Tax deductions under DTC

Taxes | admin | June 4, 2011 at 11:23 am

To maintain the balance of savings and investment in an economy, it is vital for any state administrative machinery to have necessary incentives in place.

Incentives work best when they are linked to payment of taxes. Indians unlike western counterparts by and large love to save and invest for the future and all the more when its leads to saving in tax outflow.

Recently tabled DTC bill, has also retained tax deductions similar to the deductions available under Income Tax Act, 1961 (the Act) to stimulate the level of investment and growth in the economy.

Shares of deductions provided in DTC are as follows:

Save to Gain

One of best alternatives to reduce the tax liability is to invest not only were you can save tax, but stands to gain in the long term. Deduction similar to available u/s 80 C of the Act, is available under DTC, though avenues for investment have been considerably reduced.

Equity linked savings scheme (ELSS) is one of avenues where deduction for savings has been done away with. This is disappointing for investors who were regularly investing in market through ELSS's.

DTC provides that a deduction can be claimed by an individual either by investing for himself, his spouse or for his child in an approved fund. An approved has been defined to include Provident Fund, Superannuation Fund, Approved Gratuity Fund, Pension fund and any other approved fund.

Investing in either of the options mentioned above will ensure both safety of capital and fair return on investment.

Health insurance and investment in child education

Health is Wealth

It's well said that "health is wealth". In this era of stress and turmoil, it is quintessential that one secures himself against the risk of health hazards by taking a medical cover. DTC provides for deduction for payment of health insurance premium to a scheme approved by Insurance Regulatory Development Authority (IRDA) for individual and his family.

So, investing in medical insurance will not only save an individual against the odds of unnecessary medical bills but worries also.

Invest in Child' future

Every parent wants their child to be the best among the lot. One can invest in child's education (future). DTC provides for deduction of tuition fee paid to school, college, university or educational institution in India. Such fee payment will achieve the dual objective of tax saving and Child's education.

Live even after

Indians make sure that they meet their family obligations not only during the lifetime but even after it. In case of loss of life of an individual, only insurance provides protection to dependants or family members of the deceased. DTC provides for deduction on payment of life insurance premium provided it does not exceed 5% of the capital sum assured.

This limit is discouraging for tax payers in comparison to premium limit of 20% under the Act as the same will reduce the policies eligible for deduction.

Investment in life insurance will save an individual against the vagaries of life and fulfillment of commitments whether it is daughter's marriage or spouse's maintenance.

Further, the existing Act provides for deduction of Rs.1.35 lakhs (i.e.Rs.1 lakh for savings, Rs. 15,000 for medical insurance premium and Rs.20,000 for investment in long term infrastructure bonds), however, DTC provides for deduction of Rs.1.5 lakhs which includes the pool deduction of Rs.50,000 on children education, life and medical insurance.

Invest in a house

Owning a house is a dream for everyone, especially when realty prices are rising every fortnight. Availability of deduction for interest on loan taken for house property used for self occupation under DTC upto Rs.1.5 lakhs will prove to be boon. This threshold also includes interest deduction pertaining to pre-acquisition or pre- construction period in five equal annual installment beginning with the FY of such completion or acquisition. The positive note here is that this deduction will be available against the gross total income, whereas the same was available as deduction from income from house property.

This provision will encourage investors to invest in under- construction properties which are usually available at discount vis-a vis ready to move available at a higher premium.

Additionally, deduction for specified donations ranging from 50% to 175% of the amount paid subject to a cap of 10% of Gross Total Income – as compared to 50% & 100% in the Act are also available under DTC for reducing the tax liability. Though tax slabs under DTC have been considerably slashed in contrast to what was originally envisaged under discussion paper on DTC but deductions mentioned above might provide some relief to the taxpayers.

Source: Economic Times