Archive for ADVANCE TAX

LIC will no more useful for Income Tax Rebate in near future due to New Tax Code- 2011


In India, nearly two-thirds of all new life insurance policies are sold during the six months between September and March — an indicator that life insurance is bought primarily for tax saving. However, the New Direct Taxes Code, slated to be implemented from April 2011, proposes to do away with the disproportionate tax advantage that life insurance products have so far been enjoying over other savings instruments. The proposals of the direct tax code are still open for debate and discussions, but the underlying policy directions indicate that life insurance will be the most affected among all other investment instruments. This may affect your financial planning if you don’t understand the implications and plan your insurance buying accordingly.


At present, premium payment for a life insurance policy is tax-exempt provided the premium amount is not more than 20 per cent of the sum assured. Similarly, any sum received under a life insurance policy — be it money back at regular intervals, death benefit, maturity benefits, including bonus and loyalty additions — is tax-free. But the new tax code envisages that any sum received under a life insurance policy, including death benefit, will be exempt from tax if and only if the premium paid for any of the years does not exceed 5 per cent of the sum assured. This provision, if it finds its way into the final bill, will prove the most significant because the premium installments of all life insurance policies, be it a traditional plan or a unit-liked one, as a percentage of sum assured is much higher than 5 per cent, except in the case of term assurance plans. In other words, benefits under all life insurance policies (except for term assurance) will become taxable from April 2011 unless insurers drastically reduce their premium rates to comply with the 5 per cent criteria. In other words, the sum assured of a policy should be at least 20 times of the annual premium — if you pay an annual premium of Rs 15,000 for a policy, the minimum sum assured should be Rs 3 lakh — to receive tax-free benefits from a life insurance policy. At present, insurance companies offer a minimum sum assured of only five times the annual premium — for an annual premium of Rs 15,000, you get a life cover of Rs 75,000.


Now, if life insurance products with their current features have to comply with the requirement for tax exemption under the direct tax code, the mortality charge payable by policyholders will increase four times (since the minimum sum assured will have to be increased four times). An increase of mortality charge will surely reduce the ultimate return to policyholders. Little wonder why life insurers lobbied and were successful in persuading the Insurance Regulatory and Development Authority (IRDA) to exclude mortality charges when the regulator put a cap on various charges under unit-linked plans — the largest selling product in the life insurance space. Had the mortality charge been included in the overall cap on ULIP charges, insurers would not have any other way but to reduce the commission payable to agents in order to provide for higher sum assured to policyholders. Now that mortality charges are excluded from overall cap on ULIP charges, it is only the policyholder who will have to pay a higher cost and sacrifice return.


What we have discussed so far is only one aspect of the fallout of the new tax regime on life insurance. The New Direct Taxes Code has another bearing on life insurance policies. Under the new tax regime, premium payment up to Rs 3 lakh for a life insurance policy will be tax-exempt. But if the sum assured is not equal to or higher than 20 times the annual premium, any sum received under the policy will be taxed at the marginal rate applicable to the income bracket taking into account the benefits received.

For example, you have bought a policy having a sum assured of Rs 10 lakh and on maturity it amounted to Rs 30 lakh. Let us assume that your annual income at the time of the policy maturity is Rs 10 lakh. So, for income tax purposes, your total income would be considered as Rs 40 lakh (= Rs 10 lakh + Rs 30 lakh) and you shall have to pay income tax on the entire sum at the rate corresponding to the Rs 40-lakh income bracket. Let us now see what it actually means.

For this we consider two separate tax regimes — one is taxed-exempt-exempt and the other is exempt-exempt-taxed. Under taxed-exempt-exempt, you invest tax-paid income while the accumulation on the invested amount and its withdrawal are exempt from tax. Under exempt-exempt-taxed, your income is not taxed initially neither the accumulation on the invested amount. You pay tax on the withdrawal amount. .Till the rate of tax remains the same there is no financial difference whether it is TEE or EET regime. But if the tax rate is a progressive one, that is, the tax rate increases with the level of income, EET will yield much lower post-tax return than in TEE.Given the proposed tax slabs in the New Direct Taxes Code, you may have to pay a much higher tax on benefits received under a life insurance policy than a 10 per cent capital gains tax on investment in other instruments

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Following deduction will be available from salary for ITax Rebate 1) Mileage 2)Compensation under voluntary retirement scheme; 3)Amount of gratuity received on retirement or death; 4)Amount received on commutation of pension


Dear Friends,

When I first read the Direct Tax code , Like other people I first read the New Tax Rate and published the same for you and all other website in www discuss benefits from direct tax code but now we will discuss here what have taken back from us. Remember as per Govt Statement tax revenue will Increase after implementation of new Direct Tax Code. In This post we will cover the salaried Class.

Under the Code, the salary will now include, inter-alia, the following:-

  1. the value of rent free, or concessional, accommodation provided by the employer irrespective of whether the employer is a Government or any other person; (earlier nominal value for Govt Employees)(read earlier rules here:valuation of rent free accommodation)
  2. the value of any leave travel concession;(earlier exempted up to 2 journey in four year block)(read earlier rules here: LTC Exemption
  3. the amount received on encashment of unavailed earned leave on retirement or otherwise;(earlier exempted for 30 days for each year of service or maxi 3.00 Lakhs) (read earlier rules here:leave encashment )
  4. medical reimbursement; and 
  5. the value of free or concessional medical treatment paid for, or provided by,the employer.(read earlier rules here:valuation of medical facility)
  6. The value of rent-free accommodation will be determined for all employees in the same manner as is presently determined in the case of employees in the private sector. The new regime of comprehensive taxation of perquisites across employees in all sectors of the economy will improve both the horizontal and vertical equity of the tax system.

Download Direct Tax code 2009 Download Direct tax code discussion paper Read Direct tax code Online


Further the following deduction will be available from salary income

  1. amount of professional tax paid;
  2. transport allowance to the extent prescribed;
  3. prescribed special allowance or benefit to meet expenses wholly and exclusively incurred in the performance of duties, to the extent actually incurred;
  4. compensation under voluntary retirement scheme;
  5. amount of gratuity received on retirement or death;
  6. amount received on commutation of pension; and
  7. pension received by gallantry awardees.

Further Item at Sr No 4,5,6 would  be available to the extent the amounts are paid to, or deposited in a Retirement Benefits Account. The amounts received from an approved superannuation fund, hitherto exempt from income tax, will henceforth also be treated in the same manner.

So there will be no exemption for House rent Allowance (HRA) (read HRA present rule) Further exemption for following allowances has also not been provided in new Direct tax code as compare to present tax provisions.

  1. entertainment allowance
  2. children education allowance
  3. children Hostel allowance
  4. HRA (house rent allowance)

The list is not exhaustive but we can say that other than deduction prescribed above no deduction from salary income is allowed. Further EET regime has been now fully introduced for all type of savings scheme which we discuss in separate post.

E: exempt at the time of Investment

E:Interest ,bonuses ,increments during the period of investment will not be taxed at all

T:full amount received at the time of Maturity is taxable in the hands of assesses.

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This financial year (FY 2009-10)onwards, you won’t have to pay advance tax if your tax liability is less than Rs 10,000 annually. The finance minister has rationalised the advance tax limit in the Union Budget. According to the Budget memorandum, the threshold for this tax has been doubled from Rs 5,000 to Rs 10,000. The limit has been hiked “with a view to providing for inflation adjustment”, says the memorandum. The Rs 5,000 limit has been in existence for the past 13 years. It was fixed in the 1996 Budget.

  • Advance tax applies to individuals whose incomes are not subject to tax deduction at source (TDS).
  • This directly impacts the self-employed in the lower tax slab. This tax is also payable on income on account of interest, tuition fee, rent, trading of securities and consultancy work. 
  • Advance tax is paid every quarter.
  • If not paid on time, it attracts a penalty at an annualised rate of 13 per cent. 

Let’s look at what is the difference the hike, included under the existing provisions of Section 208 the Income-Tax Act, has made to individuals. Considering the earlier exemption of Rs 1.5 lakh and Rs 1 lakh deductions,U/S 80C a person was liable to pay advance tax if he was earning a salary of more than Rs 2.75 lakh. This year onwards, advance tax has to be paid by people earning over Rs 3.10 lakh. The salary level increases as the exemption limit is now Rs 1.6 lakh. “This move impacts individuals in the lower income group. For those in the high income slab, this is immaterial.

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