Worried about tax planning? No need!

IDBI Tax Saving Bonds

ll you people concerned about your tax planning can now smile.

IDBI has come out with its Tax Saving Flexibond issue.

Guess what? ICICI Bank should follow soon.

Let's see what these bonds offer and how they can help you with your tax planning.

You get the tax rebate

Section 88 of the Income Tax Act, 1961, offers a rebate.

A rebate is when the government gives you a concession on your income. This is given only if you invest in certain instruments specified by the government.

What is the amount of rebate?

If your gross total income does not exceed Rs 1.5 lakh, you will get a 20% rebate.
If your gross total income exceeds Rs 1.5 lakh, you will get a 15% rebate.
If your gross total income exceeds Rs 5 lakh, Section 88 will not be applicable.

Let's say you are entitled to a 20% rebate. That means 20% of the amount invested in these instruments will be deducted from the total tax payable.

Say you have to pay Rs 18,000 as tax and you are entitled to a rebate of 20%. And you invest Rs 50,000 in the instruments eligible for a rebate. That means, you save Rs 10,000 of your tax (20% of Rs 50,000).

So now, instead of paying tax of Rs 18,000, you pay tax of Rs 8,000.

You can invest up to Rs 1 lakh in these bonds, which means you get a 20% rebate. That means you can get Rs 20,000 off your tax liability (what you pay as tax).

Do you want the money every year?

If you want the money every year, you will have to opt for the annual interest options. This means you will get the interest every year and the money that you invested (principal) will be returned to you when the tenure of the bond ends.

Tenure	Rate of interest
3 years	5.5%
5 years	5.75%
7 years	6%

Let us assume that you invest Rs 5,000. This is how much you will get every year.

Tenure	Rate of interest	Annual income
3 years	5.5%	Rs 275
5 years	5.75%	Rs 287.50
7 years	6%	Rs 300

Do you want the money once and for all?

If yes, opt for the cumulative option. Which means the interest rate is all cumulated and then given to you at one go.

You will get the principal (original amount you invested), and the interest when the bond matures -- when the time frame is completed and the money has to be returned to you.

Invest Rs 5,000 for	You will get	It works out to
3 years, 6 months	Rs 6,030	5.5%
5 years	Rs 6,620	5.77%

Does the interest look minimal?

Don't forget. It is not just the rate of interest that makes this issue attractive. It is the tax rebate that you are getting. This is primarily a tax-saving investment and then an interest-earning investment.

If you take the tax benefit into account, the return will be between 8.7% and 11.71% per annum.

Will the interest earned be taxed?

Yes.

You get a rebate on the amount you invest so you end up paying less tax.

Now, you will also earn interest (either every year or just once). You will have to pay tax on that interest. Of course, you can claim the benefit under Section 80L.

This section states that interest earned on certain investments up to Rs 15,000 in a financial year (April 1 to March 31), will not be taxed.

Of course, if your interest exceeds this amount, you will end up getting taxed. How much you are taxed depends on your tax bracket.

Points to note

You can invest in the bonds right away till February 3.
The minimum you can invest is in one bond which will cost you (face value) Rs 5,000.
The longer you hold it for (duration of the bond), the higher the interest rate.
Section 88 benefits applicable.

To read more about the Flexibond issue, take a look at IDBI's website.

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Illustration: Rajesh Karkera