The Hindu : National : New tax treatment of savings

Online edition of India's National Newspaper
Tuesday, Mar 01, 2005

National

National

New tax treatment of savings

By C.R.L. Narasimhan

CHENNAI, FEB. 28. One of the most noticeable features of the budget has been the rationalisation of the tax treatment of savings.

Currently, under various sections of the Income Tax Act, individual tax payers get varying benefits linked to the following aspects of the savings schemes: the contributions made to the savings scheme, the tax levied on accumulations and on maturity. Some savings plans are exempted from tax at all stages, while others are subject to tax on either the accumulations or payments on maturity.

The latest budget proposes far reaching changes by doing away with the distortions caused by the differential tax treatments of the several savings schemes. It signals a move towards the best international practice of taxing financial savings under what is called the EET (exempt-exempt-tax) method.

Under this, contributions to specified savings will be exempt from tax (E), accumulation will also be exempt (E) but withdrawals, including benefits, will be taxed (T).

This philosophy will govern future tax treatment of all tax savings schemes. As of now, only the tax treatment under Section 80CCC of the IT Act (allowing a deduction of up to Rs. 10,000 to an individual who buys a pension-linked annuity from Life Insurance Corporation or other insurers) is in conformity with the EET rule. Both the initial contribution and the accumulation are not taxed but the maturity proceeds or benefits are subject to tax.

The new pension scheme announced for Central Government employees has similar tax treatment under Section 80 CCD.

For the saving community, there are major implications from the withdrawal of Section 80L and Section 88 benefits.

Section 80L allows a deduction from the gross total income of an individual of any income by way of interest from Government securities, National Savings Certificate and other savings schemes, interest on bank deposits subject to a limit of Rs. 12,000 (an additional Rs. 3,000 is allowed for interest on Government securities).

Section 88 provides for a deduction from the tax payable on total income of an individual (or HUF) at a fixed percentage of contributions made to specified schemes that include life insurance premia, provident fund contributions, NSC, infrastructure bonds and so on.

There are various sub-limits and tax rebates depending upon the taxpayer's total taxable income. The tax rebate is currently not available to those having a taxable annual income of more than Rs. 5 lakhs.

In a major rationalisation move, the budget does away with both Section 88 and Section 80 L and introduces a new Section 80C.

Under the new Section, an individual will be allowed a deduction of an amount not exceeding Rs. 1 lakh by investing it in specified schemes.

For the present, these schemes are the same as those that qualify for a rebate under Section 88, including repayment of principal amount of housing loans.

There shall be no sectoral caps and an individual is free to invest the entire amount of one lakh in any scheme or schemes of his choice.

Incidentally, assessees having an income of over Rs. 5 lakhs will also qualify for tax rebate under the new section.

A new Section 80 CCE has been added to provide that the aggregate amount of deductions under 80C, 80 CCC and 80 CCD shall not exceed Rs. 1 lakh.

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