Rediff India Abroad
 Rediff India Abroad Home  |  All the sections

Search:



The Web

India Abroad




Newsletters
Sign up today!

Article Tools
Email this article
Top emailed links
Print this article
Contact the editors
Discuss this article

Home > Business > Special


Death of tax saving investments?

Laxmikant Gupta | May 29, 2006

The recent notification by the finance ministry asking response on removal of various exemptions and deductions under the Income-Tax Act indicates a definite intention to introduce the EET (Exempt-Exempt-Taxed) regime.

Though, it is difficult to understand the implications of EET and work out tax and investment planning without reading amendments to incorporate EET, we can have some broad outline to understand its probable implications on the investor and tax payer community.

Currently various investment options under sections 80C, 80D, 80 CCC, 54EA/EB enjoy deduction from taxable income. Section 10 provides exemption on interest receipt and redemption values for most of them.

Thus, currently regulatory framework is EEE. With the introduction of EET, tax exemption already enjoyed while investing will be taxed at the time of redemption of the instrument.

Broadly, tax and investment planning will be determined by what component 'T' in EET will be. It may be:

The amount of original investment added to total income in the year of repayment.

Total amount of repayment, and not the original amount of investment, again added in the year of repayment (of course, chances of this are little less). This may adversely affect the investments in ELSS/ULIP/deep discount bonds, as the amount at the end may be different from what was invested.

Amount of tax benefit enjoyed initially added to tax liability at the end.

It may also happen that tax component in EET may get relief under section 80 C over and above Rs 100,000 limit or may get further relief in some other new investment avenue.

In the absence of full clarity, still, following broad conclusions can be drawn:

Time value of tax saved would be important rather than amount of tax saved. In the current scenario, shorter lock-in period for section 80 C investment avenue provides a better post-tax return as the same tax rebate is divided into less number of years. This makes three-year lock-in of infrastructure bonds and ELSS (equity linked savings schemes) much more attractive.

However, in EET regime, instead of shorter lock-in-period, deferment of tax payment will make more sense.

EET - harmful in case of rising income

It may happen that the assessee enjoys tax rebate under section 80C when he is in 10 per cent or 20 per cent tax bracket. Later on, in the year or repayment, when the same amount of original investment is added to total income, the assessee may be in 30 per cent or 33.6 per cent tax bracket.

Motive to save under section 80 C will be completely removed for a small growing business or a salaried person foreseeing a rise in their income level.

To avoid this situation, it is better to have regulation, which says, "Tax saving earlier under section 80C is added to tax liability".

Similarly, EET may not impact a senior person, as by the time maturity and repayment of his investments come, he would have already retired and might be in the tax-free bracket.

Insurance may be the best avenue. Premiums on any insurance will continue to benefit as per section 80C. Most insurance has redemption value in the form of claim amount, policy amount, bonus/loyalty payments/terminal benefits, etc. Taxability of insurance schemes at the end of policy may be remote due to the very nature of the instrument.

ULIP - Death of ELSS?

Currently, ULIP packages the scheme in such a way that they can position their schemes as if providing capital guarantee. ELSS cannot provide positioning. With introduction of EET, ULIP (unit linked insurance plans) may become more attractive as terminal repayment of ULIP schemes may not be taxed at the end.

In respect of ELSS, shorter term of three years will not be able to garner adequate savings in terms of time value of money. However, ELSS is better placed than ULIP in respect of service tax.

A service tax is levied on ULIP in respect of "insurance component" which makes ULIP schemes unattractive against ELSS. In ULIP, only the left out portion after paying for risk premium and service tax, is invested. In ELSS, the full amount (excluding entry load if any) is invested. For better tax saving through ELSS, investors can continue to remain invested for longer term.

Deep discount/higher coupon bonds/dividend/bonus option in ELSS would be attractive. As interest component will continue to be exempt under section 10, the instruments having repayment of interest at the end will be much more attractive.

Hence, infrastructure bonds may be in the nature of deep discount bonds or repayments at a discount to face value. Similarly, higher dividend payout on ELSS will continue to remain attractive.

Depending upon the exact nature of EET regime, ELSS schemes may see series of bonus announcements to make it more tax friendly. Growth option of ELSS may benefit only if taxability at the time of repayment may be reduced by way of re-investment in specified security beyond limit under section 80 C.

Issues with EPF/PPF (prospective/retrospective) and NSC (national savings certificates) accrued interest:

EPF and PPF act like recurring banking accounts. Would our existing EPF/PPF contribution attract taxability under EET regime whenever it is introduced? If EET is on prospective basis, then what will happen to voluntary contribution to PPF by various assesses who do not get section 80 C relief ?

Many assessees in India contribute to PPF without getting section 80 C benefit just because of attractive interest rates or shorter balance maturity. Hopefully EET will escape these investments.

NSC accrued interest is currently qualified for deduction under section 80C. Hence, EET regime may tax the whole of repayment including interest component. This will significantly reduce the attractiveness of NSC.

We need to be aware of coming up EET regime and need to reformulate a few of our criteria for judging the best investment avenues at the current stage itself.

The overall benefits will reduce, but the impact can be reduced by prudent investments. Issuers of ELSS, infrastructure bonds and ULIP should also reformulate their products such that the EET regime does not impact the investors significantly.

The author works with a leading mutual fund and views expressed here are personal.



Powered by

More Specials

Share your comments


 What do you think about the story?




Read what others have to say:


Number of User Comments: 7




Sub: Death of tax saving instruments

Would the author to clarify one very important aspect of this likely EET regime.Can the GOI adopt a EET method for past investments done? i.e ...


Posted by Sashi Rao





Sub: EET

i dont think UPA govt will implement this as this will affect the common people lot.


Posted by Shashi





Sub: Death of tax saving investments

If govt discontinues all the tax saving plans then it must reduce the income tax rates,remove the tax slabs and keep this pattern 1) No ...


Posted by Pankaj





Sub: why should we pay the Tax?

I have a straight question that why should we pay tax? When the government is already charging all kind of taxes in every domain at ...


Posted by shashidhar





Sub: Made mistake voting to congress idiots....

Hi All, I feel we made mistake voting to congress stupids/idiots. And we should realise that we should never vote congress again...Whites Gandhi family is ...


Posted by Madhu




Disclaimer


Advertisement






Copyright 2006 Rediff.com India Limited. All Rights Reserved.