It’s that time of the year when the tax planning agenda is on the forefront of every common man. We give you a lowdown on the optimum and the best way of tax planning. There are an array of tax saving instruments to choose from. Some of the highly popular instruments are Public Provident Fund, Life Insurance, Tax Saving Bank Deposits (of over 5 years), ULIP’s, ELSS, Mutual Funds, Education and Housing Loan, to name a few.

It’s a known fact that Public Provident Fund (PPF) and Life Insurance are considered the most preferred tax saving instruments and constitute a major portion of investments falling under the Section 80 C.

This is followed by Mutual funds. ULIP’s – a combination of life insurance and mutual funds — have not found much favour as a tax saving instrument since the premium is high and the initial charges are also very high. ULIP’s have an entry load, which can be as high as 40% to 60%, thus a major chunk of the first year premium paid goes as a policy expense and only a miniscule portion is invested.

PPF’s are the most favoured instrument since the principal and the interest income are totally tax free. So even if PPF pays 8% interest, post-tax return turn out to be much higher than most of the other instruments.

Another good mode of saving taxes is through taking a House Building Loan.

Generally the loans are repaid through EMI’s. The total amount of EMI’s paid during the financial year is bifurcated into two components – a) the interest on Borrowed Capital Component and b) Principal Repayment component. A certificate of bifurcation of interest on borrowed capital and principal component is obtained from the bank or other institution from which the loan is taken

The Interest Component is allowed as deduction under the heads “Income from House Property” and the Principal component forms part of investments under Sec 80C along with other investments as discussed above.

Interest On Borrowed Capital :

The interest towards home loan taken for purchase, construction, repairs, renewal or reconstruction of house property is eligible for deduction under section 24(b).

In case of a let out property, the entire amount of interest payable is allowed as deduction. i.e (No cap on Maximum Limit of repayment of Interest on Borrowed Capital).

However, in the case of self-occupied property or a property unoccupied by the owner for reasons of employment at another place, deduction on account of Interest on borrowed Capital as per Sec 24(b) of the Income Tax Act 1961 is limited to Rs 30,000.

Where, however, such property has been acquired or constructed with capital borrowed on or after the 1st day of April 1999, the amount of deduction allowed is up to Rs 1,50,000 provided the house is acquired or constructed within three years from the date of borrowing. This deduction is allowed only for one such self – occupied property.

This deduction is claimed while computing the income from house property.

Principal repayment of the home loan :

As per the newly introduced Sections 80C read with section 80CCE of the Income Tax Act, 1961 the principal repayment up to Rs. 100,000 on home loan will be allowed as a deduction from the gross total income subject to fulfillment of prescribed conditions along with other instruments like Provident Fund (PF), Public Provident Fund (PPF), Life Insurance payments, Equity Linked Savings Scheme (ELSS), etc. So if an assessee has no investments, but only House Building Loan repayment, he/she can get the benefit of this section upto a maximum of Rs.1,00,000. Where however, the assessee has other investments, the benefit of Principal on Borrowed Capital would be limited to the amount of Rs.1,00,000 minus the other eligible investments.

We now study the financial implication of a house Building loan. It clearly depends on the tax bracket an assessee is. An assessee in the highest tax bracket gets the maximum benefit compared to others in the lower tax brackets. This can be illustrated in a tabular manner as follows.

So one can save a maximum of Rs.50,985, by paying Interest on Borrowed Capital to the maximum amount of Rs.1,50,000. Thus in ultimate analysis we can see taking a home loan is a good means of saving tax. If one can adjust the EMI amount vis-a-vis the Tax payable (If no House building loan is taken ), one can have a property with no out of pocket expenses or maybe a minimal layout.

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CBDT clarification

The Directorate of Income Tax (Systems) vide PAN Circular No 4 dated October 11, 2006 has now issued guidelines to its service providers (UTITSL and NSDL) facilitating NRIs, PIOs and OCIs to obtain a PAN without having to provide for a Representative Assessee.
Now, the PAN card may be issued based on the copy of the NRI’s passport as ID proof and copy of passport/copy of bank account in the country of residence as the requisite address proof.
As per the new guidelines, an applicant who is:
a) A citizen of India but residing outside India at the time of making the application; or
b) A foreign citizen; or
c) A person other than an individual (like company or trust or firm etc) having no office of its own in India
should fill the PAN application, as indicated below :
1. AO Code pertaining to International Taxation Directorate should be used. UTITSL and NSDL will provide on their web sites the codes of International Taxation Directorate and advise the applicants to mention the specific AO code out of these codes.

2. Individuals may indicate any address (residential or office, whether Indian or foreign) as the address for communication. A foreign address can be provided if they do not have any Indian address of their own. Such applicants must also provide an email-id for communication.

3. Providing details of Representative Assessee is not mandatory for such applicants.

4. Individual applicants should provide their own recent colour photograph of prescribed size. This is not applicable for other applicants.

5. The application should always be signed by an individual and in the case of non-individuals by an authorized signatory (e.g. director of the company or partner of the firm or trustee of the trust, etc.)

6. The application should be submitted along with the appropriate documents in support of identity and address of the applicant. For individuals, the main document necessary is a copy of the passport. If the applicant has a bank account in India, a copy or the bank passbook may be provided as a proof of local address. Where the foreign address is not available in the passport, a copy of bank account statement in country of residence will suffice the purpose.

A foreign citizen who at the time of application for PAN is located outside India should get the copies attested by the Indian embassy in the country where the applicant is located.

For other applicants, a copy of registration certificate of their country duly attested by the Indian Embassy in the country where applicant is located is necessary.

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