There are a wide range of investments that allow you to reduce your tax liability

Income Tax is a complex subject . Our goal here is to familiarise you with the taxation aspects only of that income (or losses) that you may have from your investments and the ways and means available to use your investments to reduce the amount of tax you have to pay. This chapter only seeks to familiarise you with concepts, It is recommended that you consult your tax advisor for details and classification on tax laws that might be needed to actually file returns.

Paying Taxes On Investments
Of the various types of investments discussed here, mutual funds and stocks are capital assets and gains from the purchase and sale of these is called capital gains. If you lose money on them, then those are capital losses. Capital gains or losses occur only when you actually sell an investment and get the money.

Dividends paid by funds or shares is dividend income, while interest earned from bank, post office or other such deposits is called interest income.

Here's an overview of the taxation situation of each of these:

Inflation Adjustment for Long-Term Capital Gains
Long-term capital gains tax is payable on gain realised on investments held for atleast three years. Capital gains tax on such gain is 20 per cent adjusted for inflation or 10 per cent if not adjusted for inflation. The inflation adjustment is done according to this table:

Capital Gains from Mutual Funds and Shares

Dividend Income from Mutual Funds and Equity

As an example, say you have made an investment in 1997-98 for R1 lakh and sold it for R5 lakh in 2012-13. Your capital gains tax will be adjusted for the inflation adjustment factor i.e. 852 divided by 331, which is 2.574. By this method, your cost of the investment will be deemed to be higher by 2.574 times than what it actually was, that is, it will be R2.574 lakh. Thus, your profit will be R2.42 lakh and the tax payable will be R48,500.

Interest Income: Interest income is simply added to your income and taxed according to whatever tax bracket you are in.

Cost Inflation Index for Calculating Capital Gains

Saving Taxes Through Investments
There are three sections of the income tax law that let you save tax by making specific financial investments. These are:

Section 80C
Section 80C offers a window of investment opportunities for up to R1.5 lakh investment in each financial year. This benefit is available to everyone, irrespective of their income levels. For instance, if you are in the highest tax bracket of 30 per cent, the investment of R1.5 lakh under this section will save you R46,350 each year (for income upto R1 crore). The various financial products that qualify for Section 80C benefits are as follows:

·         Life Insurance premium payment

·         Home loan principal, wherein the principal portion of the home loan EMI qualifies for deduction under Section 80C

·         Your contribution to Employees Provident Fund (EPF) (employers' contribution is not deductible).

·         Tuition fees for two children can be claimed upto R1 lakh. However, any payment towards any development fees or donation to institutions is excluded. Also, aggregate deduction under 80C should not exceed the overall R1.5 lakh limit.

·         Contributions to the PPF

·         Investments in the senior citizens savings scheme

·         Savings in notified term deposits in scheduled banks with a minimum period of five years under the bank term deposit scheme, 2006.

·         Savings in post office time deposits with 5-year lock-in

·         National Savings Certificate, six-year government-backed security available at post offices

·         Investments in tax planning mutual funds, (ELSS)

·         Investments in pension plans

Section 80CCG (Rajiv Gandhi Equity Savings Scheme)
The RGESS is a new scheme that provides tax relief to new equity investors but was modified in the budget 2013:

You have to be earning less than R12 lakh per annum. You should never have invested in equities before, this being judged by whether you have transacted in a demat account before.

The equities eligible are the ones in the BSE 100 and the CNX 100 indices, PSUs in the Maharatna, Miniratna, and Navaratna categories, listed mutual funds that are invested entirely in the above equities, and IPOs of large PSUs.

When you invest in these equities, the lock-in period is three years. For the first year out of this, there's a complete lock-in whereby you cannot do any trading for your Demat a/c. After the first three years, you can buy and sell within this pool of securities. When you trade, there's bound to be some period when you have some cash but you must ensure that you are holding the actual securities for at least 270 days in a year.

These are the most important rules and conditions. There are many others relating to fall in the value, corporate actions like mergers or delistings. Notably, RGESS investments in mutual funds cannot be made through an ordinary fund distributor or directly with an AMC as most of us do. They must be made only through a demat account and in funds listed on the stock exchanges.

The problem with all this complexity is that tackling it yields an advantage only for three years. Uniquely among all the tax-saving schemes ever launched by the government, RGESS benefits can be used only for three successive years by any tax payer in a lifetime.