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r year, when tax-payers get busy with planning their taxes, the focus is always on making investments. They invest a lot of time and energy identifying the right instrument for saving on the tax outgo.
However, not many bother to understand the nitty-gritties by reading the fine-print. Very few pay a thought to the circumstances under which the tax benefits so granted can be taken away.
HOME LOAN PRINCIPAL REPAYMENT
That repayment of home loan principal entitles one to deductions under section 80C is widely-known. The same cannot be said with regard to cancellation of these benefits. The reversal will come into effect if the house is sold within five years from the end of financial year in which you acquired the possession.
The deductions allowed earlier will be treated as income in the year you receive the sales proceeds. The amount will be added to the taxable income and taxed as per the slab applicable.
LIFE INSURANCE TERMINATION
Life insurance is another popular avenue and the one that many are likely to buy this tax-saving season to utilise the Rs 1-lakh limit under section 80C. This is one product that is often bought the last minute, without gaining an understanding of the finer details.
Now, remember, if you happen to realise later that the product doesn't suit your needs and decide to terminate the policy in the subsequent years, the tax benefits earned earlier will be one of the casualties. The deduction claimed earlier will be added to the taxable income of the year the policy ceases to exist.
SENIOR CITIZENS' SAVINGS SCHEME
Another popular avenue, this is meant for senior citizens, as the name suggests. It is a part of the 80C basket and carries an interest rate of 9% per annum, with the deposit amount being locked in for five years. Should you make pre-mature withdrawal, the tax benefits will be revoked.
Such withdrawals will be deemed as your income in the year it is withdrawn. The interest earned, however, will not be rolled back, if it was declared as part of your taxable income in the years it was earned.
EPF WITHDRAWALS
Your contribution to provident fund, which is deducted by your employer from the salary every month, is eligible for deduction of up to Rs 1 lakh. However, if you happen to withdraw the PF balance before five years of continuous service with the employer, then the deduction provided earlier will stand revoked. The amount will be taxed in the year in it was withdrawn.
However, the rules also provide for relief to employees who are compelled to give up their jobs. That is, if your employer shuts shop or you have to quit the same due to an illness, the withdrawal will not be subject to tax.
This season, when you sit down to evaluate tax-savers available, make sure that you also keep the benefit-reversal in mind while making a decision.
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