Investing for tax benefits under the new Direct Taxes Code (DTC) will be different in several ways from what taxpayers are familiar with right now. This will require some reconfiguration in the nature of investments for the investor and they need to be ready to tackle the changes that will come about once the new DTC is implemented from financial year 2012-13.One area of interest for most taxpayers is the manner in which they can extract the maximum tax benefit.
Here is a look at the situation and also how it changes from the existing position.
Basic deduction: At present, there is a deduction of Rs 1 lakh that is available for an individual when they make investments under specified areas such as provident fund, public provident fund, national savings certificates, equity linked savings scheme and insurance premium, among others. This benefit is available under Section 80C of the Income Tax Act. This has been replaced by a new Section 68 under the DTC where there is a deduction of Rs 1 lakh from the gross total income of the sum that will be deposited in approved fund.
The important thing is to see what an approved fund is, as this will determine the areas where the benefit will be available. Approved fund includes a provident fund, superannuation fund, pension fund, gratuity fund or any other fund that has been approved by various authorities for this benefit.
There is no change in the monetary limit (Rs 1 lakh) for the deduction, but what is important to note is that the number of options that are available for the purpose of completing the required investments has come down drastically. There are a lot of areas that include post office options as well as things such as senior citizen savings scheme and even investments in equity linked savings scheme, which will no longer be present.
Infrastructure bonds: (Section 80CCF)
In the present financial year, there is an additional deduction that is available for infrastructure bonds which is an extra amount of Rs 20,000 above the Rs 1 lakh limit.
There is no mention of any benefit for investments in infrastructure bonds and, hence, investors should not expect it to remain as a tax saving option.
What this means is that there is a short time period for which this benefit will be available and the investors would do well to keep that in mind while making their in vestments. It also implies that the taxpayers should ensure that this benefit is taken while it is available.
Additional benefit:
The new DTC has a different system that has been set in motion for the purpose for claiming additional benefits. Unlike the present system where each individual section has a specific amount that has been allotted specifically for it, there are a few sections and type of expenses that are clubbed together and provides for an additional deduction.
Life Insurance (Section 70):
The amount that is paid for the life cover of a person would be an eligible deduction but with a difference. At present, all the policies that are issued by an insurance company are covered by the benefit. This makes the scope of the insurance premium payment very wide.
Under the DTC, only those policies where the premium paid is less than 5 per cent of the sum assured of the policy will get the benefit of deduction of the premium. What this effectively means is that only term policies will be covered for the purpose of the benefit. This will require taxpayers to seriously look at taking an insurance cover for the purpose of insurance and not just to save taxes or make investments.
Tuition fees (Section 72):
An amount that is paid for the purpose of tuition fees for two children will also be covered under the benefit.
The tuition fee has to be paid to a school, college, university or other educational institution within India and this has to be for full time education which includes play school or pre school. Right now, the benefit of deduction of the tuition fee is covered under Section 80C, but this has now been moved away to this second cluster.
Medical insurance (Section 71):
The medical insurance premium paid will also be eligible for the benefit under this particular limit. This is a distinction from the system that is prevalent where there is a separate section for this deduction and there is Rs 15,000 for individuals and Rs 20,000 if the person is a senior citizen. Now this separate limit will not be present but the individual will have to claim it within the overall limit. Different people will have flexibility to ensure that they are able to get a deduction for the amount that they have spent.
