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DTC Bill: Time to revisit the investment plan
September, 10th 2010

The much hyped Direct Tax Code Bill (DTC), which was set to bring substantial relief, has disappointed individual tax payers.

The DTC, while moderately dropping the slab rates has also reduced the annual deduction limit for certain tax saving investments to Rs 150,000 from the initial proposed limit of Rs 300,000, as was proposed in the original draft.

The DTC has also limited the type of eligible investments and eliminated many of the present saving schemes forcing tax payers to revisit their investment plan for future investments to be made on or after April 1, 2012, when the DTC is proposed to come into force.

Let's take a look at the key changes proposed by DTC relating to tax saving investments:

Cap on investments for tax savings

The present law provides for a deduction of Rs 150,000 including specified investments under Section 80C of I-T Act up to Rs 100,000, infrastructure bonds up to Rs 20,000 and health insurance upto Rs 30,000 (including insurance for parents).

This limit has been retained at Rs 150,000 comprising investment in approved retirement funds upto Rs 100,000, life and health insurance up to Rs 50,000 (including, tuition fees of children).

Eligible investments

The eligible deduction limit of Rs 100,000 is limited only to contributions of self, spouse and any child to approved provident fund, superannuation fund, gratuity fund and new pension fund.

An additional deduction of Rs 50,000 is allowed in case of payment to life insurance for self, spouse, children, where the annual premium does not exceed 5% (presently 20%) of the capital sum assured; health insurance premium for self, spouse and dependent child, parents, where the scheme is approved by Insurance Regulatory Authority of India and also contribution to Central Government Health Scheme.

It may be noted that the additional limit of Rs 50,000 is including the tution fees paid for full time education of any two children.

Non-eligible investments

As compared to the present law, many of the present eligible investments did not find place in the DTC. The principal repayment of housing loan, stamp duty and registration fees on purchase of house property would not be eligible from April 1, 2012.

Hence any planning on re-payment and purchase of house property has to be done before April 1, 2012 to be eligible for tax deduction upto Rs 100,000. However the deduction on interest payment on housing loan upto Rs 150,000 is proposed to be continued for property not given on rent.

Existing Unit Linked Insurance Plans, pension funds and notified mutual funds are also presently not forming part of the deduction list, causing unrest in the minds of inviduals and financial institutions.

Long term infrastructures bonds, which were introduced in Finance Act, 2010, also do not find place in the DTC. Among other investments, even the savings certificates, term deposits with scheduled banks, time deposits with Post offices, notified bonds issued by NABARD have not made it to the DTC.

Investments in stocks

For those interested in listed investments in equity shares or equity oriented mutual funds for a short term (< 12 months), the DTC has been favorable to allow a deduction of 50% of the gains, which effectively translates into a tax rate ranging from 5%, 10% and 15% (against the present rate of 15%); thereby attracting the attention of individuals in middle (< 10 lakhs) and lower (< 5 lakhs) income levels to invest in the stock markets.

While it can be inferred that the importance is given to retirement and long term investments/insurance schemes, while also giving boost to capital markets, one needs to wait until the bill is approved to see if any of the other investments find place in the DTC for favorable treatment when it actually comes into force.

It is desirable that investments in infrastructure bonds etc is introduced in the DTC as this will go a long way in satisfying the long term developmental capital requirements. Furthermore, considering high inflation, and not high returns on these investments, it is only in the fitness of things for the tax deduction to come in handy to assure a reasonable return on investments.

Be watchful of the changes and invest sensibly!!!

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