The Hindu Business Line : Annuity falling between two stools

Contributions to pension plan under Section 80C are distinctly advantageous vis-à-vis the ones under Section 80CCC. And ironically, that is the problem.

In terms of Section 80CCC(1), an individual is eligible for a deduction from his gross total income up to a maximum of Rs 1 lakh — till assessment year 2006-2007, the maximum was Rs 10,000 — on account of contribution(s) to a plan of annuity of the state-owned Life Insurance Corporation of India or any other approved insurer.

The hike in the maximum permissible deduction under this section is consequent upon the introduction of Section 80CCE, which restricts the total deduction under various schemes enshrined in Sections 80C, 80CCC and 80CCD to Rs 1 lakh with the choice of the schemes being left entirely to the discretion of the assessee.

In fact, this hike should have been done last year itself when Section 80C was revived as a sequel to the abolition of the scheme of tax rebate under Section 88 and the various sub-limits in the erstwhile Section 88 were rightly done away with.

What the Sections say

Section 80CCC(2), which is the subject of this article, is reproduced in extenso for easy reference:

"Where any amount standing to the credit of the assessee in a fund, referred to in sub-section (1) in respect of which a deduction has been allowed under sub-section (1) together with interest or bonus accrued or credited to the assessee's account, if any, is received by the assessee or his nominee — (a) on account of the surrender of the annuity plan whether in whole or in part, in any previous year, or (b) as pension received under the annuity plan. An amount equal to the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in that previous year in which such withdrawal is made or, as the case may be, the pension is received and shall accordingly be chargeable to tax as income of that previous year."

The next sub-section — that is, (3) — makes it clear that the amount which has been considered for deduction under this section will not make the grade for deduction under Section 80C and till the AY under Section 88 for rebate. This has been done by way of abundant caution presumably. The issue is what happens if a person had subscribed to a pension plan and claimed deduction under both Sections 80C and 80CCC.

Section 80C(2)(xii) makes this possible and facilitates such dual claim as it were. The only condition which is absent in Section 80CCC is such pension plan should be the one notified in the Official Gazette. Predictably though, a trifle unfairly, the Government has notified the Jeevan Dhara and Jeevan Akshay policies of the LIC alone to the exclusion of the scheme of private sector players.

The problem area

Be that as it may, the point is the contributions to annuity schemes made under Section 80C are not subject to taxation at the point of payback in the form of pension which is the case under Section 80CCC as seen earlier.

In short, contributions to pension plan under Section 80C is distinctly advantageous vis-à-vis the ones under Section 80CCC. And, ironically, that precisely is the problem. Those who start contributing to such plan on or after April 1, 2006, will not face any problem because from this point on the limit under both the Sections — 80C and 80CCC — is the same.

Invoking the legal maxim Generalia Specialibus Non Derogant, the Department would buttonhole the assessee under Section 80CCC and capture the withdrawals later on as his income. This maxim says when there is a special regime as well as a general regime operating in the same field, the former would prevail.

However, the assessees who fall between the two stools, as it were, by claiming deduction under both the sections are likely to be at loggerheads with the Department, which would like to lay its hands on the pension at the earliest point of time. Thus, it would continue to tax the pension or annuity till such time the accumulations under the scheme by way of contributions that have been granted tax benefit under Section 80CCC(1) together with interest or bonus thereon is not exhausted. But a fairer regime would be to find out the accumulations referable to the two sections — 80C or its earlier avatar 88 and 80CCC — and work out their ratios accordingly.

For example, if the contributions made under Section 80CCC are Rs 2 lakh and those under Section 80C Rs 8 lakh — this is likely to be the typical scenario given the fact that till AY 2006-2007 only a niggardly amount of Rs 10,000 made the grade under Section 80CCC — the ratio would be 2:8.

In all fairness, when a pension of, say, Rs 10,000 per month is received, only Rs 2,000 should be brought under the tax net with the remaining Rs 8,000 being referable to contributions made under Section 80C or 88. While the two sections do not make this explicit, assessees dusting their old reference books can seek solace from the judgment of the Supreme Court in a different context. The Supreme Court, while examining the issue of taxability of amount distributed by the liquidator without differentiating between return of capital and dividend, observed as follows in CIT vs Girdhardas & Co (P) Ltd (1967) 63 ITR 300: "The fund in the hands of the liquidator is one: when a distribution is made by liquidator, distribution is deemed to take place in the same proportion in which capital and accumulated profits stood in accounts of the company immediately before winding up."

The Supreme Court was seized of a matter born of liquidation of a company and followed up its above observations with an exhortation to the tax authorities to find out the respective ratios and zero in only on the portion referable to accumulated profits, which alone could be treated as dividend. The assessees caught in the pincer of Sections 80C and 80CCC would be seized of a matter born of termination of contributions to a pension plan.

(The author is a Delhi-based chartered accountant.)