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Changes Proposed in Direct Tax Code related to Section 80 C savings

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Changes Proposed in Direct Tax Code related to Section 80 C savings

Post by anverps on Wed Feb 29, 2012 2:01 am

Changes Proposed in Direct Tax Code related to Section 80 C savings

The proposed Direct Taxes Code has made significant changes to investments that you make to avail of tax deduction, under what is currently called Section 80C provision. As of now, a large basket of options, including the Employee`s Provident Fund, Public Provident Fund, new pension fund, five-year tax-saving deposits, National Savings Certificate, tax-saving mutual funds and unit-linked insurance plans, besides life insurance premium and tuition fees paid for children, are all eligible for tax deduction up to Rs 1 lakh a year.

The proposed tax code, though, has significantly cut down on the basket of investments. It proposes to allow a total deduction of Rs 1 lakh for investments made in provident fund, public provident funds and new pension scheme. Simply put, only long-term retirement savings fall under this clause.

The code also allows another Rs 50,000 a year towards premium paid on pure life insurance and health insurance plans, besides children`s tuition fees.

In effect, there is no mention of savings options such as National Savings Certificate, post-office senior citizens` scheme, five-year bank deposit, besides the tax-saving mutual fund and unit-linked insurance options.

Most of the investment decisions by individuals in India are driven by the tax benefits that such instruments fetch. While the traditional Provident Fund remains a good choice, other options such as bank deposits or tax-saving mutual funds act as good diversifiers and many a time also fetch better returns.

The change also leaves very few options for the non-salaried class and the senior citizens. The National Savings Certificate, with a yield of at least 12% (varies across tax brackets), is an excellent investment cum tax-saving option for the self-employed, who have no option of provident fund.

The EPF is also not an option for the retired. PPF is, but it locks in much of the principal and interest amount and, therefore, is not a viable option for a retired individual looking for regular income.

A five-year bank deposit or a post-office senior citizens` scheme, on the other hand, provides tax benefit as well as regular income.

In other words, while the proposal encourages salaried people to save for retirement, it discriminates between various classes of tax payers when it comes to the number of options they have.

Given that the proposal still seals the deduction for investment option at Rs 1 lakh, the Government can consider reinstating the investment options provided this far. Schemes such as NSC and Post Office Senior Citizens has provided Rs 90-110 billionof inflows to the government every year. Inflows in to the latter, in fact, jumped since it was included as a tax-saving instrument a couple of years ago.
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Re: Changes Proposed in Direct Tax Code related to Section 80 C savings

Post by Admin on Wed Feb 29, 2012 2:30 am

Thanks for the information

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