A task force to review and rewrite the Income Tax Act 1961 is being set up but it is not that the proposals of the Direct Taxes Code Bill 2010 have been shelved entirely. On personal taxation, the DTC spoke of an enhanced Sec 80C deduction limit of ₹1.5 lakh, with ₹50,000 set aside for expenses such as life insurance premiums, children’s tuition fee and health insurance premiums. Besides, it proposed that life insurance premium paid is deductible only if it does not exceed 5 per cent of the capital sum assured, against the then existing 20 per cent cap. The idea was to provide a fillip for savings by separating investment from insurance and other expenses.

Following this, Budget 2012 moved the cap on eligible premium payment to 10 per cent of sum assured. This tilted the scales in favour of term insurance which provides pure life cover over fancy moneyback, endowment and market-linked policies. The Sec 80C deduction limit was raised to ₹1.5 lakh in 2014. While deductions for expenses weren’t carved out separately, an additional ₹50,000 deduction (2015) was given solely for investment in NPS. Budget 2016 virtually granted ‘Exempt-Exempt-Exempt’ tax status to NPS based on conditions pertaining to end-use of corpus. Budget 2017 announced a 5 per cent tax rate for the ₹2.5-5 lakh income slab, lower than DTC’s proposal.

What probably remains for the task force are two crucial decisions: whether short-term savings products such as ELSS, 5-year tax saving deposits and NSC qualify for 80C deduction, and a review of capital gains tax on equity. Clearly incentivising only long-term investments such as PPF and NPS, the DTC had removed 80C deduction for short-term products. DTC also brought in tax on long- and short-term capital gains for equities, but provided 100 per cent and 50 per cent deduction, respectively. Clarity on these two fronts front will help investors plan their savings better.

Senior Assistant Editor

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