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 No
sooner had Finance Minister Yashwant Sinha ended his budget speech on
February 28 than we started getting calls from dejected clients. The common
refrain was: since most tax incentives on savings have gone, what is the
point of saving anymore? The complaints weren't entirely illogical. Over
the years, tax rebates under Section 88 had become a prime driver for
savings by the middle classes. The incentives almost mandated a certain
amount of savings every year-not always for the sake of saving but for
reducing the tax liability.
That's where the message lies: tax incentives prompt people to save but
they also distort the pattern of savings. Instead of being driven by the
real objectives of savings-e.g. insurance, pension, child's education-the
prime criterion in savings becomes tax reduction. This often leads to
choosing the wrong instruments. For instance, middle-class investors often
lock up huge sums of money in illiquid saving instruments to earn tax
rebates. Many of them deposit huge sums in the Public Provident Fund (PPF)
only because that offers a tax rebate. They disregard the fact that mutual
funds are far more liquid than the PPF and could offer a much higher rate
of return.
The reduction-and in some cases elimination-of tax rebates will no doubt
cause a temporary dip in the quantum of savings. But it will encourage
investors to make investment decisions on the basis for three fundamentals
of investing: liquidity, safety and returns. Besides, it is not as if
Sinha has taken away all the tax incentives in the Income-Tax Act. The
anguish over the loss of a few-though substantive-rebates has probably
made people forget a whole host of exemptions still allowed on income
tax. These are listed below.
Bhatia is financial advisor at investment consultancy firm Parasmoney.
He can be reached at surya@parasmoney.com.
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WHAT YASHWANT SINHA DIDN'T TAKE AWAY
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| HOUSE RENT |
Salaried employee staying in rented house is allowed exemption
which is least of HRA received, actual rent paid minus 10% of salary,
or 50% of salary (in Mumbai, Kolkata, Delhi or Chennai) and 40%
of salary in other cities.
|
HOUSING LOAN REPAYMENT |
Rs 1.5 lakh interest repayment deducted from salary income if self-occupied
or rental income if rented out. But possession should be taken within
three years.
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| TRANSPORT ALLOWANCE |
Rs 800 per month paid
to employee is exempt from tax. |
PENSION PLAN |
Premium up to Rs 10,000
deductible in a year. |
| MEDICAL ALLOWANCE |
Medical expenses up
to Rs 15,000 a year. |
MEDICAL INSURANCE |
Premium up to Rs 10,000 for self and family and up to Rs 15,000
if dependent parents included is deductible from salary income.
|
| LEAVE TRAVEL CONCESSION |
Actual expenses on journey
twice in block of four years. |
DONATIONS |
Donations to eligible
institutions qualify as a deduction |
| STANDARD DEDUCTION |
SALARY
Up to Rs 1.5 lakh:
Rs 1.5-3 lakh:
Rs 3-5 lakh
Rs 5 lakh
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STANDARD DEDUCTION
1/3rd of salary or Rs 30,000
Rs 25,000
Rs 20,000
NIL |
INTEREST INCOME |
Interest income up to Rs 9,000 a year
is tax free. |
| MUNICIPAL TAXES |
Municipal taxes paid for rented property
deducted from rental income |
SENIOR CITIZENS
|
Citizens above 65 years get a tax rebate
of Rs 15,000. |
| REPAIRS |
One-third of net rental income (less municipal
tax paid) may be deducted for repairs |
WORKING WOMEN |
Working women below 65 years get a tax
deduction of Rs 5,000. |
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NOTE: Tax rebate structure under Sec 88 has been changed. If salary
is up to Rs 1.5 lakh a year, the rebate is 20 per cent of investment,
with a Rs 16,000 limit. If salary is Rs 1.5-5 lakh, the rebate is
10 per cent with a Rs 8,000 limit. For those earning over Rs 5 lakh,
there is no rebate.
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CURRENT
ISSUE APRIL 1, 2001
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