Calcutta, March 1: Freedom to choose and invest ' that is the objective in the shift from a rebate-based system to a uniform deduction of savings worth Rs 100,000 from an individual's annual earning before calculating taxable income.
From the financial year 2005-06, an individual investor will no longer have access to tax benefits available under various heads under chapter VIA and Section 88.
A new section ' Section 80C ' will be introduced, which will allow investment up to Rs 100,000 in various instruments to be deducted fully from total income.
Finance minister P. Chidambaram said in his budget speech that the government must be neutral between one form of saving and another, and allow the taxpayer greater flexibility in saving and investment decisions. This would have meant a wide array of investment opportunities.
Confusion reigned as there were expectations that all investment avenues available to an investor starting from mutual funds, equity shares, bank deposits, post office deposits and real estate will qualify.
But the finance bill reveals that the options have not widened, only the very complicated system of tax rebates has been abolished. Rebates are permissible deductions from tax liability while deductions are from income. And the apparent benefit of deductions is more than rebates.
The scrapping of one benefit ' Section 80L ' will make interest income from various sources taxable. These were exempt up to Rs 15,000 (Rs 12,000 for all securities, including bank and post office deposits, and an additional Rs 3,000 for government securities).
There is no change in the tax-free status of dividends received from investment in shares and units of mutual funds.
Chidambaram has proposed a big change for the future that will affect investors. He plans a move towards a system where contribution and accumulation are free from taxes but withdrawals are taxed. It's called the exempt-exempt-taxable (EET) regime.
Currently, savings instruments such as employees provident fund are untouched by tax ' contribution, accumulation and withdrawal are tax-free. The same holds for post office deposits, PPF and NSC.
It is proposed that existing investment under such schemes should continue to enjoy this benefit while new investments will come under the EET system.