannot compare an insurance product with other investment schemes for the simple reason that it offers financial protection from ris#s, something that is missing in non$insurance products. In life insurance, unli#e non$life products, you get maturity benefits on survival at the end of the term. In other words, if you ta#e a life insurance policy for 48 years and survive the term, the amount invested as premium in the policy will come bac# 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. 'hus insurance is a unique investment avenue that delivers sound returns in addition to protection
Ro!e #" $i'e insurance as ,*a( p!anning,"

6ife Insurance is one of the most popular savingsB investment vehicles in India. Ironically, it is probably the least understood too. Insurance serves as an e:cellent ta: saving mechanism too. 'he 5overnment of India has offered ta: incentives to life insurance products in order to facilitate the flow of funds into productive assets. ,nder Section EE of Income 'a: .ct 1F>1, an individual is entitled to a rebate of 48 per cent on the annual premium payable on hisBher life and life of hisBher children or adult children. 'he rebate is deductible from ta: payable by the individual or a !indu ,ndivided 7amily. 'his rebate is can be availed upto a ma:imum of -s 14,888 on payment of yearly premium of -s >8,888. *y paying -s >8,888 a year, you can buy anything upwards of -s 18 la#hs in sum assured. 1&epending upon the age of the insured and term of the policy2 'his means that you get -s 14,888 ta: benefit. 'he rebate is deductible from the ta: payable by an individual or a !indu ,ndivided 7amily.
III- MEDICAL INSURANCE: A 'MUST HAVE'

Individuals, while conducting their ta: planning e:ercise for the year, should always #eep in mind their financial obAectives. "ne obAective should be to insure themselves against any unforeseen medicalBhealth e:penses. . medicalBhealth insurance policy helps in achieving this goal. 'his note e:plains what the policy is and how it proves to be useful while carrying out the financial as well as the ta: planning e:ercise.
Simply put, a health insurance policy, also popularly #nown as );ediclaim), helps an individual cover the e:penses incurred due to an inAuryBhospitali@ation. +ot only does it cover e:penses sustained during hospitali@ation but also during the pre as well as post hospitali@ation stages. .n added attraction of these policies is that the individual gets certain ta: benefits, which are separate from the Section E8/ benefits available on traditional ta:$saving instruments. .n illustration will help in understanding things better.
Medical insurance: Small costs, huge benefits

Age -.rs/ Amount to +e insure0 -Rs/ Unite0 In0ia Insurance Co. $t0 New In0ia Assurance Co. $t0 -NO*E" *1e premium 2uotes are as s1own on we+sites o' t1e respecti%e insurance companies. 98 488,888 4,H48 98 488,888 Annua! Premium -Rs/ 4,<>F
TAX PLANNING & INSURANCE *a(es as app!ica+!e ma +e !e%ie0 on t1e 2uotes gi%en a+o%e. In0i%i0ua!s are a0%ise0 to contact t1e insurance companies 'or 'urt1er 0etai!s. /
6et us assume that an individual aged 98 years, wants to cover himself for a sum of -s 488,888. .s the table shows, if he decides to buy a ;ediclaim policy from ,nited India Insurance, the annual premium for the same wor#s out to appro:imately -s 4,<>F p.a. /onversely, if the policy were to be purchased from +ew India .ssurance, other factors remaining the same, the premium the individual would have to pay would be appro:imately -s 4,H48 p.a.
In case the individual has to undergo hospitali@ation due to an inAuryBaccident, then the e:penses incurred by him will be covered by the policy. 'he cover will be to the e:tent of the sum insured. In this e:ample, the insurance company will pay for e:penses upto -s 488,888. 'his cover will also include pre and post hospitali@ation e:penses li#e money spent for conducting medical tests and buying medicines.
"f course, the payment will be subAect to certain conditions. 7or e:ample, the insurance company will want the individual to undergo treatment from a hospital that has a tie$up with the company. .lso, the insurance company will as# for all the necessary documents pertaining to the hospitali@ation charges, the medicines bought and other related papers.
. host of added benefits are also available on ;ediclaim policies. If suppose, an individual continues to buy a ;ediclaim policy from a certain company and has a claim free year, then the company increases his sum insured in the ne:t year. .lternatively, some companies reduce the premium charged to the individual. ;ost
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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 e:penses by opting for the )/ritical Illness 1/I2) rider available with life insurance policies. 6ife 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 E8& benefits are available on such riders as well.
!owever, medical insurance differs from these riders in one #ey aspect. In case of a /I 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. 'his is irrespective of the e:penses incurred by the individual on hospitali@ation, medicines and other such costs. .s opposed to this, in case of ;ediclaim, the individual is covered only to the e:tent of the actual e:penses incurred subAect to the ma:imum limit as defined by the )sum insured).
;edical insurance has also seen a lot of innovation being brought in with the passage of time. +owadays, you have )cashless hospitali@ation). 'his is where individuals do not have to pay for their hospital bills in case of hospitali@ationC the insurance company settles the bill directly. "f course, certain conditions li#e 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 e:ample. ,nder a floating cover, an individual can either cover himself for say, an amount of -s 988,888 or cover his family of say 9 individuals, for -s 188,888 each. 'his again, will be subAect to the conditions laid down by the insurance company.
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TAX PLANNING & INSURANCE !owever, 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. 'hey shouldn)t be caught in a scenario where they are staring at a huge medical bill and haven)t planned for it. 'hat 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. .ll said and done therefore, a medical insurance policy should always form a part of any individual)s financial planning as well as the ta: planning e:ercise
T AX BE N EF I TS :
SEC*ION345D
;ediclaim policies attract ta: benefits under Section E8&. &eduction under this section is available if the premium is paid by cheque. It is .vailable to Individual and !,7 assessees 'he ma:imum amount of deduction available under this section is -s 18,888. 'his limit stands enhanced to -s 1=,888 in case an individual is a senior citi@en. 'a: benefits are also available in case individuals pay for their parents and children who are dependant on them.
.ccordingly a person who is underBin 98I ta: brac#et can save income ta: up to -s 9,8>8 1or -s. 99>> if annual income e:ceeds -s 18,88,8882 by paying -s 18,888 as premium in 3;ediclaim3 policy in a year. 14
6ANDICAPPED DEPENDEN*" SEC. 45DD

6I/ has also made special provisions for the relatives of a handicapped policyholder. Section E8 && provides relief to individual resident ta:payer who has a handicapped dependant person to support. Such an individual can pay or deposit with any scheme framed by 6I/ in this behalf for any scheme framed by 6I/ in this behalf for maintenance of handicapped dependant. Sec. E8&& stipulated that a resident individual or a member of !,7 having a dependent relative who suffers from a permanent physical disability 1including blindness2 or mental retardation was entitled to a deduction of -s. 48,888 in a year for medical treatment, training or rehabilitation. Jayment to 6I/s KLeevan .adhar and ,'Is KSpecial Jlan for the !andicapped specially designed for such persons was covered by Sec. E8&&., offering a deduction of -s. 1=,888. &eduction under section E8&& is statutory in nature and is allowed in full, irrespective of the actual e:penditure incurred on medical treatment. 7ollowing the merger of Sec. E8&&. with E8&&, the total deductible amount was raised from -s. 9=,888 to -s. <8,888. 'he ma:imum fi:ed deduction of -s.<8,888B$ is allowed under this plan. 6I/s Aeevan aadhar provides this maintenance.
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I- TAX PLANNING-A LEGAL MEASURE

Re!a(. Pa ing t1e rig1t amount o' ta( is eas 7
We pay ta:es whatever be our occupation $ service, business, self$employed, or a professional. What is important is whether such payment represents right amount of ta:. With changing legislations and complicated ta: laws, it becomes imperative that one stays abreast of the various ta: provisions and inculcates ta: planning to ta#e the best advantage.
I NT RO D U C TI O N:
.voidance of ta: liability by so arranging the commercial affairs that charge of ta: is mitigated, is ta: planning. ,nder the law, the ta:payer is legitimately entitled to plan his ta:es in such a manner that his ta: liability is minimal. 'a: Jlanning can be defined as an arrangement of the financial affairs within the scope of law in a manner that derives ma:imum benefit of the e:emptions, deductions, rebates and relief and reduces the ta: liability to minimal. .s long as you are within the framewor# of law, you can plan your financial affairs. 'a: planning is, therefore, a device within the four corners of the ta:ation laws aimed at minimi@ing the ta: liability of a ta:payer.
!owever, in the name of ta: planning, you cannot indulge in 'a: 0vasion. .nd the line between 'a: Jlanning and 'a: 0vasion is very thin, so you need to tread carefully. When financial transactions are arranged in a way that it becomes obvious that they were entered with a malafide intention of either not paying ta:es or with a view to defeat the genuine spirit of law, they can not be accepted as legitimate 'a: Jlanning. 'wisting of facts or ta#ing a very strict and literal interpretation of law without understanding the basic purpose of the law can only lead to punishable 'a: .voidance and not 'a: Jlanning
1=
'a:
planning
is
legal,
ta:
evasion
is
illegal.
'a:
planning
is
legitimate provided it is within the framewor# of law. /olorable devices cannot be part of ta: planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of ta: by resorting to dubious methods.
'a: planning is not a one$time e:ercise. 'a: planning is more of an ongoing process lin#ed to your income and your e:pensesBinvestments. 'he obAective is to ma:imi@e your interestsBnet inflows over a lifetime and successfully achieving your financial goalsBneeds. 'he whole e:ercise needs to be done in an ethical manner with full discloser of income and genuine representation of e:penses.
P A R A M ET E RS FO R TA X P L AN NI N G:
'he following are the important parametersBrates of ta: that one has to loo# at before heBshe deploys hisBher savings? a2 b2 c2 6ong$term /apital 5ains Short$term /apital 5ains 'a:ation on Income from such investments
1InterestB&ividends2 d2 e2 *enefits at time of Investment into such avenues Wealth 'a:
'he productBavenue under consideration would determine which of the above would be applicable. "ne can create a matri: with savingsBinvestments on one side and the above parameters on the other, to get an ideal reference or comparison chart. .dding parameters li#e ideal purpose 1or obAective2 of the productBavenue, loc#$in 1>
TAX PLANNING & INSURANCE period, benefits and ris#s, payments options, amount needed, etc would give a complete picture.
STEPS IN TAX PLANNING:

Jroper ta: planning is a basic duty of every person which should be carried out religiously. *asically, there are three steps in ta: planning e:ercise. 'hese three steps in ta: planning are? 1. /alculate your ta:able income under all heads ie, Income from Salary, !ouse Jroperty, *usiness & Jrofession, /apital 5ains and Income from "ther Sources. 4. /alculate ta: payable on gross ta:able income for whole financial year 1i.e., 7rom 1st .pril to 91st ;arch2 using a simple ta: rate table, given on ne:t page. 9. .fter you have calculated the amount of your ta: liability. (ou have two options to choose from? a. Jay your ta: 1+o ta: planning required2 b. ;inimi@e your ta: through prudent ta: planning.
;ost people rightly choose "ption )*). !ere you have to compare the advantages of several ta: saving schemes and depending upon your age, social liabilities, ta: slabs and personal preferences, decide upon a right mi: of investments, which shall reduce your ta: liability to @ero or the minimum possible.
0very citi@en has a fundamental right to avail all the ta: incentives provided by the 5overnment. 'herefore, through prudent ta: planning not only income$ta: liability is reduced but also a better future is ensured due to compulsory savings in highly safe 5overnment schemes. We sincerely advise all our readers and clients to
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TAX PLANNING & INSURANCE plan their investments in such a way, that the post$ta: yield is the highest possible #eeping in view the basic parameters of safety and liquidity.
SAVINGS & INVESTMENT:
Savings and investments are interconnected. *efore ma#ing investments the person has to consider various factors such as? $
6iquidity$when he requires the amount to meet the educational e:penses of children, for marriage, house construction or for a secure future after retirement
Security of the investment 'he return and ta: on income on such investments.
'his varies from person to person. . person by investing in +S/ saves on his ta:. !owever, the interest on the investment is ta:able. .gain, if the investment is made in JJ7, he is not liable to pay the income ta: on interest. *ut the period of +S/ is si: years whereas in the case of JJ7 the period of repayment is = years. !owever, a portion can be claimed after Hyears. 'hus the person who ma#es the investment has to consider whether he requires the amount after = years or he can wait for a longer period.
'o ma#e investments there should be savings. . lower income person also wants to save, but his gross income and day$to$day e:penses don)t leave him anything to save. 7or e:ample, if he has to save -s 48 from ta: by investment in +S/, he has to invest -s 188. Sometimes considering his financial needs he will be prepared to pay the ta: of -s 48, so that -s E8 is there for his other needs. 'herefore, the capacity of savings is also very relevant. 'o increase savings one
1E
TAX PLANNING & INSURANCE should ma#e investments that give reasonable returns. .gain this return becomes a saving if invested.
SHATTERING MYTHS ON TAX PLANNING:

'a: planning is not a device to reduce ta: burden. In fact, it helps savings by investments in government securities. Savings reduce e:travagance, and correspondingly inflation. 'a: savings are permitted only for investment made i?n government securities and bonds of priority sectors which ultimately help the nation. 'herefore, the savings in ta: help the /entral and state governments to mobili@es funds by way of investments and as such the government earns much by way of other benefits, by sacrificing small amount of ta:. 'he Supreme /ourt in one case observed that 3'a: planning may be legitimate provided it is within the framewor# of 6aw3. *y ta: planning, the government is equally benefited.
'he tas# of a ta: planner is gigantic and it involves a high talented approach by persons well$versed with the ta:ation laws and other laws having an important bearing on the subAect. 'herefore, ta: planning necessitates full #nowledge of the intricacies of the ta:ation laws and other allied laws.
'hus, 'a: planning may loo# cumbersome, but if done intelligently, it is the simplest way of lessening your ta: load. So when you are not sure of the ta: provisions, ta#ing advice of professionals is the right approach. While a ta: consultant will advise on investments that help avoid ta:es, a good investment advisor will add value in terms of ma#ing the right investment choice that will save on ta:es and grow in value over a period of time.
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TAX PLANNING & INSURANCE 'a: planning is an integral activity in the management of your income and finance. Inefficient ta: management or an absence of ta: planning can Aeopardi@e your finance management, irrespective of your status. It is important to plan intelligently in a way that can ma:imi@e your residual income without compromising your dues to the country
II- TAX PLANNING-A SMART WAY

G E T Y OU R AL L O C A TI O N R I G H T
7or most individuals, financial planning and ta: planning are two mutually e:clusive e:ercises. While planning our investments we spend considerable amount of time evaluating various options and determining which suits us best. *ut when it comes to planning our investments from a ta:$saving perspective, more often than not, we simply go the traditional way and do the e:act same thing that we did in the earlier years. Well, in case you were not aware the guidelines governing such investments are a lot different this year. .nd lethargy on your part to rewor# your investment plan could cost you dear.
7or a lot of investors planning for ta:ation can be quite impulsive. 'he public provident fund 1JJ72, national savings certificate 1+S/2, infrastructure bonds and life insurance are obvious choices and the proportion is decided arbitrarily without much thought to asset allocation, the ris#$return equation, the investment obAective of the product and whether it matches your own and such other evaluative yardstic#s.
While on the face of it, all fi:ed income instruments 1JJ7, +S/, infrastructure bonds2 fall largely within the fi:ed income category, there are different features,
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TAX PLANNING & INSURANCE dynamics, yields, loc#$in periods associated with each ta:$saving product. "ften investors tend to ignore the nuances and invest in a product for the wrong reasons.
*efore you start planning for ta:ation, you must understand that at the end of the day, it is Aust another investment you are ma#ing. .ll factors that are closely related to investments li#e the ris#$return equation and asset allocation are also related to ta:$planning.
'o understand this better let us understand this with the help of an e:ample. 6ets say you have -s 188,888 and want to invest the amount to ma:imise returns within a reasonable ris# limit. (ou will ta#e some concrete and decisive steps to achieve that investment obAective. (ou will choose the right instrument, plan your asset allocation, understand the ris#$return profile of the instrument and see if it matches your own. .t no stage will you deviate from the Kfinancial course that you have chal#ed out for yourself and give vent to rec#lessness for short$term gains.
6i#ewise, when you have -s 188,888 with the primary obAective of investing for saving ta:, all the factors outlined above li#e asset allocation, ris#$return, etc hold good. 'he only difference is while investing to save ta:, you have a limited range of products and not the entire investment universe, so your options are restricted to that e:tent.
I N VE S T M E N T A S P E R AG E P RO F I L E
'o understand how you can better allocate assets within the entire gamut of ta:$saving instruments the ta:$paying community is divided into 9 distinct age profiles. 'he reason we have chosen age as the distinguishing criteria is because
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TAX PLANNING & INSURANCE appetite for ris# and therefore the e:pected return, flows largely from ones age D lower the age, higher the ris# appetite and the potential return. IF .OU ARE 8E*9EEN #:3&: .EARS OF A;E"
(ou are young and probably married, maybe even with #ids. If you are the sole breadwinner in the family then your position in the family assumes even more importance. (ou need to ensure that your dependents are not put at ris# in your absence. Insurance is your most pressing need at this age. While the lure of ta:ation need not be the real reason for ta#ing life insurance, if you are getting ta: benefits along the way why complain !ow much insurance and what #ind of insurance plans do you need to ta#e 'hat is something that is best laid out to you by your insurance consultant. *ut one thing is for sure, life insurance should form a large, if not the largest chun# of your investments for ta:$saving. 'his is because in the 4=$9= age brac#et the need is acute and remember insurance is bought best at a younger age when it is cheaper.
*eing young, you have time on your side and can ta#e on some ris#. In this age brac#et, you probably have a high appetite for ris#. (our disposable surplus maybe small 1as you could be paying your home loan installments2, but the savings that you have can be set aside for a long period of time. (our children, if any, still have many years before they go to collegeC or retirement is still further away. (ou therefore should invest a large chun# of your surplus in ta:$saving funds 1equity funds2. as equities are very attractive investment option for you. . product li#e a ta:$saving mutual fundBan equity$lin#ed savings scheme 106SS2 is something that fits very nicely into your ris# profile. Invest up to the entire -s 18,888 limit. .gain, it is the investors good fortune that he can invest in equities and even get a ta: rebate on itM
(ou can put smaller amounts in JJ7 and +S/. !owever, of the two, +S/ is preferable because the cut in the interest rate 1which has been happening with alarming frequency and intensity over the years2
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TAX PLANNING & INSURANCE applies to JJ7 with prospective effect. In other words, if you have ta#en an +S/ at FI coupon rate last year, you will continue to draw that interest amount even in this year despite a cut in interest rate to EI. "n the other hand, had you invested in JJ7 at FI last year, you will now get EI after the rate cut this year.
(ou can give a miss to infrastructure bonds. 'he yield is unattractive and you are better off paying ta: and investing in debt funds with steady trac# records.
'he employee provident fund deduction happens from your salary and therefore you have little control over it. -egarding life insurance, go in for pure term insurance to start with. Such policies are very affordable and can e:tend for upto 98 years. 'he rest of your funds 1net of the home loan principal repayment2 can be par#ed in +S/BJJ7.
IF .OU ARE 8E*9EEN &:3): .EARS OF A;E" .t this age, you are probably insured, so there is a lower need on that front. !owever, the moot point is $ are you adequately insured (ou 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 youByour family can maintain this lifestyle comfortably in the future. .gain, you dont need the ta: carrot to underscore the need for an enhanced insurance cover, but you could use that ta: rebate.
While you arent e:actly young, you arent alarmingly old either. (our appetite for ris# will gradually decline over this age brac#et as a result of which your e:posure to the stoc# mar#ets will need to be adAusted accordingly. .s your compensation increases, so will your contribution to the 0J7.
49
'he life insurance component can be maintained at the same levelC assuming that you would have already ta#en adequate life insurance and there is no need to add to it. In #eeping with your reducing ris# appetite, your contribution to JJ7B+S/ increases. "ne benefit of the higher contribution to JJ7 will be that your account will be maturing 1you probably opened an account when you started to earn2 and will yield you ta: free income 1this can help you fund your children)s college education2.
(ou can ta#e equity e:posure up to -s 18,888 to get a #ic#er in your investments that only equities can provide.6i#ewise prefer debt funds to infrastructure bonds.
IF .OU ARE O<ER ): .EARS OF A;E? (ou are now nearing retirement. 'o that e:tent it is critical that you fill in any shortfall that may e:ist in your retirement nest egg.
.t <= years or above, your insurance needs are probably ta#en care of already. If they arent then, you can bridge the shortfall by ta#ing some additional insurance 1preferably pure ris#, which is cheaper2 after consulting your agent.
(ou can invest in an 06SS provided you arent too close to retirement 1around >8 years2, in which case the ris#$return profile of the mutual fund scheme would wor# against your own.
.gain, you can invest some portion of your money in +S/ as opposed to JJ7. If you havent e:hausted the -s 188,888 limit, that is not a cause for concern. Jay the ta: and invest in debt funds instead, which over a period of time will give you a better return and will compensate for the ta: you have paid. .s we mentioned earlier, it is better to invest with the clarity and foresight of cloc#ing long term growth as opposed
4<
TAX PLANNING & INSURANCE to investing with the short$term benefit of saving ta:.
(ou do not want to Aeopardi@e your pool of savings by ta#ing any e:traordinary ris#. 'he allocation will therefore continue to move away from ris#y assets li#e stoc#s, to safer ones line the +S/. !owever, it is important that you continue to allocate some money to stoc#s. 'he reason being that even at age ==, you probably have 1= $ 48 years of retired lifeC therefore having some portion of your money invested for longer durations, in the high ris# $ high return category, will help in building your nest egg for the latter part of your retired life.
IF .OU ARE O<ER :: .EARS OF A;E" (ou are to retire in a few yearsC then you will have to depend on your investments for meeting your e:penses. 'herefore the money that you have to invest under Section E8/ must be allocated in a manner that serves both near term income requirements as well as long$term growth needs. ;ost of the funds are therefore allocated to +S/. (our JJ7 account probably will mature early into your retirement 1if you started another account at about age <8 years2. (ou continue to allocate some money to equity to provide for the latter part of your retired life. "nce you are retired however, since you will not have income there is no need to worry about Section E8/. (ou should consider investing in the Senior /iti@ens Savings Scheme, which offers an assured return of FI paC interest is payable quarterly. .nother investment you should consider are Jost "ffice ;onthly Income Scheme.
VARIOUS POINTERS FOR INVESTORS
Investing the -s 188,888 in a manner that saves both ta:es as well as helps you achieve your long$term financial obAectives is not a difficult e:ercise. .ll it 4=
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 e:ecuting the same. 7ollowing are some of the important pointers for investors?
;a#e sure you have e:hausted the -s 188,888 investment limit with your insurance needs first.
06SS can be considered depending on your age. If you are over >8 years you can give it a miss.
+S/ and JJ7 interest rates arent sustainable over the long term given the e:isting yields on mar#et$lin#ed government securities. (ou can invest moderate amounts, preferably in +S/.
Infrastructure bonds can be ignored. Jay the ta: instead and invest prudently in debt funds that have the potential to give you a higher return and be quite ta:$ efficient at the same time.
Invest with prudence to ma:imise growth with saving ta: is the secondary obAective. If the ta:$saving instruments cannot help you ma:imise growth, then pay the ta: and invest in instruments that can help you ma:imise growth.
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III- GENERAL TAX PLANNING HINTS

S AL AR I ED I ND I VI D U AL
12 'he employee should ensure that dearness allowance forms part of basic salary or is considered for determining retirement benefits under the terms of employment. 'his will reduce ta: liability on items such as house rent allowance, gratuity, employer)s contribution to a recogni@ed provident fund, etc
42 Since recurring pension is always ta:able, employees should get their pension commuted. .ccordingly, the employee can ta#e the benefit of e:emption of commuted pension.
92 Instead of obtaining medical allowance on a monthly basis, the employee should opt for reimbursement of medical e:penses against bill up to -s1=, 888 per annum since such reimbursements are not ta:able.
<2 'he employee may obtain a part of his remuneration by way of employer)s contribution to a provident fund since such contributions are not ta:ed in the hands of the employee. In case of a recogni@ed provident fund, such contribution should not e:ceed 14 per cent of salary.
=2 'he employee may obtain a part of his remuneration by way of subsidi@ed lunch or provision of telephone at residence since such perquisites are not ta:able.
4H
TAX PLANNING & INSURANCE >2 5enerally, it is more advantageous to obtain perquisites than to obtain allowance for the same benefit. eg 7ree housing accommodation vis$a$ vis house rent allowance.
P R OF I T S & GA I NS F R O M B U S I NE S S
*usiness 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 ta:able under the Income 'a: .ct ie ta:ability of income has no connection whether the income is legal or illegal.
'he general rule of determining ta:able business or professional income is that from the gross income or gross receipts or gross sales, e:penses incurred for earning that income will be allowed as a deduction. 'he balance of profit remaining after claiming all the allowable e:penses as a deduction will be the ta:able income.
HINTS FOR TAX PLANNING

1. Since depreciation for the whole year is allowed only if the asset is purchased prior to "ctober of the relevant previous year, depreciable assets must be purchased in the first half of the year. "therwise only =8 per cent of the depreciation will be allowed as deduction. 4. 0:penses falling uBs <9 * such as ta:es, duties, cess payable to the government, interest on borrowings from financial institutions, etc ta:es which are allowed as a deduction only on payment basis must be paid on or before the prescribed time for ma#ing payment.
4E
TAX PLANNING & INSURANCE 9. Since only E8 per cent of the total e:penditure paid otherwise than by account payee cheque or ban# draft is allowed as a deduction, cash payments in e:cess of -s48,888 must be avoided. <. Since long$term capital gains invites a lower ta: rate, transfer of short$term capital assets must be avoided.
4F
I- TAX STRUCTURE
.n attempt is made in the following pages to present a bird eye)s view of the Indian Income 'a: laws and so that you can ta#e advantage of the available legal avenues for ta: planning, reduce your ta: liability.
'o begin with lets understand the structure of ta: regime in the country. 'a:es are the basic source of revenue to the government. -evenue so raised is utilised for meeting the e:penses of government as well as to carry out developmental wor#s.
'here are basically two types of ta:es, &irect and Indirect ta:es. &irect ta:es are those, which are, collected by the government directly from the ta:payer through levies such as income ta:, wealth ta: and interest ta:. Whereas indirect ta:es comprise of e:cise duty, sales ta:, customs duty and value added ta:. While direct ta:es form 98 per cent of government)s revenue indirect ta:es contribute a larger chun# of H8 per cent.
T HE I NC O M E TA X A CT , 1 9 6 1
'he Indian constitution has empowered only the /entral 5overnment to levy and collect Income 'a:. 'he Income 'a: .ct was enacted in 1F>1. 'he .ct come into force from the 1st of .pril 1F>4 and e:tends to the whole of India. It consists of over <88 sections and 14 schedules. 'he Income 'a: .ct determines which persons are liable to pay ta: and in respect of which income. 'he various sections lay down the law of income ta: and the schedules elucidate certain procedures and give certain lists, which are referred to, in the sections. !owever, the .ct does not prescribe the rates of Income 'a:. 98
TAX PLANNING & INSURANCE 'hese rates are prescribed every year by the 7inance .ct 1popularly #nown as 3'he *udget32 'his is done mainly to give incentives for investment in priority sectors, to discourage ta: evasion, to remove loopholes in the law and to synchronise the law with the e:isting economic situation.
Some of the terms commonly used while computing ta:es are as follows?
1. .SS0SS00?
.n .ssessee is a person by whom any ta: or any other sum of money 1for e:ample interest, penalty, fine, etc2 is payable under the Income 'a: .ct #..SS0SS;0+' (0.-? .ssessment year 1.(2 means the period of 14 months commencing on the 1st day of .pril each year. &.J-0NI",S (0.Jrevious year 1J(2 means the financial year immediately preceding the assessment year. It is essential to understand the difference between assessment year and previous year. 'he income, which is earned in the previous year, is charged to income ta: in the assessment years at the rates applicable for that assessment year. 'hus if income of -s1,88,888 is earned in J(. 1FFH$FE 1which commences on 1B<BFH and ends on 91B9BFE2, this income is charged to income ta: in .( 1FFE$FF at the rates applicable for .( 1FFE$FF. Similarly income earned in J(. 1FFE$FF is charged to income ta: in .(. 1FFF$4888, at the rates applicable for that .(.
<..SS0SS;0+'
91
TAX PLANNING & INSURANCE .ssessment includes re$assessment. It is the process of determining the income of an assessee earned during any previous year and finding out the income ta:, interest or other sum payable under the .ct.
DEDUCTIONS FROM INCOME TAX

'he aggregate of income under all heads will give the 35ross 'otal Income3 of the assessee for that previous year. 7rom this 5'I, there are certain deductions available to the assessee, provided certain conditions are satisfied. 'he net income remaining after claiming the available deductions will give the 3+et 'a:able Income3 on which income ta: is payable.
REBATE FROM INCOME TAX

"nce net income is calculated and the income ta: is determined, from the ta: liability, a further deduction of rebate can be claimed if certain conditions are satisfied. -ebate is a reduction from income ta: payable and not a deduction from income.
II- TAX RATES

94
TAX PLANNING & INSURANCE 7ollowing rates are applicable for computing ta: liability for the current 7inancial (ear ending on ;arch 91 488>, 1.ssessment (ear 488>$8H2.
FOR RESIDENT WOMEN BELOW 65 YEARS OF AGE
Net Income Range ,p to -s. 1,9=,888 -s. 1,9=,881 to -s. 1,=8,888 -s 1,=8,881 to -s. 4,=8,888 -s. 4,=8,881 to -s. 18,88,888 .bove -s. 18,88,888
Income *a( +il 18I of the income above -s. 1,9=,888 -s. 1,=88 O 48I of the income above -s. 1,=8,888 -s. 41,=88 O 98I of the income above -s. 4,=8,888
P!us Surc1arge +il
P!us E0ucation Cess +il
+il
4I of income ta:
+il
4I of income ta:
+il
4I of income ta: 4I of income ta: and surcharge
-s. 4,<>,=88 O 98I of the 18I of income above -s. 18,88,888 income ta:
FOR RESIDENT SENIOR CITIZENS

1>= years of age and above, including those who turn >= at any time during the 7inancial (ear 488=$8>2
99
Net Income Range ,p to -s. 1,E=,888 -s. 1,E=,881 to -s. 4,=8,888 -s. 4,=8,881 to -s. 18,88,888
Income *a( +il 48I of the income above -s. 1,E=,888 -s. 19,888 O 98I of the income above -s. 4,=8,888 -s. 4,9E,888 O 98I of the income above -s. 18,88,888
P!us Surc1arge +il
P!us E0ucation Cess +il
+il
4I of income ta:
+il
4I of income ta:
.bove -s. 18,88,888
18I of income ta:
4I of income ta: and surcharge
Note" 'he rules for 3Senior /iti@ens3 are the same for );en) as well as )Women). .ny person who turns >= years on any day prior to or on ;arch 91, 488> will be treated as Senior /iti@en.
FOR ANY OTHER RESIDENT INDIVIDUAL OR HUF
Net Income Range
Income *a(
P!us
P!us E0ucation Cess
9<
TAX PLANNING & INSURANCE Surc1arge ,p to -s. 1,88,888 -s. 1,88,881 to -s. 1,=8,888 +il 18I of income above -s. 1,88,888 +il +il
+il
4I of income ta:
-s 1,=8,881 to -s. 4,=8,888
-s. =,888 O 48I of the income above -s. +il 1,=8,888
4I of income ta:
-s. 4,=8,881 to -s. 18,88,888
-s. 4=,888 O 98I of income above -s. 4,=8,888
+il
4I of income ta:
.bove -s. 18,88,888
-s. 4,=8,888 O 98I of 18I of the income above -s. income ta: 18,88,888
4I of income ta: and surcharge
FILING OF INCOME TAX RETURN
1.
7iling of income ta: is compulsory for all individuals whose gross
annual income e:ceeds the ma:imum amount which is not chargeable to income$ta: i.e. -s. 1,9=,888 for -esident Women, -s. 1,E=,888 for Senior /iti@ens and -s. 1,88,888 for any other individual or !,7. 4. 'he last date of filing income ta: return is Luly 91 in case of
individuals who are not covered in point 9 below. 9. If the income includes business or professional income requiring ta:
audit 1turnover -s. <8 la#hs2, the last date for filing the return is "ctober 91. <. 7orm 4 0 1+aya Saral2 can be used to file the income ta: return.
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TAX PLANNING & INSURANCE =. /ellularB;obile Jhone subscribers now need not file income ta: return
under the "ne by Si: Scheme. !owever, those who have incurred an e:penditure of -s. =8,888 or more towards consumption of electricity during the previous year, now have to furnish the income ta: return.
P'!0 J0+.6'( 7"- +"+$7I6I+5 "7 I+/";0$'.Q -0',-+ IS -S. =888.R
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9H
I- TAX PROVISIONS FOR INSURANCE

Insurance provide a legally authori@ed way to reduce the incidence of Income 'a:. With a view to promote savings and increase awareness regarding insurance, the government has provided certain benefits through the Income 'a: .ct for ta: payers if they choose to opt for life insurance policies.
If you plan for your future in a prudent manner, you can ma:imi@e the returns on your insurance portfolio. Shouldn)t you #now the features of the Income 'a: .ct with reference to their effect on 6ife Insurance policies
S PE C I AL P RO V IS IO N S
S,; -0/0IN0& 7-"; 6I70 I+S,-.+/0 J"6I/( $ .ccording to Sec. 18 118&2, 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. 'he e:emption is, however, not available in respect of such policy which is specified under Sec. E8 &&. 192or under a #ey man insurance policy.
S0/'I"+ 18118.2
,nder Section 18118.2 1iii2 of the Income 'a: .ct, any payment received by way of commutations of pension out of the Leevan Sura#sha annuity plans is e:empt from ta:.
S0/'I"+ 181192
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TAX PLANNING & INSURANCE ,nder Section 181192, the following payments are e:empt from income ta: received from an approved Superannuation 7und made "n the death of a beneficiary 'o an employee in lieu of or in commutations of an annuity on his retirement or after a specified age. *y way of refund of contributions on the death of a beneficiary, etc.
S0/'I"+ E8/
+ew section E8c has been inserted. .ccordingly, 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 -s.1,88,888B$ 1details in chapter$K7inance act 488=2
S0/'I"+ E8///192
,nder the e:isting provisions contained in section E8///, an assessee being an individual, is allowed a deduction up to ten thousand rupees in the computation of his total income, of the amount paid or deposited by him to effect or #eep in force a contract for any annuity plan of 6ife Insurance /orporation of India or any other insurer for receiving pension from the fund. 1details in chapter$K7inance act 488=2
S0/'I"+ 18149..*2 .ny income of a fund set up by the 6I/ of India or any other approved insurer under a Jension Scheme is e:empt. PSection 18149..*2R
9F
TAX PLANNING & INSURANCE 'he fund should be such? $ 'o which contribution is made by any person for the purpose of receiving pension from such fundC Which is approved by the /ontroller of Insurance or the Insurance &evelopment and -egulatory .uthority
S0(;.+ I+S,-.+/0 D S0/ 9H112

'he premium paid by the company is allowed as a 188I deductible business e:penditure uBs 9H112 of the Income 'a: .ct. 'he proceeds received by the company at the time of the maturity or death of the #ey man is treated as income of the company and will be subAected to the ta:.
When the company assigns policy to #ey man for 3+o consideration3 as a retirement benefit, the surrender value proceeds received by the #ey man is treated as additional salary and hence ta: has to be paid by the #ey man.
J.-'+0-S!IJ I+S,-.+/0
'he insurance premium under partnership insurance on the lives of the partners is allowed as 188I business e:penditure uBs 9H 112 of the .ct. !owever, the policy proceeds on the death claims will be treated as an income of the firm and is subAected to ta:.
L IM I TA T IO NS FO R PR O V I S I O NS
'0-;I+.'I"+ "7 '!0 ,6IJ.
<8
TAX PLANNING & INSURANCE Where a member participating in the unit lin#ed plan terminates his participation before ma#ing contribution for a period of = years. +o ta: deductions will be allowed in respect of contributions made in such year. ;oreover, an amount equal to an aggregate of ta: deductions allowed in respect of the contributions to the plan in the past years shall be deemed as ta: payable by the assessee of the previous year in which he terminates his participation in the plan.
&IS/"+'I+,.'I"+ "7 '!0 I+S,-.+/0 J6.+

Where a ta:payer discontinues a policy of the life insurance, before the premium for 4 years have been paid, no ta: deductions will be allowed in respect of any premium paid on that policy in the year in which the policy is terminated. 7urther, the amount of ta: 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 ta: 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 ta: allowed earlier shall be deemed to be the ta: payable in the year of surrender.
N ON L IF E I NS UR A N C E
;0&I/.6 I+S,-.+/0 J-0;I,; $ S0/. E8 &
;ediclaim policies attract ta: benefits up to -s.18,888. 1&etails in chapter$Kmedical insurance$a must have2
<1
!.+&I/.JJ0& &0J0+&0+' $ S0/ E8&&

Section E8 && provides relief to individual resident ta:payer who has a handicapped dependant person to support. 1&etails in chapter$Kmedical insurance$a must have2
I+S,-.+/0 /6.I; -0/0IN0& $ PS00. <= 11.2R

'he insurance claim received on account of destruction of asset is not chargeable to ta:, as 3destruction3 does not amount to transfer. 'he newly inserted sub$, section 11.2 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, earthqua#e or other convulsion of nature, riot or civil disturbance, accidental fire or e:plosion or because of actions by the enemy or actions ta#en in combating the enemy, then any profits or gains arising from receipts of such money or other assets shall be chargeable to income ta: under the head 3/apital 5ains3 and shall be deemed to be the income of such person in the previous year in which such money or other asset is received. $et us un0erstan0 t1e e(penses w1ic1 are a!!owa+!e in computing t1e ta(a+!e +usiness = pro'essiona! income -In conte(t 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.
.ny e:penditure incurred by way of insurance of machinery, plant and furniture used for the purpose of business or profession will also be allowed as deductions.
<4
"'!0- &0&,/'I"+S ,+&0- S0/'I"+ 9>

'here are various other e:penses, which are allowed as deduction for obtaining the ta:able profits. 'hey are briefly described below?$
Insurance Premium >Sec. &? -!/-i/ 'he amount of any premium paid in respect of insurance against ris# of damage or destruction of stoc#s or stores, used for purposes of business or profession, is allowed as deduction.
Insurance Premium pai0 + operati%e Societ >Sec. &? -i/ -ia/@
a Fe0era! Mi!k Co3
Insurance premium paid by the federal mil# co$operative society on the lives of cattle, owned by the members of a primary mil# co$operative society affiliated to it, is allowable as deduction.
&? >!-i+/@
Premia 'or Insurance on 6ea!t1 o' Emp!o ees >Sec.
.n 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 5eneral Insurance /orporation and approved by the /entral 5overnment.
In the last budget there was a proposal to charge service ta: to the insurance premium paid by the insured. 'he service ta: for the insurance premium was proposed to be <9
TAX PLANNING & INSURANCE levied at a rate of =I. 'his could act as a serious impediment to the growing insurance business. !owever it was later on agreed not to charge any service ta: on insurance premia.
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II- WEALTH TAX AND LIFE INSURANCE POLICIES
INTRODUCTION:
Wealth 'a: was introduced to remove inequalities of wealth and to achieve the obAective of a socialistic pattern of society in the country. 'he wealth 'a: .ct 1F=H came into force form 1.<.=H. It is charged for every assessment year in respect of net wealth of every individual and company at the rate of 1I of the amount by which net wealth e:ceeds -s. 1= lacs. )+et Wealth $ can be defined as the combined value on the valuation date of all assets 1li#e land, building, car, house, Aewellery, cash$in$ hand etc2 in e:cess of the debts outstanding on such assets. Where a person ma#es a gift to another by mere boo# entries or at consideration lower than the mar#et 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:
$i'e Insurance po!icies are not inc!u0e0 un0er t1e term ,assets, an0 t1e are not su+Aecte0 to wea!t1 ta( as !ong as t1e premiums are pa a+!e 'or a perio0 o' 15 ears or more. $i'e insurance p!ans t1ere'ore o''er one wa o' a%oi0ing su+stantia! wea!t1 ta(.
<=
III- INSURE YOUR CHILD & SAVE TAX

6ife Insurance can be used as a ta: tool in many ways and the most popular route is to save for ta: deductions as eligible savings. *ut there are many other methods by which life insurance could be made use of as ta: tools and one of those methods is discussed here under.
It is a common #nowledge that under section >< of the Income 'a:, 1F>1 any income arising or accruing to a minor child would be clubbed in the hands of the$parent whose income is greater. Similarly, the wealth of the minor would also be clubbed in the hands of the parent. Suppose one #eeps rupees one la#h in a ban# deposit carrying an interest at the rate of say eight per cent per annum in the name of a minor. 'he interest thereon of rupees eight thousand would be clubbed in the hands of the parent. 'here is no escape from this and the entire gamut of asset transfer is covered in one way or the other.
'he notable e:ception as it stands to day is that of life insurance. What does this mean 'his would simply mean that wealth could be transferred to the minor child without attracting the clubbing provision. /onsider the case of an individual who ta#es out a life policy in the name of his minor son in such a way that the policy will mature after the minor attains maAority. In this case, the parent will continue to pay the premium and as is well #nown would continue to avail of the deduction for payment of premium from his income subAect to the provisions of Income 'a: .ct, 1F>1 as amended from time to time. 'he bonus declared by the corporation, being ta: e:empt under clause l" 1&2 of Section 18 of the Income 'a: .ct, 1F>1, there is no amount to be clubbed in the hands of the parent. 'he policy will mature after the minor attaining maAority and hence the clubbing provisions will not be applicable on the income to be earned on the monies invested out of the proceeds of the policy consequent upon maturity. Similarly, the same would not enter into the Wealth 'a: net too.
<>
TAX PLANNING & INSURANCE 'he individual year premiums could be treated even as gifts as a matter of abundant caution and this would not have any ta: implication. 'hus this method paves the way for transfer of assets from the parent to child without much of a hassle.
6et us consider the case of ;r. Q who has ta#en a policy as under? P$AN 15# -$IC/BBBBBBBBBBBBBBBBBBB J"6I/( .;",+' I+S,-0&? &"*? &.'0 "7 /";;0+/0;0+'? 1$<$1FF9 ;.',-I'(? J-0;I,;? 1$<$488F -s. 4F,>H> J... -s.=, 88,888 ;I+"- /!I6& 1$<$1FE9
'he premium will be allowed as a deduction in the hands of the parent and would ensure substantial ta: savings. 'he policy will mature after the child$attaining maAority. Since the bonus declared is ta: free, nothing will be ta:ed in the hands of the parent every year unli#e investment in other instruments. 'he parent can treat every year premium as a gift without ta:.
"n 1$<$488F, a sum of more than -s.18, 88,888 will be transferred in the name of the child. 'he child who is a maAor can invest the said proceeds in any instruments and the income thereon will not be clubbed in the hands of the parent. .ssuming an interest TEI$-*I *onds, the interest of -s.E8 888 will be ta:ed in the hands of the child, if at all it is outside the ta:able limits 5enerally, the parent will be in the higher slab of ta: at this stage as he will be having accumulated savings and the child will be on a nil or lower slab of ta:. 'he gains will be substantially higher. In the above e:ample, if policy was ta#en 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. <H
'his is where the insurance wor#s as a ta: tool. 'he gains are manifold. 'he child)s life is insured as a matter of primary obAective. 'he transfer of money would ensure that much needed money is made available to the child upon attaining maAor status, be it for higher education, going abroad, buying of dwelling unit, celebration of marriage or for simple investment for the future.
'he 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. 'he savings would be substantial if one rec#ons the fact that the accumulated savings in the hands of the parent at that time would be very high. 'he income on certain savings such J7, JJ7, etc. are not liable to B be ta:ed. *ut consequent upon withdrawal or maturity, the reinvestment of the said sum into any other form of savings pushes up the ta: liability in the hands of the parent as the return thereon becomes liable to be ta:ed.
. planned methodical transfer of wealth to the children may reduce the future ta: liability a lot. !ere is where the life insurance lends in its helping hand as stated earlier. "f course, this could be even affected by single premium policies.
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I- RELEVANT SECTIONS
EFFEC*I<E DA*E OF AMENDMEN*" 13)3#55?
SECTION 80C
Nature o' amen0ment" S1a!! +e inserte0 E''ect o' amen0ment" Section E8/, 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. Su+3section -1/ provides that in computing the total income of an individual or a !indu undivided family, a deduction not e:ceeding one la#h 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$section 142 of the said section. Su+3section -#/ provides that the amount paid or deposited in the previous year as 1. 6ife insurance Jremiums 4. /ontributions to 0mployees Jrovident 7undB5J7 9. Jublic Jrovident 7und 1ma:imum -s H8,888 in a year2 <. +S/ 1+ational Saving /ertificate2 =. ,nit 6in#ed Insurance Jlan 1,6IJ2 >. -epayment of !ousing 6oan 1Jrincipal2 H. 0quity 6in#ed Savings Scheme 106SS2 E. 'uition 7ees including admission fees or college fees paid for 7ull$time education of any two children of the assessee 1.ny &evelopment fees or donation or payment of similar nature shall not be eligible for deduction2. F. Infrastructure *onds issued by InstitutionsB *an#s such as I&*I, I/I/I, -0/, and J7/ etc.
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TAX PLANNING & INSURANCE 18. Interest accrued in respect of +S/ NIII 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 Su+3section -&/ provides that the provisions of sub$section 142 shall apply only to so much of any premium or other payment made on an insurance policy other than a contract for a deferred annuity as is not in e:cess of twenty per cent of the actual capital sum assured. It is also clarified by the Explanation to sub$section 192 that in calculating any such actual capital sum, no account shall be ta#en 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. Su+3section -)/ specifies the persons in whose name the investments can be made. Su+3section -:/ provides the consequences in the event of termination of contract of insurance before the e:piry of two years or transfer of the house property referred to in clause 1xviii2 of sub$section 142 before the e:piry of five years. Su+3section -?/ provides the consequences in the event of transfer of equity shares or debentures within a period of three years from the date of their acquisition. Su+3section -C/ provides that insurance, deferred annuity, provident fund, superannuation fund, unit$lin#ed insurance plan, etc., mentioned in sub$section 142 of section EE shall be eligible for deduction under the new section E8/. Su+3section -4/ defines certain terms such as contribution, insurance, security, transfer, etc., for the purposes of new section.
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TAX PLANNING & INSURANCE *ecause the deduction is allowed from ta:able income, the e:act savings in ta: will depend upon the ta: slab of the individual. 'hus, a person in 98I ta: stab can save income ta: up to -s. 98,>88 1or -s. 99,>>8 if annual income e:ceeds -s. 18,88,8882 by investing -s. 1,88,888 in the specified schemes uBs E8/.
SECTION 80CCC(3)
Nature o' amen0ment" S1a!! +e su+stitute0 E''ect o' amen0ment" ,nder the e:isting provisions contained in section E8///, an assessee being an individual, is allowed a deduction up to ten thousand rupees in the computation of his total income, of the amount paid or deposited by him to effect or #eep in force a contract for any annuity plan of 6ife Insurance /orporation of India or any other insurer for receiving pension from the fund referred to in clause 123AAB2 of section 18. Sub$section 192 of section E8/// 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 EE. Sub$section 192 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 E8/. 'he amendment is consequential in nature. Available to Individual Assessee only .ccordingly, a person who is in 98I ta: brac#et can save income ta: of -s 9,8>8 1or -s. 99>> if annual income e:ceeds -s 18,88,8882 by contributing -s 18,888 towards Jension plan in a year. Some of the popular pension plans are Leevan Sura#sha by 6I/, 6ife 'ime Jension *y I/I/I Jrudential 6ife Insurance, .viva 6ife $ Jension Jlus by .viva
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TAX PLANNING & INSURANCE 6ife Insurance, ;a:$0asy 6ife policy by ;a: +ew (or# 6ife, +irvana Jlus by 'ata .I5 Insurance 0tc.
SECTION 80CCE
Nature o' amen0ment" S1a!! +e inserte0 E''ect o' amen0ment" +ew section E8//0 provides that the aggregate amount of deductions under section E8/, section E8/// and section E8//& shall not, in any case, e:ceed one la#h rupees.
SECTION 80(9)
Nature o' amen0ment" S1a!! +e inserte0 E''ect o' amen0ment" Section E8/, relating to deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc., shall be inserted with effect from 1$<$488>. Sub$section 1F2 shall, therefore be inserted in section EE so as to provide that no deduction from the amount of income$ta: under section EE shall be allowed to any assessee for the assessment year beginning on 1$<$488> and subsequent years.
SECTION 88
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Nature o' amen0ment" S1a!! +e omitte0 Contents o' section" In respect of /ertain Investments and &eposits available to individual and !,7 assessees only. In -espect of? Investments, deposits and payments made in the following items? $
In respect of an individual assessee, 6ife Insurance Jremium paid on the policy for self$spouse children but not parents.
"wn contribution is statutory or recogni@ed provident 7und. JJ7 contribution &eposit in 18 year .ccount under post office saving ban# cumulative time deposit rules 1F=F P/'&R
/ontribution of ,6IJ, &hanra#sha plan or 6I/ ;utual 7und equity lin#ed saving scheme of mutual fund.
-epayment at loan from a public financial institution in respect of a residential accommodation or cost of construction but the ma:imum eligible amount -s48, 888 for a previous year.
&eposit in +SS Investment in notified infrastructure bonds, debentures, mutual fund and shares
Jremium paid for an insurance policy whose premium e:ceeds 48I of the capital sum assured 1e:cluding bonus, other benefits, etc2 would not be eligible for rebate.
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TAX PLANNING & INSURANCE .ny payment made by an individual for full time education of any two children of such individual, as tuition fees to university, college, school or other education institution situated within India, subAect to ma:imum of -s. 14,888B$ per child, subAect to ma:imum of two children and is to be included in the gross qualifying amount of -s. H8,888B$.
*A8$E 'he rebate allowable for all categories of individuals & !,7 is as follows?
;ROSS *O*A$ INCOME -in Rs./ ,p to 1,=8,888B$ *etween 1,=8,888B$ to = lacs 0:ceeding = lacs
RE8A*E 48I 1=I +I6
!owever in respect of individuals whose salary income is less than -s.1 la#h before claiming deduction uBs 1> and whose salary comprises at least than F8 I of his gross total income, rebate will be T 98 I.
;a:imum qualifying amount is -s. 1,88,888B$ out of which limit of -s.98,888B$ or more can be utili@ed for infrastructure bonds.
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II- SEC-80C: A RELIEF OR CONFUSION
7inally, the government is treating you li#e an adult. It is no longer interested in dictating where to invest to save ta:es. 'his years budget proposals to include ban# fi:ed deposits under Section E8 / and scrap the cap of -s 18,888 e:clusively available to pension plans would testify to that. !owever, an overcrowded section E8/ is going to ma#e life confusing for the adults, as it may increasingly become difficult to choose the right vehicle from the options available. .nd a cap of -s 1 la#h ma#es the process even harder, says financial advisors.
3,nless the upper limit is raised, it is meaningless to add more products to the E8/ list. It only ma#es the selection process confusing. . wrong choice of products can have serious consequences,3 says a financial consultant. 7or the uninitiated, if you are ready to invest money in certain instruments for a specified period, you cant claim ta: deduction of up to -s 1 la#h under section E8/. 'he list of instruments that qualify for ta: deduction include 0mployer)s Jrovident 7und, Jublic Jrovident 7und, +ational Savings Scheme, life insurance premium and equity$lin#ed saving schemes 106SS2, among others. Loining the list is fi:ed deposits with a minimum tenure of five years and pension plans from life insurance companies.
'he best way to go is to put down an obAective first and then choose the product. 7or e:ample, if you have a medium$term goal, you should pic# 06SS or fi:ed deposit. If you are loo#ing for a long$term investment avenue and assured re$ turns, you should consider JJ7. .lso, you should mentally e:clude items li#e life
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TAX PLANNING & INSURANCE insurance from the list if you don)t have any descendants.
.nother thumb rule, according to him, is to ban# on safe, assured returns schemes if you have a short$term goal. .lternatively, one should always loo# at equity as long$term investment, he adds. 'he new entrantsU7& and pension plansU don)t have many ta#ers in the financial community. 7i:ed deposits always give you negative returns. So, It wouldn)t be advisable to put money in a =$year 7&. .s for pensions, It would rather be better to wait for the government to come out with de$ tailed guidelines on pension funds. ,ntil then, one should #eep money in 06SS.
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SEC 44 <=S SEC 45C

'he annual ta:$planning e:ercise for most investors tends to be divorced from their financial planning process. .s a result factors li#e ris# appetite, investment obAective and tenure of investment are often overloo#ed when ta:$planning investments are made. While apathy or lac# of awareness on the investors) part could be partly )credited) for this, the restrictive nature of Section EE of the Income 'a: .ct should also shoulder the blame.
S EC TI O N 8 8
In the erstwhile ta:$regime 1prior to 7inance *ill 488=2, provisions for the purpose of ta: sops fell under the gamut of Section EE. Investors were required to ma#e investments in stipulated ta:$saving instruments for claiming ta: rebates under the given section. *a( re+ates un0er Section 44 .nnual Income ,pto -s 1=8,888 -s 1=8,888 to -s =88,888 "ver -s =88,888 'a: -ebate 48I 1=I +il
.s can be seen from the table above, the investor)s income level was the #ey in determining the rebate he was entitled toC a higher income level translated into lower rebates. Investments eligible for the purpose of claiming ta: benefits included Jublic Jrovident 7und 1JJ72, +ational Savings /ertificate 1+S/2 and ta:$saving funds among others. 'he upper limit 1in monetary terms2 for the purpose of ta:$saving investments was pegged at -s 188,888.
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TAX PLANNING & INSURANCE !owever the hitch was that )sectoral caps) e:isted on the various investment avenues. 7or e:ample investments in ta:$saving funds 1also referred to as 06SS2 of upto -s 18,888 were eligible for claiming ta: benefits. Similarly investments in instruments li#e JJ7, +S/, ta:$saving funds and avenues li#e insurance premium, repayment of home loan 1principal component of the 0;I only2 among others accounted only for a -s H8,888 benefit. 'he balance -s 98,888 1-s 188,888 less -s H8,8882 was reserved for infrastructure bond investments.
0ffectively, the investor had little choice in selecting the ta:$saving investments. Instead it was Section EE which determined how each individual would ma#e his investments. .n investor with a high ris# appetite had to choose the same investment avenues as a low ris# investor because of Section EE)s restrictive nature.
E NT E R S E CT I ON 8 0 C
Section EE was scrapped in 7inance *ill 488=, instead Section E8/ was introduced. .ll avenues which were eligible for ta: benefits under Section EE were brought under the Section E8/ fold. !owever instead of offering ta: rebates, investments 1upto -s 188,8882 under Section E8/ qualified for deduction from gross total income. !ence a new system of claiming ta: benefits was introducedC furthermore a new ta: structure was introduced as well.
'he biggest advantage Section E8/ offered was that sectoral caps on ta:$ saving instruments were removed. .s a result investors were given the freedom to select investment avenues of their choice for ta:$planning purpose.
W HY S EC TI O N 8 0 C S CO R ES O VE R S E CT I ON 8 8
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TAX PLANNING & INSURANCE Section E8/ has come as a boon to investors who have an appetite for ris#. Investing in line with one)s ris# appetite is a tenet of financial planning and Section E8/ promotes the same. -emoval of sectoral caps on investments for the purpose of ta:$planning means investors can invest in line with their ris# appetites and needs.
,ntil the previous year, investment in ta:$saving funds 1otherwise #nown as 0quity 6in#ed Savings Schemes2 for the purpose of availing a ta: benefit was restricted to -s 18,888 pa. In the current year all such restrictions have been done away withC an individual assessee now has the fle:ibility to invest the -s 188,888 that is allowed under Section E8/ in any proportion that he wishes 1only in JJ7 is there an upper limit of -s H8,888 pa2 in specified instruments. . ris#$ta#ing investor can invest his entire corpus of -s 188,888 in a high ris# instrument li#e 06SSC conversely a ris#$averse investor can select small savings schemes li#e JJ7 and +S/. .s a result, every investor)s ta:$saving portfolio can now reflect his individual preferences.
.nother advantage Section E8/ offers is for investors whose gross total income is greater that -s =88,888. ,nder the earlier ta: regime, these investors were not eligible for Section EE ta: rebates. !owever Section E8/ has done away with this disparity and investors across ta: brac#ets can claim the -s 188,888 deduction.
ILLUSTRATION:
.s we all #now that under new section E8/, deduction is allowed where as under section EE, rebate is given. 'he below given illustration will ma#e it clear that deduction is more advantageous than rebate for a ta:payer. Suppose, ;r. .mitabh bachchan is earning gross income as -s. 1,H=,888 & if he gets -s.18,888 as deduction, then
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TAX PLANNING & INSURANCE 5ross income less? &eduction +et Income ta: payable 198I$4>,8882 *ut, if rebate is given for rs.18, 888, then 5ross income less? &eduction +et Income ta: payable 198I$4>,8882 less? rebate ta: payable 4=888 1=88 net 1,H=,888 8 1,H=,888 4>=88 1,H=,888 18,888 1,>=,888 49=88
'hus, deduction has given the benefit of -s.1=88 to the assessee. 'herefore sec E8/ is better than sec EE.
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I- ISSUE OF TAXING LIFE INSURANCE SECTOR

I S S UE :
With the opening of Insurance sectors for private player ta:ation of Insurance underta#ings has become a maAor issue. 'he issue relates to ta:ation of policyholders and shareholders. 'he first category includes 12 'a: treatment of premiums and contributionC 42 'a:ation of policyholder fundsC and 92 'a:ation of benefits received and latter category includes ta:ation of transfers between policyholders funds and <2 Shareholders funds and ta:ation of shareholders funds.
/urrently the 6ife Insurance industry is ta:ed on the Naluation Surplus that emerges during the most recent inter$valuation period, and the investment profit on shareholders) funds. .ll other types companies are ta:ed on shareholders) profits.
'he emerging valuation surplus is distributed as bonuses to policyholders and profits to shareholders. 'a:ing this way 1Naluation surplus2 imposes a ta: on both shareholders and policyholders. +ow with the opening up of the insurance sector to private sector participation, a fresh approach needed to be adopted to ta: the life insurance segment. /entral *oard of &irect 'a:es 1/*&'2 has constituted an e:pert committee on the 'a:ation of 6ife Insurance Sectors under the /hairmanship of N.,. 0radi.
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TAX PLANNING & INSURANCE 'he issues of concern are also the rate of ta:, 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 1life fund2 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 ta:ed in the normal course.
While it is correct to ta: that part of the surplus that represents shareholders) profits, it was not reasonable to ta: policyholders on the full value of bonuses distributed to them, since a maAor source of these bonuses are the premiums paid by the policyholders themselves. 'his was recogni@ed when the current ta: rate of 14.=I was first set. 'his figure was based on a calculation performed at that time on the 6ife Insurance /orporation of India 16I/2 and was meant to represent an effective ta: rate which when applied to the emerging valuation surplus would be equivalent to the full corporate ta: rate being applied to those parts of the surplus that should be ta:ed
B A CK GR O U ND :
Section << of the Income 'a: act 1F>1, read with first schedule of the act deals with ta:ation of life Insurance business. 'ill 1FH>, 6ife Insurance business was ta:ed on the higher of Jrofit on investment income less e:penses or Naluation surplus 1e:cluding prior years surplus or deficit2 less E8I of bonuses declared or amounts reserved for policyholders. In the *udget of 1FH> government abandoned Khigher of the two system and adopted the annual average of the surplus disclosed by the actuarial valuation under the Insurance act, 1F9E, after e:cluding from it any surplus or deficit included therein relating to any earlier inter$valuation period. 'he ta:able income so determined is ta:ed at a flat rate of 14.= I prescribed under the first Schedule of the I' .ct. 'his rate is not affected by the .nnual acts and has remained unchanged since 1FHH.
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TAX PLANNING & INSURANCE +evertheless, in the matter of ta:ation of life insurance companies, the Indian standard is not only on par with the international one, but is also one of the simplest.
/urrent system of 'a:ation was wor#able when there was only one life insurance company and was of the view that it would not wor# in the new environment where many insurance companies are going to enter the Indian mar#et. 'he rate of 14.= I 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 Naluation surplus.
I NT E RN A TI O NA L P RA C TI C E :
'here is no singular system of 'a:ation worldwide $ it varies over country to country. Some country li#e Lapan, Jhilippines, !ong Song, ;acau have premium$ based ta:ation of life Insurance business. Whereas in some countries li#e ;alaysia, Insurer are ta:ed on KInvestment income and capital gains either in lieu of or in addition to a premium based ta:. In some countries li#e 5reat *ritain have adopted a system where insurers have to pay ta: on Investment income less e:pense.
S UG G E S T IO N:
It is proposed that instead of ta:ing al emerging surplus at one rate of ta:, it be ta:ed according to the recipient of the surplus. 'he surplus transferred to the shareholders fund represents shareholders profits and therefore they should be ta:ed at the full corporate ta: rate of 9E.=I including surcharge. 'hese can be achieved by not directly ta:ing 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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'he total shareholders profits would be ta:ed at the full corporate ta: rate. In the case of the surplus distributed to policyholders as bonuses, there is strong demand for having lower ta:ation for life insurance policyholders. 'he current rate of 14.= I was set when the corporate ta: rate was =4.=I. +ow when the corporate ta: rate has been brought down to 9=I there is reasonable case of reducing the ta: rate on surplus distributed to policyholders to around EI. In the case of Surplus retained within the policyholder)s fund, it is proposed that no ta: should be levied on surplus retained within the policyholders fundC such surplus will be either transferred to shareholders or distributed to policyholders as bonuses. In this regard different /hamber of commerce have submitted their paper to 0radi committee, which is li#ely to table its report within few days.
'he /onfederation of Indian Industries 1/II2 has suggested five pronged strategies to ta: in a paper submitted to the 0:pert /ommittee on the 'a:ation of the 6ife Insurance Sector.
/II has proposed that instead of ta:ing all emerging surpluses at one rate of ta:, the same may be ta:ed according to the recipient of the surplus. /II has suggested a =$pronged approach to ta:ing the life insurance sector. In the case of surplus transferred to shareholders, /II has proposed that there should be no direct ta:ation. 'he transfer should be included in shareholders) profit and loss account and ta:ed as part of shareholders) total profits at the full corporate ta: rate. Whereas in the case of surplus distributed to policyholders as bonuses, these should be ta:ed at the time of distribution at a rate of EI, plus surcharge, if any. 'he ta: 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 /II has recommended that in the case of surplus retained within the policyholders) fund, there should also be no direct ta:ation. 'hese should be ta:ed when they are transferred or distributed. In the case of profits on shareholders) investments, these should also not be subAect to direct ta:ation. 'he profits on shareholders) investments should be included in shareholders) profit and loss account and ta:ed as part of shareholders) total profits at the full corporate ta: rate. "n the issue of Shareholders losses /II 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.
.ccording to /II, there is an enormous scope to increase the insurance coverage in India. It is for this reason, /II has suggested that in the long term, the government should set a low ta: rate which will stimulate the required growth of insurance coverage and enable long term investment in the economy, including the infrastructure sector. 'his, /II believes, would also result in a far greater ta: income from life insurance over the long term. /II 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

'riton Insurance /o. 6td. was the first general insurance company to be established in India in 1E=8, whose shares were mainly held by the *ritish. 'he first general insurance company to be set up by an Indian was Indian ;ercantile Insurance /o. 6td., which was established in 1F8H. 'here emerged many a player on the Indian scene thereafter.
'he general insurance business was nationali@ed after the promulgation of 5eneral Insurance *usiness 1+ationalisation2 .ct, 1FH4. 'he post$nationali@ation general insurance business was underta#en by the 5eneral Insurance /orporation of India 15I/2 and its < subsidiaries? 1. 4. 9. <. "riental Insurance /ompany 6imitedC +ew India .ssurance /ompany 6imitedC +ational Insurance /ompany 6imitedC and ,nited India Insurance /ompany 6imited.
'owards the end of 4888, the relation ceased to e:ist and the four companies are, at present, operating as independent companies.
T AX A TI ON O F G E NE R AL I NS UR A N C E C O M P A NI ES
'here has not been any notable special treatment for the ta:ation of a general insurance company. It is ta:ed as a normal trading company. 'he 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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TAX PLANNING & INSURANCE 'he premium charged for the ris# cover and the contract period fall in two successive accounting periods. In accordance with the mercantile system of accounting, the premium, claims and e:penses have to be appropriated to the correct accounting year. 'his requires that the premium is allocated to the year of issue in proportion to the period of ris# falling in that year, assuming that the ris# is uniformly spread over the period of the contract. 'he amount of premium for the une:pired portion of the contract is carried forward to the following year. 'his carried forward amount is #nown as the ,ne:pired Jremium -eserve. Where the ris# 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. . certificate by the actuary is to be appended to the revenue account for this purpose. ;ost of the countries in the 0urope, including the ,S, allow a further amount to be set up as reserve, where such unearned premium reserve is felt not adequate to cover the ris#. In these countries, this additional amount is ta#en into account while arriving at the une:pired premium reserve to be set up.
In India, the I-&. regulations allow for provisions for the ,ne:pired -is# -eserve 1,--2 as a percentage of premium for different classes of business 1which includes the above une:pired premium reserve2. !owever, 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$ta:ed profits could be considered in the regulations. .lthough most of the general insurance contracts are for a period of one year or less, there is a noticeable trend towards longer$term contracts in recent years. &eferred health insurance contracts, under which the cover commences between ages == and >8 of the life assured and then span hisBher balance lifetime is a typical e:ample. 'he proAect insurance that provides comprehensive cover against all the ris#s associated with the e:ecution of big proAects, is another e:ample. 'he contractor)s all ris# cover 1/.-2 and the marine cum erection ris# cover 1;/02 that are increasingly becoming popular are also components of proAect insurance. 'hese contracts cover the ris# for periods ranging from > months to = years. ,nder these
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TAX PLANNING & INSURANCE contracts, the required premium is collected either in a single installment or in multiple installments. While arriving at the premium to be charged for the ris# cover, future cash flows in respect of claims payable and the estimated future e:penses are discounted at an appropriate rate of interest. .t the end of the year, while that portion of the premiums covering the ris# in future come under the une:pired premium reserve, the interest earned on the une:pired premium reserve is not added to the une:pired premium reserve but credited to the shareholders) account. 'hese contracts are similar to long$term life insurance contracts. 'he une:pired 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. 'o address this, general insurance companies could be allowed to set up appropriate reserves on this basis.
'he I-&. 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. 'his 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. 'he need for such a reserve has been recognised by many countries in 0urope, including the ,S, and the reserve has been allowed to be set up, or added to, out of pre$ta: profits. In India too, the importance of providing for catastrophe reserve has been duly recognised by the I-&. and the 5overnment. !owever, the transfer to this reserve has to be made from profit after ta:. .s in other countries, the transfer to this reserve could be allowed to be made out of pre$ta:ed profits. In the matter of ta:ation 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

'he 5overnment is li#ely to incorporate a specific provision in the income$ta: law to e:empt from ta: the profit earned by general insurance companies from sale of investments. 'he amendment may be proposed in the forthcoming ,nion *udget.
/urrently, under the I$' law, general insurance companies are assessed under a dedicated set of provisions that they feel have put them at a disadvantage vis$V$vis other assessees in respect of ta: treatment of profits from sale of investments.
'he insurers have approached the 7inance ;inistry to bring about a level$ playing field by clearly spelling out that such profits would be ta:$e:empt.
5eneral insurance companies are #een to benefit from the amendments in the *udget of 488<$8= which provided that long$term capital gains from sale of equity shares 1where securities transaction ta: has been charged2 would be ta:$e:empt from assessment year 488=$8>.
&espite other companies enAoying the benefit, general insurers apprehend that they do not benefit from the e:emption since they are governed under separate provisions. 7rom the financial year 4881$84 1when the Insurance -egulation and &evelopment .uthority 1I-&.2 regulations became mandatory2, the profit on sale of investments are ta:ed at the hands of the general insurers by the ta: authorities on the plea that there is no specific provision e:empting such profits from ta:.
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'he I-&. had required general insurance companies to route their profits on sale of investments through the profit and loss 1J&62 accounts and revenue accounts. Jrior to the I-&. requirement, the general insurance companies were adAusting the gains against the reserves.
/onfirming that the insurance industry had raised the issue with the 7inance ;inistry, the /hairman and ;anaging &irector, "riental Insurance /o, ;. -amadoss, said there has been a collective demand that profit from sale of investments should be ta: e:empt for non$life insurers too.
3.ll companies other than insurance companies get benefit on e:emption from long$term capital gains. 'his is because of the peculiar nature of ta:ation for insurance companies under the present laws. We have said that profit made by us from sale of investment should also be ta:$free,3 -amadoss said.
!e said while companies have individually ta#en up the issue, the matter has also been raised through the collective forum such as the 5eneral Insurance Jublic Sector .ssociation. -amadoss said the I-&. has also supported the cause of the non$ life insurers.
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IV- TAX PLANNING FOR AGENTS INTRODUCTION

'he insurance agents can earn commission by procuring business. .gency /ommission earned by an agent is li#e any other business income for which an agent can claim reasonable e:penses incurred before arriving at JrofitB 6oss for this business. .n agent is required to maintain proper records of his )Income & 0:penditure so as to satisfy the I.'.". that the e:penses claimed are supported by relevant vouchers. 'he nature of e:penses could be? a. b. c. d. e. f. /onveyance e:penses including drivers salary if any "ffice rent and maintenance e:pense including salary of staffBpeons etc. &epreciation on /ar, /omputer etc. Stationery, Nisiting /ard e:pense 'elephone e:pense 0ntertainment e:pense
'he commission, generally, is in nature of first year commission, renewal commission and bonus commission. 'he commission earned is an income, which may be ta:able depending on the total income. If the income from all sources including 6I/ commission does not e:ceed -s. =8,888 per annum, then one is not liable to pay income ta: as it is below ta:able limit.
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S EC TI O N 3 7- ( DE D UC T I O N )
!owever there is a specific provision under Section 9H of income 'a: 1F>1 for an adhoc deduction from agency commission income 1without maintaining records2 as mentioned below? If the commission earned from 6I/ is below -s. >8,888 per annum and if no separate boo#s of accounts is maintained, then the entitlement for deduction is as follows? 1a2 7irst year /ommission $ =8I 1b2 -enewal /ommission $ 1=I SubAect to ma:imum of -s.48, 888
!owever, if separate bifurcation could be made then 6I/ agent is entitled to a flat deduction of 991B9I of total commission.
'he 6I/ commission after claiming deduction as mentioned above will be included with other source of income for ta: purposes.
In case gross commission earned by an agent from 6I/ e:ceeds -s. >8,888 per annum then he cannot claim deduction referred above.
INCOME FROM OTHER SOURCES - SEC. 56(2)

.s per the provisions of Sec. =>142 of the .ct, income received in the form of insurance commission is chargeable to ta: under the head of 3Income from other sources.3 Income chargeable under this head is computed in accordance with the method of accounting regularly employed by the assessee. 'his head of income can be evo#ed only if all the following conditions are met? H<
TAX PLANNING & INSURANCE 'here is an incomeC 'hat income is not e:empt from ta: under Sec. 18 to 19.C 'hat income is neither salary income, nor rental income from house property, nor income from businessBprofession, nor capital gains.
T DS FR O M I NS U RA N C E CO M M I S S I ON . [S E C . 1 9 4 ( D) ]
. 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 ta: thereon at the rates in force 118I for the ..(. 4884$892. 'a: shall be deducted at the time of credit of such income to the account of the payee or the payment thereof 1by whatever mode2, whichever is earlier. +o ta: is required to be deducted at source if the insurance commission credited or paid during the financial year does not e:ceed -s. =,"""B$. 'he person receiving insurance commission can ma#e an application in 7orm +o. 19 to the concerned .ssessing "fficer and obtain a certificate authori@ing the person responsible for ma#ing payments, by the way of insurance commission, to deduct ta: at a lower rate or to deduct no ta:, as may be appropriate.
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BUDGET 2006: ITS IMPLICATIONS ON TAXATION
.s J./hidambaram presented *udget 488>, his speech was more about the benefits he has showered upon his countrymen. .s always, the party has begun soon thereafter. 'he worst, however, lay be yet to come, which typically happens when e:perts go past the broad proposals and start wor#ing out the implications of the 7inance *ill that is released along with the *udget. *ut for now, there)s some good news, some that)s neither here nor there, and a little that qualifies as bad news.
TA X A T I O N: TH E H I GH S
*1ere were se%era! issues to c1eer a+out in 8u0get #55?D suc1 as"
'.Q -.'0S ,+/!.+50&$ Individual and corporate ta: rates have remained unchanged and no new ta:es are being imposed. 'hat)s a big relief to the common man as well as to industry.
"+0$I+$SIQ S/!0;0 .*"6IS!0&$ 'he one$in$si: scheme of filing ta: returns on income is now being abolished. 'he scheme was only increasing the wor#load of the ta: department and was serving no good purpose as the required data is in any case now being collected through various other sources and reports. *.+S 7&S W,.6I7I0& ,+&0- S0/'I"+ E8/$ Investments in fi:ed deposits of scheduled ban#s for more than five years would now be covered uBs E8/. 'hat)s good news for
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TAX PLANNING & INSURANCE ban#s that felt left out after Section E86, which provided deduction on account of certain interest income, was withdrawn last year. 'he proceeds would, however, be ta:able at the time of maturity.
S0/'I"+ E8///)S /0I6I+5 "7 -S 18,888 -0;"N0&$ 'he removal of the ceiling of -s 18,888 uBs E8/// would enable a person to invest in pension funds aloneU up to -s 1 la#h, the limit prescribed uBs E8//0. Section E8//0 states that the total deduction under Sections E8/, E8/// and E8//& cannot e:ceed -s 1 la#h in a year. 'his demand had been pending for a long time, since people whose investment in retirement planning depended on the ta: brea#s available could invest only -s 18,888 in a year for their old age support.
"J0+$0+&0& & /6"S0&$0+&0& ;,',.6 7,+&S "pen$ended and closed$end equity$oriented schemes would now be treated at par for the purpose of e:emption from dividend distribution ta:. In fact, both will now be e:empt from the dividend distribution ta:.
S0-NI/0 '.Q -.'0S !IS0S Service ta:, which is e:pected to contribute =< per cent of the 5&J, is now /0+N.'. So you can now claim the credit of input in your output service ta: or e:cise duty liability. .s a result of the positive impact, it has now been raised from 18 to 14 per cent. Including education cess, the raise is from 18.4 to 14.4< per cent. +ew services now covered under Service 'a: include? .'; operations, maintenance and managementC -egistrars, share transfer agents, ban#ers to an issueC Sale of ad space or time, other than in the print mediaC Sponsorship of events, other than sports events, by companiesC International air travel 1e:cluding economy class2C
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TAX PLANNING & INSURANCE /ontainer services on rail, e:cluding freight chargesC *usiness support servicesC .uctioneeringC -ecovery agentsC Ship management servicesC 'ravel on cruise ships, andC Jublic relations management services. 'here is also a proposal to e:pand the coverage of certain services currently subAect to service ta:.
0;J6"(00S) !0.6'! I+S,-.+/0 S/!0;0S 'he definition of perquisites for calculating ta:able salary has been amended to e:clude premiums paid for employees) health insurance under those schemes approved by the I-&. from the definition of perquisites.
+0W K'.Q -0',-+ J-0J.-0-S) S/!0;0$ 'he new Section 19F* refers to a scheme for submission of returns through )ta: return preparers), under which certain individuals would be authori@ed as preparers as per the scheme to be framed by the /*&', who will help particular classes of ta:payers to fill and file their return of income, and affi: their signatures on such returns. Inter$lin#ing of I$ ' departments all over India 1through I'2 continues.
T AX A TI ON : T H E L OW S
8ut t1e 'o!!owing instances are e%i0ence t1at ta(man wi!! +ite.
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TAX PLANNING & INSURANCE J.+ 1J0-;.+0+' .//",+' +,;*0-2 'he various .I-s 1.nnual Information -eturns2, which had been instituted to trac# various e:penses, have not been of much help since J.+ numbers arent quoted at all in >8 percent of relevant transactions. In such a case, the Income 'a: department would have suo motu powers to allot to allot the J.+. 'he powers would also include directing a person to apply for J.+ in certain cases, even if sBhe is not liable to pay income ta:.
*//' & 7*' S'.(S$ *//' 1*an#ing /ash 'ransaction 'a:2 has been a huge success, at least according to the 7;, with the authorities being able to unearth a huge amount of blac# money and the money laundering process. !ence, this is going stay till the .I-s ta#e over the purpose the *//' is serving today. 7ringe benefit ta: or 7*', for which there has been huge demand for withdrawal, stays.
S'' 1S0/,-I'I0S '-.+S./'I"+ '.Q2$ 'he rates of Securities 'ransaction 'a: or the SI' have been increased by 4= per cent across the board. 'his rise will not affect any transaction immediately, though. 'he rates come into effect from Lune 1 this year. /.JI'.6IX.'I"+ "7 I+'0-0S' ,nder Section <9*, certain payments are allowed as deduction only when they)re actually paid. 7or e:ample, interest on a loan deductible only if it is actually paid during the year. .n 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. 'his is bound to the schemes of revival of sic# 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$performing asset 1+J.2.
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E4
PAY TAX & GET INSURANCE FREE!
I NG E NI O US B M C PR O P OS AL
8U. oneD get one 'ree. 'he *;/ has thought up ah ingenious mar#eting strategy. !aving failed to ma#e the ta: defaulters fall in line, the civic authorities have decided to offer them insurance cover.
.ccording to a proposal passed in the standing committee of the *;/ on Wednesday, all ;umbai#ars within *;/ Aurisdiction will be provided with -s one la#h personal accident cover, if they pay the civic ta:es on time.
"ver the last couple of years, the *;/ authorities have not been meeting their proAected annual ta: revenue targets. 'he insurance e:ercise is aimed at encouraging the residents to cough up their ta:es on time.
'he ta:$insurance scheme will cover husband, wife and two unmarried children below 4= years of age. 'he scheme envisages 188 per cent insurance cover in both fatal accidental cases and those resulting in permanent disability. 'he civic officer said that the proposal would serve as an incentive to shell out ta: dues regularly and on time. In this way, it would augment ta: collection. .s per the pro$ posal, all ta:payers who are residing, in the limits of the *;/ would be covered. !owever, the ta:payer should be residing either in his own house or a cooperative society. .lthough the property ta: bill is issued in the name of the society, all members of this society would be treated as individual ta:payers for the purpose of insurance cover.
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If the ta: payer is residing in tenanted building, he too would be entitled to the ris# cover, the civic body)s official added.
'he *;/ has entered into an agreement with the +ational insurance /ompany for the purpose of this scheme.
.n accident will include accidental death and permanent disability, including the partial loss of eye, hand and feet or both. . total of =8 la#h regular ta:payers would be covered under the scheme. 0ach year, the *;/ earn -s 1,=<8 crore as ta: under various heads. !owever, it still wants more.
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CONCLUSION
O P IN IO N :
/hange is perhaps, the only static constant within the dynamics of life and ris#s always move in tandem within a changing environment. Insurance, in its purest form, is a ris# management tool, a security blan#et. It is more of a hedging mechanism that eliminates ris#s primarily by transferring the ris# from the insured to the insurer. .lthough it came into e:istence to compensate the losses due to Kperils of sea but the Aourney doesnt ends here. +owadays, the benefits of insurance are widespread starting from a hedging device to a ta: saving investment.
!owever, though Insurance )investments), and the returns on them, have a ta: edge. *ut that)s the wrong reason to buy cover. 'he basic motive of insurance is ris# cover and that should be #ept in mind while opting for an insurance policy. It should cater the personal needs of the buyer of policy.
.fter the introduction of section E8/, which provides ta: benefit for many investment options along with life insurance schemes, buying insurance as such doesnt have any standalone ta: benefit for an assesse. 1"ther than claim e:emption2.
*ut the contradicting viewpoint is that the limit of -s. H8,888 under sec EE has been raised to -s. 1,88,888 under sec E8/. 'hus, it has widened the scope of insurance, a person can pay insurance premium up to 1,88,888 if he wishes so.
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TAX PLANNING & INSURANCE .part from this, the dual advantages of insurance are protection against uncertainty and also ta: benefits. 'his fact gives an edge to insurance above the other investment avenues.
S UG G E S T IO NS :
In India the number of people insured is very meager. 'his is due to lac# of awareness in rural villages and availability of many better investment options for urban people. 'hus, .wareness must be created among the people about the importance of insuranceC 5overnment should ma#e insurance more attractive by giving some unique ta: benefits and incentives to encourage people to buy the insurance. /onsidering the significance of the insurance, insurance must be #ept one step ahead of all other investment opportunities.
M O R AL OF TH E PR O J EC T :
DONE* E<ADE *AFES 8U* $EARN 6O9 *O MANA;E *6EM
EH

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