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INDIA
BUSINESS WORLD -
DECEMBER 2005
THE MONTH THAT WAS
EXEMPT TAX ONLY ON LONG-TERM SAVINGS
The government may move only the long-term retirement savings instruments into the proposed exempt exempt-taxed (EET) net. Small and medium terms instruments such as national savings certificates and infrastructure bonds are expected to kept out of the EET umbrella.
Thus, savings instruments such as pensions funds, provident funds and superannuation funds, life insurance policies and long-term time deposits are expected to attract tax on withdrawal when the EET regime kicks in.
A specific cap for investment in retirement planning schemes — outside the existing exemption of Rs 1 lakh allowed under Section 80C of the Income Tax Act, 1961 — is also being considered. Alternatively, a cap within the overall ceiling for deduction of Rs 1 lakh from taxable income may be considered.
In the third scenario, the government may refrain from setting a ceiling for investment in retirement schemes. But this option would go against the spirit of ensuring equity across classes of taxpayers as those with higher disposable income would be able to investment more and claim higher deduction.
Further, the finance ministry is considering various options to keep the taxation impact on withdrawals at the minimum given that the retired and retiring class is a very sensitive constituency. Ministry sources also said that the tax planning and legislation division was also looking at ways to protect existing investments in schemes that are set to come under the EET regime. The grand fathering of schemes whereby investments made up to a cut-off date would be exempt from tax at withdrawal is also being considered, these sources said. However, actual operation of the EET regime and grand fathering of investment is subject administration feasibility.
The government may also allow systematic withdrawals or withdrawal in installments from the schemes covered by EET to ensure lower tax impact for the investor.
At present, investments in a variety of tax saving schemes as well as certain expenditure made by tax assesses are allowed as deduction from their taxable income subject to a ceiling of Rs 1 lakh under section 80C of the I-T Act.
These include investment in equity linked savings schemes of mutual funds, tuition fees for school and university education, installments paid for acquiring a house, repayment of housing loan, stamp duty and registration fee paid for transfer of a house property and subscription to bonds of public financial institution. Besides these, investment in central government savings certificates, contribution to recognised provident funds, unit linked insurance plan, life insurance plans and pension schemes qualify for deduction under Section 80C.
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