Save yourself some taxes

It's that time of the year when you need to take a look at your salary slip to figure out how much you're paying by way of taxes. And check out how you can put away some money and earn a tax-break on it.

For those of who earn a gross income of below Rs 5 lakh, Section 88 of the Income Tax Act gives you some good tax-saving avenues.

If your gross total income is below Rs 1,50,000 you can get a rebate of 20 per cent of the amount invested from the tax payable.

If your salary is between Rs 1,50,000 and Rs 5,0,000, you get a rebate of 15 percent of the amount invested. The maximum that you can invest under Section 88 is Rs 70,000.

The money can be put into either the public provident Fund, National Savings Certificates or insurance policies.

An additional Rs 30,000 can be invested in infrastructure bonds. Alternately, you can buy bonds for the entire amount of Rs 1 lakh.

The bonds available in the market are those of PFC, REC and IDBI. ICICI should be out with a bond scheme soon. 
 

Options worth checking out
	Price (Rs)	Tenure (years)	Redemption value (Rs)	Interest (%)	Put & call
PFC
Option I	10000	5	10000	6	3 yrs from per bond
Option II	10000	5	11910 (3 yrs)	-	-
	-	-	13382 (5 yrs)	6	3 yrs from allotment
REC
Option A	5000	3	5000#	6	3 years
Option B	5000	5	5000#	6.25	5 years
IDBI
Option A	5000	3	5000	5.5	None
Option B	5000	5	5000	5.75	None
Option C	5000	7	5000	6	None
Option D	5000	3.6	6030*	YTM	None
Option D	5000	5	6620*	YTM	None
# Non-cumulative

There are some differences, so check out the coupons, the face values and the tenures carefully. For instance, REC offers a six per cent per annum coupon for three years while IDBI offers a coupon of 5.5 per cent.

The face value or the minimum amount that can be invested is lower for REC and IDBI at Rs 5000 compared with Rs 10,000 for PFC.

While investing in these keep in mind that though the coupon is 6 per cent, the yield is actually higher because of the tax break.

For example, on a bond of Rs 10,000, a 6 per cent coupon gives you Rs 600. But because of the tax break, of say 15 per cent, you have actually earned Rs 600 on Rs 8500, which is a yield of 7 per cent.

It makes sense to keep the money in a cumulative scheme and earn a larger lump sum amount at the end of say three or five years than getting a cheque for the interest annually.

That's because of the compounding effect "" you earn the interest on a higher principal amount each year.

For example, on a sum of Rs 10,000 you will earn Rs 11,800 in all (with cheques of Rs 600 coming to you after the first, second and third years) but with the cumulative option you will earn Rs 11,910 at the end of three years.

While on Rs 10,000 the difference may seem small, on larger amounts the difference could be significant. Among the three bonds available REC is paying out the highest coupon but unfortunately, does not offer a cumulative option.

While you are looking at tax-saving options, keep in mind Section 80CCC . This section allows you a deduction, from your income, of the premium paid under a pension plan. Premiums paid up to Rs 10,000 will be reduced from your salary. The tax saving would be Rs 3,000, if you are paying tax at the rate of say 30 per cent.