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Suresh Krishnamurthy

A NEW financial year has begun and it is now time for investors to adjust to changes in taxation (unless there is some roll back). For tax-savers, the proposed changes in Section 88 of the Income-Tax Act have now become important.

For investors with an annual taxable income of more than Rs 1,50,000, investments in tax-saving instruments will fetch a rebate of only 10 per cent. Only investors with an annual income of less than Rs 1,50,000 will be eligible for a rebate of 20 per cent. What are the options?

A legal way of ensuring that your income is less than Rs 1,50,000 would be to take a housing loan.

However, not many people are likely to be able to purchase or construct a house; investors, therefore, have to look for other options to reduce their tax liabilities.

More than what you should do, it is easier to identify what you should not:

Investors, irrespective of what their annual income is, should avoid tax-saving instruments that require annual outlays, such as insurance policies and unit-linked insurance plans. They should, instead, prefer investments requiring one-time subscription.

Why this approach: Section 88 may altogether be scrapped in a few years — going by the recommendation of the advanced group on tax policy and tax administration.

This group also wanted to do away with the deduction for housing loan interest, standard deduction and deductions under Section 80-L. In addition, this group recommended increasing the 10 per cent tax slab from Rs 60,000 to Rs 1,00,000, and 20 per cent slab from Rs 1,50,000 to Rs 2,00,000.

This indicates that the policy-makers are looking at ways to enhance tax revenues. The Finance Minister, Mr Yashwant Sinha, however, chose to heed only partially the committee's exhortations this year. In an attempt to soften the blow and weaken the opposition, Mr Sinha opted for pruning the benefits under Section 88 for persons with an income of more than Rs1,50,000, instead of scrapping it altogether.

Lobbies who would want the benefits resurrected would be seen as giving voice to the demands of the high income group and, therefore, the opposition to the pruning of tax rebates is likely to be muted.

However, in the following years, the benefits under Section 88 may be scrapped when the tax slabs are widened.

Woes of annual options: Such a move will ensure that no investment is eligible for tax exemption. However, investors would be forced to invest in instruments requiring annual commitments in accordance with the terms of offer, if they take up such options now. The returns on such instrument, though, will decrease substantially.

Moreover, such compulsory investments can create cash flow problems later since the incidence of tax payments would also have increased then.

In short, commitments that seek tax rebates can land investors in trouble when Section 88 is scrapped.

The compulsory nature of these schemes, imposition of a lock-in-period as high as15 years reducing the flexibility considerably, and so on, can make such investments unattractive when tax rebates are withdrawn.

Investors who have already entered into annual commitments can only hope to carry on with the commitments with lesser or no tax benefits.

Different objective needed: This is not to suggest that investments in insurance policies and unit-linked insurance plans should not be made. What is important is that these investments are not made to secure tax savings.

Investors looking for the discipline an annual commitment would bring, can choose pension policies. The tax exemption for pension policies may stay in the tax books longer. In addition, they also offer higher tax savings in the year of investment. The tax incidence, post-retirement, when annuities are received can also be reduced with tax planning.

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