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Tax code must allow investment switching

There’s a lot that is genuinely new in the new direct tax code that has been proposed, but it also says that when the income tax department sells a defaulter’s property, it shall do so by ‘by beat of drum.’

business Updated: Aug 16, 2009 23:01 IST
New Delhi

There’s a lot that is genuinely new in the new direct tax code that has been proposed, but it also says that when the income tax department sells a defaulter’s property, it shall do so by ‘by beat of drum.’

In the age of tweeting on Twitter.com, some traditions don’t die, it seems!

Percussions apart, the new tax code is clearly a revolution in the making. On the face of it, the biggest change is quantitative. The annual tax saving investment limit (which used to be under Section 80C and will now be under Section 66) has been raised from Rs 1 lakh to Rs 3 lakh.

This limit is such that it could well account for the entire savings potential of a middle class family. At Rs 25,000 a month, many Indian households will now find it hard to exhaust this tax saving limit. It will drive them to save more.

One curious change that has been made is the dropping of mutual funds from the list of “permitted savings intermediaries” which qualify as tax-exempt savings.

Even though this is not a big thing quantitatively (tax-savings funds currently total up to only about Rs 16,000 crore), there doesn’t seem to be any reason to specifically drop such funds.

What is missing from the draft code is any mention of time limits for the (new) Section 66 investments. How long will these investments have to stay locked in?

We don’t know yet. Section 66 also forbids tax breaks for amounts that are withdrawn from one tax-friendly investment to be invested in another.

However, over a long period, some particular investment could turn sour. Even though a saver doesn’t want to withdraw the money, he may be forced to switch to another tax-saving investment.

The law should allow such switches without them being considered withdrawals. The new code is radical, and it will take a few years before we adjust to it.