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.