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Roti, Kapda but No Makaan!

Analyzing Tax Gain & Pain In The New EET Regime

  • Tax Incentives for Housing Scrapped: Current deductions in respect of interest & repayment of housing loan abolished under the new Code.
  • Higher Deduction For Savings & Children’s Education: Individual & HUF entitled to an aggregate deduction of upto Rs.3 lakhs in respect of permitted savings & children’s tuition fees payment, as compared to current ceiling of Rs.1 lakh.
  • Accretions Exempt but Withdrawal Taxable: No tax on accretions to the permitted savings. However, any withdrawal from permitted savings to be taxed.
  • Tax Shelter for Old PF/PPF Accumulations: Future withdrawals out of accumulated balance of PF & PPF as on 31stMarch, 2011 to enjoy special exemption.

Tax incentive for savings has always been one of the pet subjects of every income earner and tax payer and hence, discussion and analysis of the relevant provisions under the new Direct Tax Code bear meaningful significance.

Introduction of EET

In line with international practice in this regard, the Code proposes to introduce the ‘Exempt-Exempt-Tax’ (EET) method in respect of tax treatment of savings. Under this method, the contributions are exempt from tax (the first ‘E’), the accumulation or accretions are also exempt until they remain invested (the second ‘E’) and all withdrawals at any time are subject to tax at the applicable marginal rate of tax in the case of the taxpayer (the ‘T’).

Higher Deduction but with a Difference!

Taxpayers will need to now remember Sections 66 and 67 of the new Code in place of the erstwhile Section 80C of the I.T. Act. As against the current limit of Rs.1 lakh in respect of prescribed savings and allocations, under the new Section 66, an individual or HUF will enjoy an aggregate annual deduction of Rs.3 lakhs in respect of any sum paid to, or deposited in any account maintained with any permitted savings intermediary (PSI) being any approved provident fund, superannuation fund, life insurer or new pension system trust.

In case of an employee, the employer’s contribution to PF will initially be treated as part of taxable salary and then considered as eligible for deduction u/s.66.

The above limit of Rs.3 lakhs will also encompass in its fold, deduction under the new Section 67 in respect of tuition fees for full time education of any 2 children of the individual or HUF.

Tax Treatment of Savings

The PSI will, invest the amounts deposited with it in government securities, bank deposits, unit-linked insurance plans, annuities, bonds, equities and mutual fund investments and the investor will also have his choice in the matter. Rollover of any amount from one to another account with the same or any other PSI will not be treated as withdrawal.

The accretions to the deposits will remain untaxed till such time as they are allowed to accumulate in the account. Any withdrawal made, or amount received, under whatever circumstances, from this account will be included in the income of the taxpayer under the head ‘income from residuary sources’, in the year of withdrawal or receipt.

Old PF/PPF Balances Tax Secure!

With the switching over to EET system, a major concern that is bound to arise in the minds of any investor is in regard to the future tax impact on the value of his accumulated saving until the cut-off date of the non-EET regime.

In respect of provident funds (PFs), fortunately, the Code provides that the withdrawal of any amount of accumulated balance as on 31st March, 2011 in any GPF, RPF, EPF or PPF will not be subject to tax. In other words, only new PF contributions on or after the commencement of the Code i.e. 1st April, 2011 will be subject to tax under EET.

Plea for restoring incentive for Housing!

It is indeed lamentable that under the new Code, the deductions as presently available u/s. 24 and 80C, of upto Rs.1,50,000 for interest payable and upto Rs.1,00,000 in respect of repayment of housing loan, have been scrapped. The foreword to the Code boasts of being designed to provide stability in the tax regime, based on well accepted principles of taxation and best international practices. However, it has sadly ignored the fact that almost all progressive tax systems of the world grant tax incentive for housing.

Several taxpayers have acquired houses over the past years, planning their financial resources on the basis of related tax savings via this incentive. And all of a sudden, the Code has threatened to pull the carpet under their feet and destabilize their plans.

The draftsmen also seem to have lost sight of the reality that the tax incentive for housing introduced since 1999 has infact given a great boost to the growth of real estate sector and construction industry and thus significantly contributed to higher GDP growth and larger tax collections. Moreover, while taxpayers enjoy tax incentive for interest paid, banks do pay tax on the same interest earned.

It needs to be strongly represented that housing needs to be put atleast at par alongwith children’s education and room for this deduction within the overall limit of Rs.3 lakhs should be allowed.


Should the Code not provide deduction in respect of interest payment and repayment of housing loan, within the overall limit of Rs.3 lakhs as proposed for permitted savings and children’s education?

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