Avoid situations under which you may end up losing your tax benefits
Don’t let your tax benefits slip away
March is always a hectic month for working professionals.While most people spend a lot of time and effort on attempting to identify the best tax-saving avenue, few pay attention to the possibility that what has been saved once need not remain in the savings kitty forever. In the rush to optimize the tax breaks at the last minute, many fail to take into account the circumstances under which they can be taken away.
Home Loan: If you are repaying the principal component of your home loan, you can claim deductions up to Rs 1 lakh under Section 80C (subject to the overall limit). However, if the house is sold within five years from the end of the financial year in which you took possession of the property, then the deductions claimed in the previous year (on principal repayment and payment of stamp duty along with registration fees) will be added to the taxable income of the year in which you sell the house.
EPF account: Typically, this amount is deducted from your salary every month and hence, is automatically eligible for the deduction. However, if the PF balance is withdrawn by the employee before five years of continuous service with the employer, then the deduction provided earlier will be withdrawn. “However, this will not hold in case your employment has been terminated for reasons beyond your control. For instance, if your employer’s business winds up or you have to quit the same due to ill health, such withdrawal will be exempt from tax,” says Vaibhav Sankla, ED, Adroit Tax Services.
Capital gains tax: When you sell a house property, held for more than 36 months, any profit made is subject to long-term capital gains tax. However, if you invest the proceeds into another house, you will be relieved of the burden. “The revocation will come into play where exemption has been claimed for capital gains tax for investments made in a house property and the conditions are not met subsequently,” says Vikas Vasal, executive director, KPMG. That is, if you decide to sell the new house, which was purchased to claim exemption under Section 54, within three years from the date of its purchase or construction, then the amount of short-term capital gains arising on such sale is increased by the amount of exemption claimed earlier under Section 54.
Post office deposits: Those looking for a secure instrument offering guaranteed returns usually find this less-promoted avenue attractive. But, you need to be aware of the implications in case you the break the deposit before maturity. “In this case, the amount encashed is added to the taxable income in the year of encashment,” says Sankla. Any interest received on the amount at that time will also be included.
Life insurance: With the tax-saving season drawing to a close, you will have insurance agents and relationship managers chasing you to sign up for the seemingly-irresistible combination of tax, insurance and investment – Ulips (unitlinked insurance plans) and endowment policies. While they could well turn out to be the perfect fit for your portfolio, make sure you do not buy with purely the tax benefit under Section 80 C in mind.
For, if you find that the product does not suit your needs later and decide to terminate the policy the next year, you will stand to lose several benefits. The tax break that your first premium earned for you will be one of them. The deduction that you claimed for previous premium payments will be added to the taxable income of the year in which the policy is terminated or ceases to exist. What’s more, this would be applicable to single-premium policies too.
“In this case, the tax benefits doled out to the policyholder will be revoked if the policy is terminated within two years from the date of commencement of the insurance cover,” says Sankla of Adroit Tax Services.
Senior citizens’ savings scheme: it offer a lucrative interest rate of 9% per annum, payable quarterly, to its accountholders, it comes with a lock-in period of five years. The tax benefit is dependent on you fulfilling your commitment to stay invested during this period. Any withdrawal from this before the end of five years will be considered part of your taxable income the year it is withdrawn. The interest that you may have earned during the period, though, will not fall prey to this roll-back, provided the interest was declared as part of your taxable income in the years it was earned. Thus, while it is always good to optimise the tax breaks offered and thus minimise your tax outgo, it would be wise to closely scan the circumstances where a reversal comes into play, if you wish to keep the withdrawal syndrome at bay.
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