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Deduction u/s 80C for ELSS investments

Kindly clarify the latest position with regard to tax exemption of investment up to Rs.1 lakh in ELSS schemes (Equity Linked Savings Scheme) allowed under the new Section 80C. There is a lot of confusion after the November 3 CBDT notification and clarification by the Finance Ministry on November 11. The plain issue is whether an investment in an existing open-ended ELSS scheme made after April 1 this year for Rs. 1 lakh is deductible? Can there be more than one instalment of investment in ELSS but totalling less than Rs. 1 lakh during the year? Is 80C an EET scheme, that is, is there deferred taxation at the time of withdrawal? If yes, the lock-in condition seems meaningless.

In view of the fact that Sec. 80C was inserted with effect from April 1, 2006, that is from assessment year 2006-07 of the Act, all savings listed under Sec. 80C are eligible for what were subscribed during the financial year 2005-06 for deduction up to a maximum of Rs. 1 lakh subject to the conditions thereunder. Sec. 80C was in force earlier up to assessment year 1991-92 when it was substituted by tax rebate under Sec. 88, so that such saving schemes, which were required to be notified by the statute, had to be notified again for tax rebate from assessment year 1991-92. On substitution of Sec. 88 by Sec. 80C again from assessment year 2005-06, they had to be renotified to the extent they continue to be in force under the new Sec. 80C, which is applicable from AY 2006-07.

If notifications such as the one issued on November 3, 2005 had been made effective from April 1, 2005, there would have been no scope for any doubt. But they were made effective from the date on which they were notified, that is, November 3, 2005. In the case of other savings instruments such as Public Provident Fund [80C(2)(v)], National Savings Certificates-Series VIII [80C(2)(ix)], Unit Linked Insurance Plan or specified policies covered by Sec. 80C(2(xi) and (xii) and Retirement Benefit Fund [80C(2)(xiv)], there was no difficulty as there was no change in such schemes.

But in the case of Equity Linked Savings Scheme, many new schemes have been floated between April 1 and November 3, 2005, so that a doubt had arisen as to whether contribution to such ELSS schemes would fail to qualify for deduction. A clarification has since been issued as reported by the Press Information Bureau that these contributions to Mutual Funds under the Schemes 1992 as amended in 1998 would also be eligible for benefit of Sec. 80C (2005) 149 Taxmann (Tax News) 1. In view of this clarification, even the earlier contributions under such schemes will be eligible, so that there need be no further apprehension on this matter.

All the contributions under the Equity Linked Savings Schemes made between April 1, 2005 and the date of notification, that is, November 3, 2005 will also qualify for deductions under Sec. 80C.

As for the query, whether one can make more than one instalment of investments in equity linked saving schemes totalling up to Rs. 1 lakh during the year, there can be any number of saving schemes which can be availed at different points of time during the year. If the aggregate investment in the same or under different permissible savings schemes exceeds Rs. 1 lakh, all that happens is that the deduction will be limited to Rs. 1 lakh.

Not an EET scheme

Reference to EET (Exempt, Exempt, Tax) scheme in the Budget Speech seems to continue to create confusion. EET was only a proposal which is not yet given effect, except to the limited extent already in force in Sec. 80CCC applicable for certain annuity plans of LIC and other insurers for which tax rebate was being allowed, but now substituted by deduction under Sec. 80CCC. Similarly, those contributions made by Central Government servants who joined service on January 1, 2004 or after, will be deductible, but subject to taxation of any amount payable under the pension scheme, which has been notified for this purpose. It has also been made clear that those availing benefit of Sec. 80CCC and 80CCD will be bound by the limit of Rs. 1 lakh which should include not only the items covered under Sec. 80C but also the amount covered by Sec. 80CCC and 80CCB.

There have been some reports that the new scheme of EET will be introduced even during the year but later reports indicate that it will be deferred till April 1, 2006. If and when it is introduced, the existing schemes may have to be either discontinued or continued without the benefit of deduction or exemption for contributions under Sec. 80C, while schemes which replace them will be governed by the EET scheme, so that the contribution and interest thereon will not be taxable, but the maturity amount including interest will be taxable on receipt basis. This was the position which prevailed under Sec. 80CCA for the National Saving Scheme, 1987 which continued up to March 31, 1992, so that no fresh contributions were received under the scheme after the date on which it was discontinued, but then interest is earned thereon with tax being payable on principal amount and interest only on withdrawal.

It is precisely such a scheme, which is sought to be reintroduced for purposes of saving schemes now covered under Sec. 80C. The present contributions are not affected by the EET scheme. It is true that if and when such a scheme is introduced, the need for a lock-in period may be meaningless, but then it may be considered necessary from the point of view of funds that mobilise such savings.

Clarifications needed

The fear that the existing savings will also be affected and may be brought to tax notwithstanding the undertaking implied in the scheme is not justified as it will be contrary to the promise and expectation, which law recognises as a right available to the assessee in law on the principle of promissory estoppel and the theory of legitimate expectation.

At any rate, there is no indication of any such unreasonable proposal. In view of the widespread fear of EET expressed in the query, the Government should clarify this position because even the present collections for such savings covered by Section 80C may be affected by such fears.

S. RAJARATNAM

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