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How to prepare for a new tax regime

Last updated on: July 13, 2011 13:15 IST

How to prepare for a new tax regime

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Neha Pandey in Mumbai

Sanjay Kapoor, a 25-year-old resident of Bengaluru, diligently invests in equity-linked savings schemes every year.

Besides getting tax benefits under Section 80C of the Income Tax Act, it gives him the equity exposure he needs at his age.

However, he is not quite sure whether his next set of ELSS investments would make much sense.

"With the scheme going out of 80C, why should I lock my money in an ELSS scheme? Returns from equity and equity-diversified schemes are anyway tax-free after a year," he says.

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There are many such questions investors are asking their financial advisors.

Abhinav Angirish, founder, InvestOnline.in, says clients are, especially, curious about ELSS.

The reason: Though the final draft of the Direct Taxes Code could be slightly different, if one is investing through a systematic investment plan, the money would get locked for three years.

No wonder, then, Kapoor's financial planner has already started work.

He has advised Kapoor to stick to term plans as they are cheap and most-suited to those without responsibilities.

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According to DTC's last draft, benefits for life policies may get reduced to Rs 50,000 from Rs 100,000 -- including children's tuition fee and medical insurance (self and parents').

Since benefits for ELSS may not continue, Kapoor has been asked to stop it from March 2012.

With the exempt-exempt-tax regime likely to kick in, there are select avenues which will get attention, though pension plans will be exempt-exempt-exempt.

"This will benefit Kapoor as he hasn't started planning for retirement. New Pension Scheme is another such avenue," suggests his financial planner.

Kapoor has an adequate health cover. However, to ensure full benefit of the Rs 50,000-limit, he can buy extra cover, given the high medical expenses.

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"He can continue with equity as long as he has the required expertise. Also, benefits of long-term capital gains tax, which is zero, will continue," adds his planner.

Angirish points out that portfolios need not undergo a change in allocation, but will need to accommodate extra saving as the basic exemption limit will be raised to Rs 200,000 from Rs 180,000 this financial year.

The earlier the better, says Anil Rego, a certified financial planner. He has already started making changes to his clients' portfolios.

His 32-year old client, Minat Balwa, earns Rs 18 lakh (Rs 1.8 million) a year and has been planning for his child and retirement.

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The project manager has two properties (self-occupied and let-out) and a home loan, which he prepays.

Balwa is majorly invested in debt funds and has a medical cover from his employer. He also pays wealth tax.

Rego suggests a few changes: Insurance can be claimed up to Rs 50,000.

Balwa should look at a life cover, which he doesn't have.

The maturity value is also likely to be taxed -- it is to be determined if the entire corpus will be taxed or only the premium.

He can also increase the health cover to make full use of the Rs 50,000 limit.

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"Investments in debt funds will be impacted by the new calculations for indexation of capital gains," Rego adds.

Indexation takes inflation into account during the holding period and allows investors to adjust the buying price.

To avail indexation benefits, DTC prescribes the investments will have to be held for over a year from the end of the financial year it was bought.

This will impact investors of fixed maturity plans and debt funds.

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"Hence, we advise debt-oriented balanced funds and arbitrage funds (treated as equity) and direct bonds, to risk-averse investors," he adds.

Tax benefit on principal repayment will be gone and, hence, preclosure could bring down the liability and not necessarily provide the desired tax benefit.

Tax on notional rent will go out, too, so a vacant property need not be deemed rented.

Advanced tax from a tenant will be taxed in the year it relates to and not when received. The wealth tax limit may be raised to Rs 50 lakh (Rs 5 million) from Rs 30 lakh (Rs 3 million) and the rate may be cut to 0.25 per cent from one per cent.



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