Need better tax-saving investment avenues

Tejas Sule, 29, was planning for his tax-saving requirements early 2010. Skimming through his magazine, he learnt that there are savings schemes offered by the India Post that too offer tax benefits just like life insurance, 5-year fixed deposits (FDs) and mutual funds.

As the stock markets were wobbly and the interest rates on FDs too low, he thought, “I need to go where there is safety.”

Little more research told him that the tax deduction is allowed under the Post Office Time Deposit Account. Investments made under this can be claimed for tax deduction under Section 80 (C).

However, it is subject to a limit of Rs 1 lakh that applies for other investment options such as life insurance premiums, equity linked savings schemes, National Savings Certificate interest, public provident fund, principal repayment of housing loan, 5-year tax-saving FDs, other infrastructure bonds, Senior Citizens Savings Scheme 2004 etc.

What this meant was that if Sule had already invested Rs 15,000 in public provident fund, he can only claim tax deduction of an additional Rs 85,000 from any other instruments listed above.

Having decided in favour of the Post Office Time Deposit, Sule rushed to the post office as the last date for submitting investments proofs to his employer was approaching.

But to his dismay, when he visited the Post Office closest to his house, he was told that the deduction is not available.

Sule argued with the Sub-Post Master but to no avail. “They just stuck and said that tax deduction is not available,” he said.

Sule then checked the website of India Post to see if this was a recent change and so the post offices were not informed. He was happy to see that the India Post website said for the Post Office Time Deposit, “The investment under this scheme qualifies for the benefit of Section 80C of the Income Tax Act, 1961 from 1.4.2007.”

He immediately took a print and rushed back to the same post office. There he was given four options, 1-year, 2-year, 3-year and 5-year account, the interest on which was 6.25%, 6.5%, 7.25% and 7.5%, respectively.

Just like Sule, if you too are looking for other options to save tax (other than the common ones mentioned above), also check the past year whether you have made any donations via various websites or under schemes such as Bihar or Andhra Pradesh flood relief or any other organisations. See their websites or brochures or receipts to check whether the donations qualify for deduction under Section 80 (G).

Remember that tax exemption for charitable purpose is granted only if it is made for relief of the poor, education, medical relief and any other object of general public utility.

There could soon be options where one could save tax over and above the present Rs 1 lakh limit under Section 80 (C). Securities and Exchange Board of India had proposed to launch dedicated infrastructure funds (DIFs). These schemes, which pool investors’ money and invest in infrastructure projects, have a lock-in of seven years. The draft proposal of DIFs says that an additional exemption of up to Rs 1 lakh will be permitted for investments under DIFs.

Unfortunately, more than 30 months after the proposal was put forth by a Sebi committee for public comments, the scheme has not yet seen the light of the day. It was also proposed by finance minister P Chidambaram in his 2007-08 Budget.

The tax treatment of other funds such as real estate mutual funds is not known yet. It would help drive investments to infrastructure building if there is additional exemption allowed.