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New code to hit tax saving plans

Before choosing a tax saving instrument this year, it would be a good idea to take a look at the Direct Tax Code (DTC), which is expected to come into effect in April 2012. Sachin Kumar reports.

business Updated: Feb 21, 2011 22:03 IST
Sachin Kumar

Before choosing a tax saving instrument this year, it would be a good idea to take a look at the Direct Tax Code (DTC), which is expected to come into effect in April 2012. Some of the financial products that got you tax deductions this year would not qualify for tax benefits under the DTC regime.

Equity-linked saving schemes (ELSS), unit-linked insurance plans (Ulips) and the National Pension Scheme (NPS) will be impacted by the DTC. "Certain instruments such as Ulips, traditional insurance plans (except pure products), ELSS and their reinvested dividends would not qualify for tax benefits beginning April 2012. Investors should keep it in mind before investing in these," said Vishal Dhawan, a financial planner here.

One of the provisions of the DTC is that a policy will not be eligible for tax deduction if it offers a life cover of less than 20 times the annual premium. "If it is not so, not only the premium will lose tax benefits but also the income accruing from the policy will be taxable," says Amar Pandit, chief executive officer, My Financial Advisors.

Also, it is proposed that the tax deduction limit be halved from the current Rs 100,000 a year under the DTC. At present, one can claim deduction of up to Rs 100,000 under section 80 (c) of the Income Tax Act. ELSS are also expected to be removed from the purview of Section 80(c), and will not qualify for tax deductions. In case of NPS, the maturity amount, which is taxable currently, is expected to become tax-free.

If you bought into a Ulip that has a lock-in period of five years or an ELSS that has a lock-in of three years for tax saving, reconsider your move, as all investments done into the product from the third year (April 2012) will not qualify for tax benefits.