SECURE & SAFE Upcoming issues of bonds is a golden opportunity for small investors

                                      

There is good news for investors in debt instruments. PSUs will issue tax-free bonds worth `40,000 crore in this financial year. For retail investors, classified as individuals who put in up to `10 lakh, the coupon rate of AAA-rated bonds will be about 55 basis points below the yield of government bonds of equal tenure. For HNIs, the rate will be 80 basis point lower.

Experts feel this is a great opportunity for small investors to lock in at high rates for the long term. The coming bond issue provides a lucrative opportunity to lock-in to high yields for a long time in a more tax-efficient avenue. Tax-free bonds are long-term instruments, with tenures of 10, 15 and 20 years. The longer the tenure, the higher is the coupon rate. At the current yields, investors are likely to be offered between 7.3% and 7.7% for various tenures. A guaranteed tax-free return of around 7.5% for the next 10-15 years is a fantastic proposition. It is good for people who do not need the money back for a long time and are riskaverse. Investors in the 30% tax bracket will find this very lucrative.For them, this is equivalent to a pre-tax return of 10.56-11.14%

Retirees and those nearing retirement will find these bonds especially useful. The predictable return and tax-efficiency make these an ideal option for post retirement income. On the other hand, annuities offer low-yields and the income is fully taxable.

The only glitch is that annuities pay regular monthly income while these tax-free bonds will pay interest once a year. This problem can be overcome by spreading out the investments in a way that there is some interest income every quarter. A retiree who needs `15,000 a month (or `1.8 lakh a year) will need to invest `24 lakh in tax-free bonds offering a coupon rate of 7.5%.Instead of putting this in one instrument, he should spread it out in tranches of `6 lakh in four different bonds with payout dates in different quarters of the year. Tax free bonds can be used to generate a post-tax cash flow, by not only diversifying the payment of coupon but also the issuer of the instrument.

Investors in the highest 30% tax bracket could replace fixed deposits with the upcoming taxfree bonds. While banks' FDs are convenient and offer up to 8.5%, the interest earned is fully taxable. In the 30% tax bracket, the posttax yield is barely 5.95%.The tax-free bonds could offer 150-175 basis points more. Tax free bonds still offer superior post-tax returns compared to most other fixed income options, who exhaust the `1.5 lakh annual investment limit in the PPF will find these tax-free bonds useful.





Here are a few little known deductions that can be claimed at the time of filing the tax return.

                                      

Most tax payers are familiar with the tax deductions under Sec 80C and 80D. But there are several other deductions that a tax payer can avail. We list out a few.

Home loan processing fee and other charges

Home loan customers are aware of the tax benefits on the loan interest and principal repayment. But even the processing fees qualifies for deduction under Section 24. The processing fees and other charges are considered as interest and can be claimed as a deduction.

Interest on personal loan for down payment

Section 24 covers more than just interest on the home loan. It also includes the interest paid on any loan taken for the purchase, renovation or reconstruction of a house. The tax laws do not specify that only interest on a `housing loan' would be eligible for deduction. Even loans taken from friends or family members are eligible for deduction under Section 24. But the taxman may want to see a loan agreement between the two parties and the interest earned by the lender will be taxed as his income.

Tax deduction for disabilities

If a taxpayer suffers from 40% disability (as certified by a government hospital), he can claim deduction of `50,000 under Sec 80U. For a disabled dependent, he can claim a deduction of `50,000 under Sec 80DD. In both cases, if the disability is severe (80% or above), the deduction is `1 lakh. This is a flat deduction and does not depend on actual amount spent. However, the disabled person should be wholly or mainly dependent on the taxpayer for maintenance, and should not have claimed deduction for disability under Section 80U separately.

Clubbing income of disabled child

If you invest in the name of your spouse or minor child, the income from the investment will be clubbed with your income under Sec 64 and taxed accordingly. However, if the child is disabled, the income from investments made in his name will not be clubbed with the income of parents. Parents can use this provision to invest in taxable instruments like fixed deposits and debt funds.

Deduction for specified illnesses

A deduction of up to `40,000 can be claimed if a taxpayer suffers from any ailment specified under Sec 80DDB or has a dependent who is a patient. For senior citizens, the deduction is higher at `60,000. The diseases include certain neurological ailments, cancers, AIDS, kidney failure and haematological disorders. However, if the amount spent is reimbursed by the employer or insurance, the taxpayer is not eligible for deduction. If he gets partial reimbursement of the expenses, the balance can be claimed as deduction.

Interest from savings accounts

The interest you earn is fully taxable but there is a small window of exemption. Up to `10,000 interest earned on savings banks account is exempt under Sec 80TTA. Also, up to `3,500 interest from a post office savings account is exempt from tax under Sec 10(15)(i). If you hold a joint account, the exemption is higher at `7,000."Since both provisions are separate, one can claim the benefits under both sections.

House rent exemption without HRA

Many pay house rent but cannot avail exemption because there is no HRA component in their salary. Under Sec 80GG, you can claim a deduction for the rent even if you don't get HRA.However, the taxpayer should not be drawing any housing benefit. Nor should he or spouse or child be owning a house in the city where he stays.The exemption is limited to the least of the following: rent paid less 10% of total income; or `2,000 a month; or 25% of total income.

Adjusting losses against gains

If you lost money in stocks or on other investments during the previous financial year, there is a silver lining. You can adjust some losses against capital gains from the sale of stocks, property, gold or debt funds. Shortterm capital losses can be set off against both short-term capital gains as well as taxable long-term capital gains. However, long term capital losses can only be set off against taxable long-term capital gains. Long-term losses from stocks and equity funds cannot be adjusted against any gain.

Section 80G donations

Donations under Sec 80G are generally not included in Forms 16. The CBDT circular on TDS does not clarify as to whether deduction under Sec 80G needs to be considered by employers. You will have to claim this deduction at the time of filing your return. Depending on the organisation or fund you have contributed to, you can claim a deduction of 50100% of the donated amount. But the deduction cannot be more than 10% of your gross total income.