Written in : December 1999

This is to wish all my readers a very happy, prosperous and worry-free (specially tax-worry-free) new year. One hopes the 21st century will belong to India and we would see all round happiness and prosperity in the country. In the last few articles we have seen the various exemptions and deductions that are available to you as a taxpayer. There is one another break available and that is tax rebate. Let us see how this works.

An exemption, as we saw, is one which considers income to be not-income and removes it altogether from income calculation, often regardless of the quantum of income. A deduction is one which is reduced from income during its calculation.

A tax rebate, on the other hand, is one which reduces the amount of tax payable by you. Tax rebate, famously, is available on your life insurance payments, investments into PPF etc. Let us see the various facets of the law which allow you to claim this most attractive benefit.

Tax rebate is available only to individual and HUFs. Thus, it is not available to companies, firms etc.

The rebate is available on the aggregate of various payments or investments you make during the year. That is, you have to total up all payments that qualify for the rebate and then apply the law to the total amount.

The investments to qualify should have been made out of your taxable income.This is an important condition to remember. If you make investments out of loans borrowed, or out of exempt income like agricultural income, you would not get the deduction.

There are serious implications. For instance, if you have redeemed an NSC, or have withdrawn an amount out of your PPF account, the amount is not your taxable income. Any investment you make out of this may not then be eligible to the rebate.

In such situations, you should first make the investment out of your taxable incomes, and then withdraw/redeem as it may be. Also, payments made by non-residents out of their foreign funds which have not suffered Indian tax may not qualify for the rebate. However, if the payment is made out of past years' taxable income, it should do.

It is important that the payment is made during the year. The rebate is eligible on actual payment basis.

This also means that if you make payment for two years' insurance premia, for instance, you should get the rebate for both payments in the year of payment. You would, of course, not get the rebate for the year in which you have not made a payment.

Several of the items are applicable if the beneficiary is not you but your child or spouse or, if you are an HUF, a member of the HUF. For instance, insurance premia paid by you for an insurance policy on the life of your child will allow you the rebate. A few points need to be understood in this context. A child means a son or daughter. It does not have to be a minor child - payments for benefit even of a major child would be eligible. It also is not important that the child has his or her own taxable income. Even if he or she so has it, you would be eligible to the deduction if you make the payment. If the minors' income gets clubbed with yours, the deduction is available only once, even if you and the minors make separate payments. The same rule applies to payments made for benefit of the spouse. A member of an HUF can be a male or a female, a minor or a major. He or she should, however, be a part of the family.

There are various amounts which qualify for the rebate. These are discussed individually below.

Any amounts paid by you to effect or keep in force an insurance policy is eligible for rebate. The insurance policy can be a life policy or endowment policy. What also qualify for the rebate are:

• payments made by government employees to Central Government Employees' Insurance Scheme
• children's deferred endowment assurance policy

If you are an individual, you get a deduction if the policy is taken on your own life, or the life or your child, or spouse. If you are an HUF, you get the deduction if the policy is taken out on the life of any member of the HUF.

Today, the most common policies for this are those issued by the LIC. However, the cost of insurance in case of LIC is high. We should soon, hopefully, have insurance policies given out by private companies and undoubtedly they should be more attractive. The competition would also, hopefully, make LIC become more customer-oriented and make its policies more attractive. That should be something we should wait for in the new year. We shall, in the next article, wind up our discussion on life insurance policies.