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Direct Taxes Code? Nah! That will take a while, we all thought. But tweaks in the Budget on the personal taxes front indicate that the DTC is slowly, but surely making its way in.
With the tax savings season in full swing, make note of these changes. They could be a big influence on your investment strategies.
Lower deduction for premium
One of the first tax-saving investments that any of us take up is usually a life insurance policy.
It fetches us a deduction under Section 80 C for the premium paid. Currently this deduction is allowed as long as the premium paid is not in excess of 20 per cent of the policy value (sum assured).
The Budget has reduced this limit. To claim a deduction for any insurance premium paid from April 1, 2012 onwards, it should not exceed 10 per cent of the sum assured.
Although higher than the cap of 5 per cent mentioned in the DTC Bill, the lowering of this limit is significant. This change is important because through this, the Government seems to be encouraging the idea of taking your insurance through pure term policies which feature a low premium.
Even if it is available in other types of policies, the term of the policy typically needs to be longer to get the deduction benefit. This increases the uncertainty for other popular insurance products such as money back, endowment plans and ULIPs. So if you are taking up a new policy this year, DTC-proof your investment.
Equity savings scheme
The introduction of the Rajiv Gandhi Equity Savings scheme also seems to be a step towards alignment with the DTC proposals.
A study of Sec 69 of the DTC (equivalent of Sec 80C) will show that investments in Equity Linked Savings Schemes (ELSS) of mutual funds, which are currently eligible for deduction under Sec 80C are not mentioned in the DTC.
This new scheme (which allows a 50 per cent deduction on investments) with a similar lock-in feature of three years could well be a substitute for that.
With benefits for ELSS, NSC and five-year fixed deposits being taken away under the DTC, the Rajiv Gandhi Equity scheme and public provident fund should be the preferred options under your investments if you are keen on tax benefits.
Higher Limit
While more details on this new scheme are awaited, it has been pointed out by many that the Rs 50,000 cap proposed in this scheme would be over and above the current investment limit of Rs1 lakh.
If that is indeed the case, then this would also be a step towards enhancing the investment limit to Rs 1.5 lakh as mentioned in the DTC.
The DTC however had clubbed life and medical insurance premium and tuition fees of children for the additional Rs 50,000 leaving Rs 1 lakh for savings. Also under a new Section 80TTA, interest on savings account with a bank or post-office will be exempt up to Rs 10,000.
Other Changes
Other changes worth noting on the personal taxation front are:
* Section 80CCF under which deduction was allowed for investment in infrastructure bonds in 2010-11 and 2011-12 has not been extended for 2012-13;
* An amount up to Rs 5,000 can be claimed under the overall Sec 80D limit (medical insurance premium) for preventive health check-ups
* Donations are made in cash will no longer enjoy exemption beyond Rs 10,000.
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