With the additional gain of Rs 50,000 announced in the Budget 2014 for tax saving under the 80C basket, many would be planning more investments to reduce the tax burden. This is the first year when taxpayers can claim Rs 1.5 lakh under the 80C umbrella of tax saving instruments. But is saving alone enough to claim the benefit?
In the last minute rush to make investments, one should never forget to go through the essential conditions. Apart from the lock-in period for investments and the returns that you would earn, another important parameter is the condition under which the taxation benefit can be reversed.
Annulled tax benefits would not just require you to pay through the nose years later, but also lead to an increase in your tax bracket for the year under consideration.
This reversal of tax benefit is possible not just under life insurance policies, but pension plans and home loans too. Let us look at the conditions under which the benefit can be reversed.
Traditional insurance plans
Have you been thinking of discontinuing a traditional life policy a year into it? If you stop paying premium for these life insurance plans in which you initiated investments last year or prior to that then the premium claimed as tax benefit under Section 80C would be reversed.
You need to continue with the traditional insurance policy for more than two years to continue the tax benefit received.
Also, you should assess whether the premium you are paying for an insurance plan is 10% of the sum assured. Check this percentage of premium to all life insurance policies issued after April 1, 2012. If the ratio is higher than 10%, then your usually free insurance maturity amount would turn taxable, thus reversing major tax gains.
Unit-linked insurance plans
Though the time period of continuance is merely two years for traditional life insurance policies, the period specified is higher for unit-linked insurance plans. If you terminate or stop paying premium of a unit-linked insurance plan within five years of issuance of a policy then the tax benefit claimed earlier would be reversed.
You would have to pay more tax in the year in which you stopped paying the premium within these five years as the entire amount paid since the start would be added to your income and taxed.
Under pension plans too surrendering a policy before the second policy anniversary would lead to reversal of the tax benefit claimed under Section 80C for the premium paid. You need to pay a minimum of two premiums to keep claiming the benefits made in the past. So, before you seek a new pension policy, check your files for old policies you may be ignoring.
Even for a home loan the tax benefit is allowed under Section 80C for the principal section of home loan paid during the year. However, there is a condition to this rule – the property should not be sold for five years. You would thus face the double blow of tax benefit reversal and capital gains tax for the house in that particular year.
Don’t just count the five years after you booked the property or the five years from when you started paying off the home loan equated monthly installments. These five years start from the end of the financial year in which you get the possession of your house.
If you sell your house within the five-year time frame, the entire amount you claimed under Section 80C for the principal amount paid would be reversed. The housing loan interest deduction claimed under section 24(b) won’t be reversed, under such a condition.
There is some respite here for those who have made additional investments apart from claiming the home loan principal amount under 80 C. If your Section 80C investments were already rounding up to Rs 1 lakh (1.5 lakh financial year 2014-15 onwards) under instruments such as ELSS, life insurance, PPF etc, keeping aside the home loan principal, then you need not reverse the Section 80C amount claimed.
Even though these benefits weren’t claimed in the return filed, you can still reduce the tax benefit reversal only to the extent of the gap between the other 80C investmentsand the principal amount claimed.
Keep investment proofs and other documents safe until the reversal-clause period expires
Curated From : Tax benefits can be upturned too – dnaindia