Is this your last chance to get tax benefits U/S 88?

  • Bajaj Capital, PTI
  • |
  • Updated: Feb 24, 2003 18:39 IST

Come February and most salaried employees, scamper to the nearest investment centre or their chartered accountant to make necessary investments in order to minimize their tax liability.

The law provides for a taxpayer to plan his taxes in such a manner that his tax liability is nominal. With proper tax planning you can reduce your tax outgo, plus invest in a structured manner towards achievement of your financial goals.

The government accepts the fact that investing is a good exercise, and to encourage such activities, gives beneficial tax treatment to certain investments.

But the task force on income tax formed under Vijay Kelkar, advisor to the finance minister, thinks otherwise. The Kelkar committee report suggests the removal of deductions and rebates under the Income-tax Act. The suggestion to scrap Section 88, which offers tax breaks to the salaried class and encourages savings, would critically affect the savings pattern of the salaried middle class investor.

The rebates available under Section 88 for investments was basically a mechanism intended to provide a kind of monetary security to senior citizens and also induce an investment habit in the general investor, which would prove useful during emergencies. This was especially beneficial for the retired individual, particularly in the absence of a social security.

To put forth our point, we have also enclosed a computation for a middle class individual, who earns an annual salary income of Rs 3,00,000, and has invested in a house (also because of tax sops - taking a cost benefit of the rental payments that he was making vis a vis the interest payment), and has some investments.

As you will note, the tax liability of the person goes up at least 4 times from Rs 10,557 to Rs 40,524, due to the removal of the beneficial provisions being currently provided.

For Pankaj Sharma, tax rebate is a great incentive for making investments, "last year I invested Rs 50,000 in National Saving Certificate (NSC), for the sole reason of getting a tax rebate of 20 per cent under Section 88. It is not a very attractive scheme due to its extended lock-in period of six years, and no liquidity of your money. But if Section 88 is scrapped, as the Kelkar Committee proposes, schemes like NSC/NSS would not be availed off by any investor."

"One can understand had the task force recommended a single lock-in period of, say, ten years and  estricted Section 88 rebate to only investments in infrastructure bonds. But what it has suggested is scrapping Section 88 rebate altogether. The idea being that tax rebates does not induce investments.

However, the long queues witnessed in post offices and notified banks during the last weeks of March every year counter this notion," observes Ritika Khanna, a chartered accountant.

The law, in certain plans, provides a reduction of a specified percentage of the total investment from the tax payable by you. These are referred to in tax parlance as Section 88 investments, since the investments are specified under that section of the tax law.

The following table shows the rate of rebate available under Section 88 for Financial Year 2002-03

Rebate U/S 88
Gross total income before deduction
Rate of rebate
Up to Rs 1.5 lakh
Rs 1.5 lakh to Rs 5 lakh
15 %
Above Rs 5 lakh

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