You must pay attention to these tax saving details if you are in the process of finalizing investments just before the March 31, 2013 deadline.
Many salaried tax-payers spend a lot of time calculating the likely tax savings and returns before finalizing their investments to claim tax breaks. Most of them, however, devote very little time to read the fine print, especially the crucial one on under what circumstances the tax benefits can be rolled back or revoked. For example, many individuals fail to note that every investment under Section 80C of the Income Tax Act comes with a lock-in period. If they try to discontinue or withdraw money, they may have to forgo the tax break claimed on it. For example, many individuals don't know that they can't just get rid of the insurance policy they bought in a hurry before two years. There are many more such conditions.
You must pay attention to these details if you are in the process of finalizing investments just before the March 31, 2013 deadline.
TERMINATION OF LIFE INSURANCE POLICY
Many individuals end up buying a life insurance policy to save taxes under Section 80C, thanks to the relentless promotion by banks and insurance agents. If you happen to be one of them, you need to read the tax rules carefully. For example, if you realise next year that the product does not suit your needs and decide to surrender the policy, you will have to let go of the tax benefits earned this year. As per tax laws, if the policy is terminated before premiums for two years have been paid, the tax relief granted earlier will be revoked.
"Tax breaks will also be withdrawn if an individual terminates a Ulip (unitlinked insurance policy) before contributions in respect of such participation have been paid for five years," informs Suresh Surana, founder, RSM Astute Consulting Group, a tax consultancy firm.
A policy can be terminated either by surrendering it or simply not paying the premiums.
REPAYMENT OF HOME LOAN PRINCIPAL
Another popular tax-saving avenue — repayment of housing loan principal is allowed as deduction under Section 80C. However, if you sell this house within five years, you may have to forgo your tax benefits. "The entire amount of deduction claimed under Section 80C in prior years on the amount of the principal repayment (and on payment of registration fees and stamp duty) will be added to the taxable income in the year of sale of the property," explains Vaibhav Sankla, director, H&R Block India. Put simply, if the house is sold within five years from the end of the financial year in which you took possession of the property, then the deductions claimed in the previous year will be added to the taxable income of the year in which you sell the house.
"Do note that this rollback is applicable only to deduction under Section 80C. Deduction claimed under Section 24 (b) on interest payable on a such loan will not be withdrawn," informs Sankla.
ROLL BACK OF TAX INCENTIVE UNDER RGESS
This year, you are likely to get a lot of promotional calls for the newly-introduced Rajiv Gandhi Equity Savings Scheme, too. New retail investors who earn less than Rs 10 lakh can invest up to Rs 50,000 in this scheme and claim a 50% deduction.
However, the scheme comes with a lock-in period of three years, including an initial blanket lock-in period of one year. Now, you are not allowed to sell or pledge any eligible security during the fixed lock-in period. "If the new retail investor fails to fulfill the above conditions, the deduction originally allowed to him under Section 80CCG, shall be deemed to be the income of the assessee of such previous year and shall be liable to tax," informs Surana.
CAPITAL GAINS TAX EXEMPTIONS
If you sell a house property you owned for more than three years, you have to pay long-term capital gains tax on the profit made. However, if you invest the proceeds in buying another house, you will not have to pay this tax. But, there is a catch: the exemption will be revoked if this new house is sold within three years from its purchase or construction.
"The exemption will also be withdrawn if the assessee purchases any additional house other than such residential house within two years after the sale of the longterm capital asset," adds Homi Mistry, partner, Deloitte Haskins & Sells.
WITHDRAWAL FROM SENIOR CITIZENS SAVINGS SCHEME
While an investment in the Senior Citizens Saving Scheme (SCSS) fetches an attractive interest of 9.3% per annum, it is also subject to a minimum lock-in period of five years. If you decide to make a premature withdrawal, you may have to pay a heavy price."Any premature withdrawal, including the principal and accrued interest, will be deemed to be the income of the assessee of the previous year in which the amount is withdrawn," says Surana.
If you are senior citizen with no other source of income, the impact could be significant. However, do note that the taxable amount on such pre-mature withdrawals will not include the amount of interest on which tax has already been paid on an accrual basis.