An Economic Times article states that some of the 80C deductions, those that helped you make 1 lakh of your income off the taxman’s list, may now be removed as part of the next year’s budget.
…[Being reviewed] are a whole lot of tax breaks – bonus from life insurance policies; payments from a provident fund, other statutory funds, superannuation funds; medical insurance premia, interest on home loans; capital gains on property transfers invested in bonds, gratuity benefits, pension benefits and so on. Sops to software developers, incentives for backward area development are also in this hit list, though experts reckon that their phase out is next to impossible.
The government’s reasoning is simple: Make taxation more transparent and simple, but do not affect collection of tax. This year, a huge amount of taxes have been collected, which means more people are complying with the taxation laws. Going forward, the government might want to cut down on the (high) tax rates, and even bring down the highest rates from 30% down to a more affordable rate.
But doing so means losing revenue, and money is required by the government to build infrastructure. So a lower tax rate may mean that income tax will apply to a lot of things that are currently out of the tax bracket. Let us see what may face the axe, and reasoning.
Insurance premia: The reason this used to be exempt was to promote insurance. But today most of the insurance premiums paid are for investment. Again, the government wants to promote long term investment as well, so tax benefits were provided if money was locked in for three years. At this point, the government might decide to remove the investment from the tax benefit, and only provide this for the mortality charge premiums. There may be a push to move the investment to the EET regime (explained later).
ELSS Funds: To encourage long term equity investing and therefore build the capital markets, tax sops are given to ELSS fund investments under 80C. Given that there is no shortage of liquidity in either diversified or tax saving funds, or in the market, the government might remove the ELSS scheme from 80C or make it EET based.
Housing loan interest or principal: Interest may still be out of the taxation bracket (it’s separate from 80C) but the principal repayment is an 80C saving. That might have to go, meaning you save tax on the interest paid but not on the principal. This might ease the huge investments in the real estate industry, though I don’t believe tax-on-principal a big factor at the moment.
PPF and Pension plan investments: Chances are that these will stay, since they are retirement benefits and honestly the government has done nothing to keep you going after retirement, and has no plans to. That’s why it incentivises you to save for your own retirement, and I don’t believe that should be changed.
EET means Exempt-Exempt-Taxed. This means that your investment is exempt from tax at the point of buying in, exempt at accrual, but taxed at exit. In simple terms it’s like this. If you invest Rs. 10,000 in an 80C investment like ELSS or Insurance, it is taken of your taxable income in the year you invest (Exempt at Entry). Then, in the next three years, say it grows to 15,000. The 5,000 Rs. growth is not taxed. (Exempt at Accrual). Then, if you sell the fund at say Rs. 20,000, then what is taxed is the amount of tax you saved. (Taxed at Exit)
Let’s see how it goes. The EET regime was supposed to come in 2006, it’s not in. With 2007 being right in the middle of the Parliament tenure, there may be some changes without feeling that they will lose a lot of votes (which is what drives most policy anyhow). I do believe in the rationalisation of tax, and I hope that the finance ministry will show the courage to reduce tax rates. If in the process we have to lose out on some confusing tax saving schemes, so be it.
