The last three months of financial year 2010-11 are here. Historically, this is the period when individuals begin to actively explore the best avenues to invest in order to save on tax.
However, this is not the best way to do tax planning, experts say. Tax planning should ideally be
done when the financial year begins — in April. One of the most important things an individual needs to remember with respect to his tax-saving investments is that beginning April 2012, there will be a change in the instruments that qualify for tax benefits.
That is the time when the direct tax code (DTC) becomes applicable. And it will change the way you save on taxes. Investors will need to review whether their long term commitments qualify for income tax exemptions.
“Some instruments would not qualify for tax benefits beginning April 2012, such as unit-linked insurance plans, traditional insurance plans (except pure products), equity-linked savings schemes (ELSS) and their reinvested dividends,” said Vishal Dhawan, a Mumbai-based financial planner. “Investors should keep this in mind before investing in such instruments.”
Why is this important?
If you have locked yourself into a five-year Ulip plan anticipating tax benefits, investments under this head will not qualify for tax benefits beginning the third year (April, 2012).
In the case of ELSS, there is no commitment to invest regularly for three or five years, so you can still go ahead with this. The same is the case with single-premium insurance products. The government this year introduced additional tax benefits for investment up to R20,000 in infrastructure bonds. Investors should not miss out on this opportunity.
Individuals will continue to get benefit on principal payment on home loans (up to R1 lakh) till March 2012 and on interest payment of up to R1.5 lakh even beyond that, as per provisions in the direct tax code (DTC).
The current tax regime stems from the 2010-11 budget speech, in which finance minister Pranab Mukherjee announced new income tax slabs. The current tax regime will last end in March 2012. In April, the direct tax code becomes applicable.
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