Under 30 And Financially Secure In 10 Steps

Being financially secure enough to enjoy your life in retirement is the last thing on the minds of those under 30. After all, with the stress of all the expensive "firsts" that often come about during this period, like purchasing a car, buying a house and starting a family, it's hard to even think about saving for the future. However, working toward financial security need not be an exercise in self-deprivation, as many people assume. Attaining this goal even has some immediate benefits, as financial insecurity can become a serious source of stress - something 20-somethings have enough of already.
So can you achieve long-term financial security without sacrificing your short-term goals? Read on for 10 tips on how to do just that.1. Have FunEnjoy yourself while you are young - you will have plenty of time to be miserable when you are older. Living a successful, enjoyable and happy life is about achieving a proper balance between time with family and friends and between work and leisure time. Striking a proper balance between your life today and your future is also important. Financially, we can't live as if today was our last day. We have to decide between what we spend today versus what we spend in the future. Finding the correct balance is an important first step toward achieving financial security. (For further reading, see Budget Without Blowing Off Your Friends.)2. Recognize Your Most Important Financial Asset: YourselfYour skills, knowledge and experience are the biggest asset you have. The value of your future earnings will dwarf any savings or investments you might have for most of your career. Your job and future career is the most important factor in achieving financial independence and security. For those just entering the work force, future career opportunities are as bright as they've ever been. The large number of retiring baby boomers is expected to create labor shortages. There will be room for advancement as companies scramble to fill the positions held by these aging baby boomers. Those who are in a position to take advantage of these opportunities will benefit the most.Look at yourself as a financial asset. Investing in yourself will pay off in the future. Increase your value through hard work, continual upgrading of skills and knowledge, and making smart career choices. Efforts to improve your career can have a far bigger impact on your financial security than tightening your belt and trying to save more. (To learn more, see Should You Head Back To Business School?)3. Become a Planner, Not a SaverResearch has shown that those who plan for the future end up with more wealth than those who do not. Successful people are goal oriented: they set goals and develop a plan to achieve them. For example, if you set a goal to pay off your student loans in two years, you'll have a better chance of achieving this goal than you would if you merely said you wanted to pay off your student loans, but failed to set a timetable. Become a planner. Set goals and develop an action plan to reach them. Even the process of writing down some goals will help you to achieve them. Being goal oriented and following a plan means taking control of your life. It is an important step toward improving your financial independence and security.
4. Set Short-Term Goals - Long-Term Goals Will Take Care of ThemselvesLife holds many uncertainties - and a lot can change between now and 30 years into the future. As such, the prospect of planning far into the future is a daunting task and in many ways, it's often an exercise in futility for young investors. Rather than setting long-term goals, set a series of small short-term goals. These goals could be a simple as trying to pay off credit card debt or student loans in a matter of months. Maybe your goal is to contribute to your company's pension plan with a set salary reduction contribution each month. Setting short-term goals that will help you to advance in your career is important in helping you get ahead. Remember, these short-term goals should be measurable and precise. You can't win a race if there's no finish line. As you achieve your short-term goals, set other short-term goals. Maybe you want to buy a house, earn a promotion at work or buy a new car. The constant setting and achieving of short-term goals will ensure that you reach your longer-term goals. If your goal is to be worth a million dollars by age 40, you cannot achieve this without first achieving smaller goals like having $10,000, $50,000 or $500,000.
5. Planning For Retirement: Fuggetaboutit?Just out of school, retirement planning is the last thing on your mind. So, if you have to for now, just fuggetaboutit. If you follow the other tips, you will not only be more financially secure and prepared in the short term, but you will also be financially prepared for the distant future as well. However, if you take a few steps now to start saving, like setting up automatic monthly contributions to a retirement plan like an employer-sponsored 401(k) or your own Roth IRA, compounding will work in your favor, which makes reaching your goal much easier. If you implement this pay yourself first ideal, you won't have to worry about how much you're contributing; the most important thing is to develop the habit of saving. The rest will take care of itself. You can increase your contributions when your income rises or when you've achieved more of your short-term financial goals. (To learn why starting now can save you thousands later, see Understanding The Time Value Of Money, Compound Your Way to Retirement and Delay In Saving Raises Payments Later On.)
6. Make Sure Your Lifestyle Costs Lag Your Income GrowthMany new graduates find that in the first couple years of working they have excess cash flow. Still used to their more frugal student spending habits, it is easy to make more money than they need. Rather than using excess income to buy new toys and live a more luxurious lifestyle, this excess could be put toward reducing debt or adding to savings. As you advance in your career and attain greater responsibility, your salary should increase. If the cost of your lifestyle lags your income growth, you will always have excess cash flow that can be put toward paying down debt, making investments, saving for a home, or achieving any other financial goals you may have.Where many people get into trouble is that they feel entitled to a standard of living that exceeds what they can afford. However, if you keep your standard of living below what you earn, you won't have to cut back to accumulate money; instead, you will naturally have excess cash flow because you earn more than you need to live on. In addition, keep in mind that trying to keep up with the Joneses is always a recipe for financial failure. For all you know, you may make more than the Joneses, who may be funding their lavish lifestyle with debt anyway. (For more on this topic, see Stop Keeping Up With The Joneses - They're Broke.)The good life should be a reward for your hard work, good fortune and successful planning, not something that you are entitled to. Once you have established a certain lifestyle, it is psychologically difficult to lower it. It is very easy to raise it.
7. Become Financially LiterateMaking money is one thing; saving it and making it grow is another. Financial management and investing are lifelong endeavors. Making sound financial and investment decisions is important for achieving your financial goals. The more knowledgeable and experienced you are in financial matters, the fewer mistakes you will make. Research has shown that people who are financially literate end up with more wealth than those who are not. There is a strong monetary incentive for becoming financially sophisticated. Taking the time and effort to become knowledgeable in the areas of personal finance and investing will pay off throughout your life. 8. Seize the Opportunities: Take Calculated RisksTaking calculated risks when you are young can be a prudent decision in the long run. You might make mistakes along the way, but remember, mistakes are the lessons of wisdom. You often learn more from your mistakes than from your successes. Also, when you are young, you can recover faster from financial mistakes, and you have many years to recover. (Keep on reading about this in Retirement Savings Tips For 18- To 24-Year-Olds and Retirement Savings Tips For 25- To 34-Year-Olds.)Examples of calculated risks might include moving to a new city with more job opportunities, going back to school for additional training or taking a new job at a different company for less pay but more upside potential. Starting a new company, working for a small startup company, or investing in high risk/high return stocks, is easier to do when you're young. Younger people can afford to take risk, and the same opportunities might not be available later in life. As people get older and assume more family responsibilities like paying off the mortgage or saving for the kids' education, many are forced to play it safe and are unable to capitalize on riskier opportunities that present themselves. Taking calculated risks when you can afford to do so is necessary to get ahead financially. Playing it safe might be the bigger mistake in the long run.9. Borrow Money For Investments - Never to Finance a LifestyleAs mentioned before with the Joneses, you should never borrow to finance a lifestyle you cannot afford. Using credit for a life you feel entitled to is a losing proposition when it comes to building wealth. The constant borrowing will assure that there is no money available for investing, and the added interest expense of borrowing further increases the cost of the lifestyle. Borrowing money should be used only for investing - where your gain will outrun your borrowing costs. This might mean investing in the literal sense (for stocks, bonds, etc.) or it might mean investing in yourself for your education, extra training, to start a business or to buy a house. In these cases, borrowing can provide the leverage you need to a reach your financial goals faster. Borrowing to meet short-term desires is counterproductive. (To learn about your borrowing options, see Different Needs, Different Loans.)10. Take Advantage of Financial FreebiesNot many things in life are free. If you belong to a company pension plan, take the free money it offers and make sure that you contribute at least up to the maximum of what your company will match. You can also look for (legal) ways to take advantage of tax laws. For example, contributing to an individual retirement account (IRA) will result in a tax savings - in effect, the government is giving you free money to provide an incentive to contribute. There is also an incentive to invest in stocks because of favorable tax treatment on capital gains and dividend income.ConclusionAchieving financial independence is a goal most people strive for. It is not necessarily easy, but it is achievable if you understand your priorities, set achievable goals and take the proper steps toward reaching them.
by Ken Hawkins, (Contact Author Biography)Ken Hawkins is a financial writer and vice president of Second Opinion Investor Services http://www.secondopinions.ca/, an investment consulting firm that provides unbiased and independent investment advice. His experience spans the investment world of the private client investor as well as the world of the institutional investor representing pension funds, asset management companies, mutual funds and investment counselors. Hawkins is also co-author of "The New Rules for Retirement - What Your Financial Advisor Isn't Telling You" (2008).

4 steps to a great business plan

A business plan serves two purposes:
It provides a road map for your business.
It helps you obtain outside financing.
If you're going into business for yourself, you must have a business plan - period. Numerous studies have shown that one of the major reasons new businesses fail is poor planning.

The good news is that developing a business plan is not as hard as it seems. In order to develop a solid business plan, you need to have a thorough understanding of the business you're entering. Next, you need to determine how you'll use the plan and who your target audience is. Finally, you should create a complete a business plan that is comprehensive and concisely written. We'll explore each of these steps in detail.

Step 1: Know your businessIn order to prepare a business plan, you must know the business you are entering inside and out. This means lots of research. Research comes in two forms: reading everything you can about the industry and talking to those who are already in it. Learn everything you can about your business and industry.

Step 2: Determine your purposes for the planA business plan serves to crystallize your business vision and guide you in fulfilling that vision; it is also frequently used to entice potential investors. If you are self-financing your business, you design the plan mostly for your benefit, but if you're seeking outside investors, you'll need to target them. As such, before you create your plan, determine whether you will solicit outside investors.

Step 3: Determine your audienceIf you plan to recruit investors, you need to build a plan to suit them. Outside investors, who range from friends and family members to banks and venture capitalists, will invest through either loaning you the money, buying shares in your company or some combination of the two. Determine their level of sophistication and what they are looking for in a potential business investment. Remember that regardless of their level of sophistication, they are all looking for four things:

Trust in you - You build trust by demonstrating ethics and integrity, so your business plan should demonstrate those qualities.

Understanding of the business - It is your job to clearly articulate your mission statement, your product offerings and how you will make money. Your may have to tailor your plan to suit your audience: less-sophisticated investors may be scared off by industry jargon, while investment professionals will probably expect it.

Financial confidence - Clearly articulate the risks of investing in your business. Also, show investors how they can recoup their money - whether your venture succeeds or fails.

A good return on investment - Over the period of 1928-2007, the geometric (exponential) return for stocks was 9.8 per cent, while for 10-year Treasury bonds, it was 5 per cent. Historical private-equity returns are more difficult to measure, but, in general, investors will expect a premium of anywhere from 2-5 per cent over public-equity market returns. The return on equity for your new business must be in the private-equity range.

Typically, investors will look to beat a certain internal rate of return. Your job is to make sure your projected returns are in line with those of similar industries.

Step 4: Create your business planFirst, develop an outline of your business plan. Consider every aspect of your business and how it will affect your business plan. Remember, this business plan is a road map. It must guide you. It must also communicate to investors what you're doing and why they should invest with you.

The order in which your plan is presented should be something like the following:
a) Mission Statement
b) Executive Summary
c) Product or Service Offerings
d) Target Market
e) Marketing Plan
f) Industry and Competitive Analysis
g) Pro-Forma Financials
h) Resumes of the Company Principals
i) Your Offering (what type of financing you're seeking)
j) Appendix (any other pertinent information)

You'll probably also want to note any personal seed capital you're investing in the venture. Financiers want (and often require) entrepreneurs to put their own funds in the venture, and the greater the portion you invest relative to your net worth, the better.

Now let's review each section of the business plan in detail.

Mission statement

The mission statement is a concise, one- to three-paragraph description of your business objectives, or your business's guiding principles. In this section, you should state your unique selling point, or what separates your company from all the others in the industry that are otherwise just like it.

Executive summary

This is a one- to two-page summary of your business. Potential investors will read this to decide whether they want to look at the rest of your plan.

Product or service offering

Create a section describing your product or service offerings in detail, as well as how much you'll charge for what you're selling.

Target market

Present your primary and secondary target markets, along with any research that demonstrates how your target market will benefit from and consequently purchase what you're offering.

Marketing plan

Present your marketing plan, which should show in detail how you'll reach your target market. This part of the plan will include advertising and promotional strategies.

Industry and competitive analysis

Include a complete and thorough industry and competitive analysis that includes all stakeholders in your business. Don't forget to include governmental and regulatory agencies.

Financial statements

These must be complete, accurate and thorough. Each number on your spreadsheets must mean something. Don't estimate payroll, for instance; determine what it will actually be. Your income statement must reconcile to your cash flow statement, which reconciles to your balance sheet. Your balance sheet must balance at the end of every period. You must have supporting schedules (e.g., depreciation and amortisation schedules) to back up your projections.If you are having trouble building your pro-forma financial models, which should project out for at least five years, seek outside help from a qualified professional.Use realistic projections. In estimating the growth of your business, you will make certain assumptions, which should be based on thorough industry research combined with a strategy for how you'll compete. Also, analyze how quickly you'll achieve positive cash flow. Investors vary in their standards, but most like to see positive cash flow within the first year of operation, particularly if this if your first venture. In order for your projections to be accurate, you must know your business. If you've built an accurate and realistic model, but still project negative cash flow for more than 12 months, rethink your business model.

Resumes of company principals

Include the bios and professional backgrounds of all significant employees of your business. You will want to emphasize how their backgrounds have prepared them to take on the challenge of running your new startup. Also, if an employee's business background is in a significantly different industry, you might want to emphasize how this can be an advantage instead of a detriment.
Your offering

Present what level of investment you're seeking and for what purposes you will use the funds. If you're selling business units, state the individual price per unit.

Once you've put together all of this key information, make sure to present your plan professionally. It should be typed, margin aligned and neatly bound. Use color graphics and pictures where possible. Do not handwrite changes or corrections. The inside of your business plan should be near book or magazine quality.

After you've finished your plan, have a professional you trust, such as a Certified Public Accountant or attorney, look it over. This person may catch details, errors or omissions you've made. They also will be able to give you a more objective opinion of the viability of your business.

Building your business plan is just the first step

Once you've completed your plan, you'll submit it to potential investors, who may ultimately commit to financing. Once you receive those commitments, you'll negotiate terms and then, finally, open your doors for business, which is where theory ends and the real work begins.

Source: Investopedia

How to achieve financial nirvana in 5 steps

Financial planning may sound like a complicated exercise to most of us, complicated enough for us to postpone it for another day when there is more time and inclination. But, as we all know, that day rarely arrives.
Thus our financial issues keep piling up, our investments continue to be in disarray and financial nirvana is just a dream that we chase everyday.
The good news is that turning this dream into reality isn't as imposing as it seems. You can crack it in just five simple steps!

Step 1: Set yourself an investment objective
If you can take some time out from the daily grind to set yourself some key investment objectives, then you will have taken an important step towards achieving financial nirvana. When you actually get down to it you will notice that the investment objectives that you have set for yourself are actually quite simple.
For example, your child wants to pursue MBA/engineering/medicine? That's a good thing, but education is very expensive nowadays. Where is the money going to come from? You don't know; so add it to your financial plan.
Your child needs to get married some day and that marriage will cost you. So where is the money going to come from? You don't know that either; another objective for your financial plan. Slowly but surely, your investment objectives keep building up.

Step 2: Do your homework
Once you have short-listed the important investment objectives, you are already on the path to financial nirvana. You now have to find a way to achieve these objectives. This sounds like a monumental task, but it isn't.
Not when you actually get down to doing your 'homework'. Your homework will simply entail reading business dailies and personal finance magazines and visiting personal finance Web sites. Also meeting up with various financial planners and investment advisors will help.
Take notes of your discussions with them and study the advice from various quarters. The idea is to be well-informed at all times as to what is happening around you, so you don't get taken for a ride by an unscrupulous investment advisor who is looking for easy bait.

Step 3: Avoid the 'noise'
If you have been doing your homework religiously, you will find discussions on some trends/investments cropping up more often than that on others. For some time now it's about gold; earlier it was about mid caps, ULIPs (unit-linked insurance plans) and infrastructure stocks among others.
Investing only according to the latest trend can often be a surefire recipe for disaster as investors found out in 2000; then technology/media/telecom (TMT) proved to be the undoing for many an investor.
Typically investments tend to polarise around such noise. That's not such a good idea, because by the time these trends get written/spoken about, the opportunity to make money is often gone. You run the risk of investing in the 'idea' at the peak.
If you have done your homework well, then you will be a in a position to avoid such pitfalls and catch the trend earlier on. Even if you don't catch the trend soon enough to make money, at least you will avoid investing in it when it's too late.

Step 4: Select the right financial planner
One reason why financial planning isn't quite as difficult as it seems is because your role in it is relatively limited. Apart from basic reading up on financial matters and keeping yourself updated on investment-related news, there is very little that can be expected from a lay investor.
The reason why you need to be relaxed about financial planning is because your partner needs to take all the heat on him. Your partner over here is your financial planner. He is the one who needs to sit down with you, draw up an achievable investment plan after considering your investment objectives, age and risk profile.
It is for him to recommend you at regular intervals what you need to do with your money and give you an update on your investments.

Step 5: Don't get attached to investments
As an investor it helps if you are 'cool and calculated' about your investments; so don't get attached to them. If an investment you made is not working out like you thought it would and an evaluation (in consultation with your financial planner) suggests that it's best you get rid of it, then go ahead and do it.
Let it not become an 'ego' issue. We make mistakes with a lot of things and investments are no exceptions. So just like we rectify the other mistakes we make, we should resolve the wrong call we have made on an investment.
Remember the investment itself is not the objective; it's only a way to achieve your objective.

India's Double Tax Avoidance Agreements

12.0 The Central Government, acting under Section 90 of the Income Tax Act, has been authorised to enter into Double Tax Avoidance Agreements (hereinafter referred to as tax treaties) with other countries. The object of such agreements is to evolve an equitable basis for the allocation of the right to tax different types of income between the 'source' and 'residence' states ensuring in that process tax neutrality in transactions between residents and non-residents. A non-resident, under the scheme of income taxation, becomes liable to tax in India in respect of income arising here by virtue of its being the country of source and then again, in his own country in respect of the same income by virtue of the inclusion of such income in the 'total world income' which is the tax base in the country of residence. Tax incidence, therefore, becomes an important factor influencing thenon-residents in deciding about the location of their investment, services, technology etc. Tax treaties serve the purpose of providing protection to tax payers against double taxation and thus preventing the discouragement which taxation may provide in the free flow of international trade, international investment and international transfer of technology. These treaties also aim at preventing discrimination between the tax payers in the international field and providing a reasonable element of legal and fiscal certainty within a legal framework. In addition, such treaties contain provisions for mutual exchange of information and for reducing litigation by providing for mutual assistance procedure.
12.1 Acting under the authority of law, the Central Government has so far entered into agreements with countries listed below which have become operative with effect from the assessment year mentioned against them.
S.no. Name of the country Effective from Assessment Year
1. Australia 1993-94
2. Austria 1963-64
3. Bangladesh 1993-94
4. Belgium 1989-90 1999-2000 (Revised)
5. Brazil 1994-95
6. Belarus 1999-2000
7. Bulgaria 1997-98
8. Canada 1987-88;
9. China 1999-2000 (Revised)1996-97
10. Cyprus 1994-95
11. Czechoslovakia 1986-872001-2002 (Revised)
12. Denmark 1991-92
13. Finland 1985-86 Amending protocol 2000-2001
14. France (Revised) 1996-97
15. F.R.G. (Original) 1958-59
F.R.G. (Protocol) 1984-85
G.D.R. 1985-86
F.R.G (Revised) 1998-99
16. Greece 1964-65
17. Hungary 1989-90
18. Indonesia 1989-90
19. Israel 1995-96
20. Italy (Revised) 1997-98
21. Japan (Revised) 1991-92
22. Jordan 2001-2002
23. Kazakistan 1999-2000
24. Kenya 1985-86
25. Libya 1983-84
26. Malta 1997-98
27. Malaysia 1973-74
28. Mauritius 1983-84
29. Mongolia 1995-96
30. Namibia 2000-2001
31. Nepal 1990-91
32. Netherlands 1990-91
33. New Zealand 1988-89 Amending notification 1999-2000
34. Norway 1988-89
35. Oman 1999-2000
36. Philippines 1996-97
37. Poland 1991-92
38. Qatar 2001-2002
39. Romania 1989-90
40. Singapore 1995-96
41. South Africa 1999-2000
42. South Korea 1985-86
43. Spain 1997-98
44. Sri Lanka 1981-82
45. Sweden 1990-91 Revised 1999-2000
46. Switzerland 1996-97
47. Syria 1983-84
48. Tanzania 1983-84
49. Thailand 1988-89
50. Trinidad & Tobago 2001-2002
51. Turkmenistan 1999-2000
52. Turkey 1995-96
53. U.A.E. 1995-96
54. U.A.R. 1970-71
55. U.K. (Revised) 1995-96
56. U.S.A. 1992-93
57. Russian Federation 2000-2001
58. Uzbekistan 1994-95
59. Vietnam 1997-98
60. Zambia 1979-80
12.2 These Agreements follow a near uniform pattern in as much as India has guided itself by the UN model of double tax avoidance agreements. The agreements allocate jurisdiction between the source and residence country. Wherever such jurisdiction is given to both the countries, the agreements prescribe maximum rate of taxation in the source country which is generally lower than the rate of tax under the domestic laws of that country. The double taxation in such cases are avoided by the residence country agreeing to give credit for tax paid in the source country thereby reducing tax payable in the residence country by the amount of tax paid in the source country.
12.2.1 These agreements give the right of taxation in respect of the income of the nature of interest, dividend, royalty and fees for technical services to the country of residence. However, the source country is also given the right but such taxation in the source country has to be limited to the rates prescribed in the agreement. The rate of taxation is on gross receipts without deduction of expenses. These rate of taxation as agreed with different countries are given in the Annexure I. The Finance Act, 1997 has exempted income from dividend declared after 1.6.97 in the hands of share holders.
12.2.2 So far as income from capital gains is concerned, gains arising from transfer of immovable properties are taxed in the country where such properties are situated. Gains arising from the transfer of movable properties forming part of the business property of a 'permanent establishment 'or the 'fixed base' is taxed in the country where such permanent establishment or the fixed base is located. Different provisions exist for taxation of capital gains arising from transfer of shares. In a number of agreements the right to tax is given to the State of which the company is resident. In some others, the country of residence of the shareholder has this right and in some others the country of residence of the transferor has the right if the share holding of thetransferor is of a prescribed percentage.
12.2.3 So far as the business income is concerned, the source country gets the right only if there is a 'permanent establishment' or a 'fixed place of business' there. Taxation of business income is on net income from business at the rate prescribed in the Finance Acts. Chapter X may be referred to for a discussion on the subject.
12.2.4 Income derived by rendering of professional services or other activities of independent character are taxable in the country of residence except when the person deriving income from such services has a fixed base in the other country from where such services are performed. Such income is also taxable in the source country if his stay exceeds 183 days in that financial year.
12.2.5 Income from dependent personal services i.e. from employment is taxed in the country of residence unless the employment is exercised in the other state. Even if the employment is exercised in any other state, the remuneration will be taxed in the country of residence if -
the recipient is present in the source State for a period not exceeding 183 days; and
the remuneration is paid by a person who is not a resident of that state; and
the remuneration is not borne by a permanent establishment or a fixed base.
12.2.6 The agreements also provides for jurisdiction to tax Director's fees, remuneration of persons in Government service, payments received by students and apprentices, income of entertainers and athletes, pensions and social security payments and other incomes. For taxation of income of artists, entertainers sportsman etc, CBDT circular No. 787 dates 10.2.2000 may be referred to.
12.3 Agreements also contain clauses for non-discrimination of the national of a contracting State in the other State vis-a-vis the nationals of that other State. The fact that higher rates of tax are prescribed for foreign companies in India does not amont to discrimination against the permanent establishment of the nonresident company. This has been made explicit in certain agreements such as one with U.K.
12.4 Provisions also exist for mutual agreement procedure which authorises the competent authorities of the two States to resolve any dispute that may arise in the matter of taxation without going through the normal process of appeals etc. provided under the domestic law.
12.5 Another important feature of some agreements is the existence of a clause providing for exchange of information between the two contracting States which may be necessary for carrying out the provisions of the agreement or for effective implementations of domestic laws concerning taxes covered by the tax treaty. Information about residents getting payments in other contracting States necessary to be known for proper assessment of total income of such individual is thus facilitated by such agreements.
12.6 It may sometimes happen that owing to reduction in tax rates under the domestic law taking place after coming into existence of the treaty, the domestic rates become more favourable to the non-residents. Since the objects of the tax treaties is to benefit the non-residents, they have, under such circumstances, the option to be assessed either as per the provisions of the treaty or the domestic law of the land.
12.7 In order to avoid any demand or refund consequent to assessment and to facilitate the process of assessment, it has been provided that tax shall be deducted at source out of payments to non-residents at the same rate at which the particular income is made taxable under the tax treaties. As a result of amendment made by the Finance Act, 1997 exempting from tax income from dividend declared after 1.6.1997, no deduction is required to be made in respect of such income.

17 tax-free incomes for you

The following are 17 important items of income, which are fully exempt from income tax and which a resident individual Indian assessee can use with profit for the purpose of tax planning.
1. Agricultural income
Under the provisions of Section 10(1) of the Income Tax Act, agricultural income is fully exempt from income tax. However, for individuals or HUFs when agricultural income is in excess of Rs 5,000, it is aggregated with the total income for the purposes of computing tax on the total income in a manner which results into "no" tax on agricultural income but an increased income tax on the other income.
Agricultural income which fulfils the above conditions is completely exempt from tax. The manner of calculating tax on total income and agricultural income, is explained in the following illustration:
Illustration
For FY 2008-09 (assessment year 2009-10), a male individual has a total income from trading in textiles amounting to Rs 1,52,000; besides, he has earned Rs 40,000 as income from agriculture.
The income tax payable by him will be computed as under:
On the first Rs 150,000 of the taxable non-agricultural income: Nil
On the next Rs 40,000 of agricultural income (falling under 10% slab): Nil
On the next Rs 2,000 of taxable non-agricultural income @ 10 per cent: Rs 200
Income tax on aggregated income of Rs 152,000 + Rs 40,000 = Rs 192,000: Rs 200


2. Receipts from Hindu Undivided Family (HUF)
Any sum received by an individual as a member of a Hindu Undivided Family, where the said sum has been paid out of the income of the family, or, in the case of an impartible estate, where such sum has been paid out of the income of the estate belonging to the family, is completely exempt from income tax in the hands of an individual member of the family under Section 10(2).


3. Share from a partnership firm
Under the provisions of Section 10(2A), in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm is completely exempt from income tax since AY 1993-94.
For this purpose, the share of a partner in the total income of a firm separately assessed as such would be an amount which bears to the total income of the firm the same share as the amount of the share in the profits of the firm in accordance with the partnership deed bears to such profits.


4. Allowance for foreign service
Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India, rendering service outside India, are completely exempt from tax under Section 10(7). This provision can be taken advantage of by the citizens of India who are in government service so that they can accumulate tax-free perquisites and allowances received outside India.


5. Gratuities
Under the provisions of Section 10(10) of the IT Act, any death-cum-retirement gratuity of a government servant is completely exempt from income tax. However, in respect of private sector employees gratuity received on retirement or on becoming incapacitated or on termination or any gratuity received by his widow, children or dependants on his death is exempt subject to certain conditions.
The maximum amount of exemption is Rs. 3,50,000;. Of course, this is further subject to certain other limits like the one half-month's salary for each year of completed service, calculated on the basis of average salary for the 10 months immediately preceding the year in which the gratuity is paid or 20 months' salary as calculated. Thus, the least of these items is exempt from income tax under Section 10(10).


6. Commutation of pension
The entire amount of any payment in commutation of pension by a government servant or any payment in commutation of pension from LIC [Get Quote] pension fund is exempt from income tax under Section 10(10A) of IT Act.
However, in respect of private sector employees, only the following amount of commuted pension is exempt, namely: (a) Where the employee received any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive; and (b) In any other case, the commuted value of half of such pension.
It may be noted here that the monthly pension receivable by a pensioner is liable to full income tax like any other item of salary or income and no standard deduction is now available in respect of pension received by a tax payer.


7. Leave salary of central government employees
Under Section 10(10AA) the maximum amount receivable by the employees of central government as cash equivalent to the leave salary in respect of earned leave at their credit upto 10 months' leave at the time of their retirement, whether on superannuation or otherwise, would be Rs. 3,00,000.


8. Voluntary retirement or separation payment
Under the provisions of Section 10(10C), any amount received by an employee of a public sector company or of any other company or of a local authority or a statutory authority or a cooperative society or university or IIT or IIM at the time of his voluntary retirement (VR) or voluntary separation in accordance with any scheme or schemes of VR as per Rule 2BA, is completely exempt from tax. The maximum amount of money received at such VR which is so exempt is Rs. 500,000.


9. Life insurance receipts
Under Section 10(10D), any sum received under a Life Insurance Policy (LIP), including the sum allocated by way of bonus on such policy, other than u/s 80DDA or under a Keyman Insurance Policy, or under an insurance policy issued on or after 1.4.2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 20 per cent of the actual capital sum assured, is fully exempt from tax.
However, all moneys received on death of the insured are fully exempt from tax Thus, generally moneys received from life insurance policies whether from the Life Insurance Corporation or any other private insurance company would be exempt from income tax.


10. Payment received from provident funds
Under the provisions of Sections 10(11), (12) and (13) any payment from a government or recognised provident fund (PF) or approved superannuation fund, or PPF is exempt from income tax.
11. Certain types of interest payment
There are certain types of interest payments which are fully exempt from income tax u/s 10 (15). These are described below: (i) Income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf. (iia) In the case of an individual or a Hindu Undivided Family, interest on such capital investment bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e. 7 Capital Investment Bonds); (iib) In the case of an individual or a Hindu Undivided Family, interest on such Relief Bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e., 9 per cent or 8.5 per cent or 8 per cent or 7 per cent Relief Bonds); (iid) Interest on NRI bonds; (iiia) Interest on securities held by the issue department of the Central Bank of Ceylon constituted under the Ceylon Monetary Law Act, 1949; (iiib) Interest payable to any bank incorporated in a country outside India and authorised to perform central banking functions in that country on any deposits made by it, with the approval of the Reserve Bank of India [Get Quote] or with any scheduled bank; (iv) Certain interest payable by Government or a local authority on moneys borrowed by it, including hedging charges on currency fluctuation (from the AY 2000-2001), etc.; (v) Interest on Gold Deposit Bonds; (vi) Interest on certain deposits are: Bhopal Gas victims; (vii) Interest on bonds of local authorities as notified, (viii) Interest on 6.5 per cent Savings Bonds [Exempt] issued by the RBI, and(ix) Stipulated new tax free bonds to be notified from time to time.


12. Scholarship and awards, etc
Any kind of scholarship granted to meet the cost of education is exempt from tax under Section 10(16). Similarly, certain awards and rewards, etc. are completely exempt from tax under Section 10(17A), for example, Lakhotia Puraskar of Rs 100,000 awarded to the best Rajasthani author, every year under Notification No. 199/28/95-IT (A-I) dated 22-4-1996. Any daily allowance received by a Member of Parliament or by an MLA or any member of any Committee of Parliament or State legislature is also exempt from tax under Section 10(17).


13. Gallantry awards, etc. -- Section 10(18)
The Finance Act, 1999 has, with effect from AY 2000-2001, provided for complete exemption for the pension and family pension of Gallantry Award Winners like Paramvir Chakra, Mahavir Chakra, and Vir Chakra and also other Gallantry Award winners notified by the Central Government.


14. Dividends on shares and units -- Section 10(34) & (35)
With effect from the Assessment Year 2004-05, the dividend income and income of units of mutual funds received by the assessee completely exempt from income tax.


15. Long-term capital gains of transfer of securities -- Section 10(38)
With effect from FY 2004-05, any income arising to a taxpayer on account of sale of long-term capital asset being securities is completely outside the purview of tax liability especially when the transaction has been subjected to Securities Transaction Tax (STT).
Thus, if the shares of any company listed in the stock exchange are sold after holding it for a minimum period of one year then there will be no liability to payment of capital gains. This provision would even apply for the old shares which are held by an assessee and are sold after the Finance (No.2) Act, 2004 came into force.


16. Amount received by way of gift, etc -- Section 10(39)
As per the Finance (No. 2) Act, 2004, gift, etc. received after 1-9-2004 by an individual or an HUF whether in cash or by way of credit, etc. is being subjected to tax if the same is not received from a stipulated relative. Section 10(39) provides that the amount received to the extent of Rs 50,000 will, however, be exempt from the purview of tax payment.
Similarly, amount received on the occasion of marriage from non-relatives, etc. would also be exempted. It may be noted that the gift from relatives, as specified in the section can be received without any upper limit.


17. Tax exemption regarding reverse mortgage scheme -- sections 2(47) and 47(x)
Any transfer of a capital asset in a transaction of reverse mortgage for senior citizens under a scheme made and notified by the Central Government would not be regarded as a transfer and therefore would not attract capital gains tax. The loan amount would also be exempt from tax. These amendments by the Finance Bill, 2008 apply from FY 2007-08 onwards.

[Excerpt from How to Save Income Tax through Tax Planning (AY 2009-10) by R N Lakhotia and Subhash Lakhotia, two of India's top taxation experts.