You can lose tax breaks in rush to exit investmentsAug 8 2014,
Thinking of terminating the insurance policy you bought to save tax at the last minute? Hold on for a moment.
Do you know that you will have to forego all tax breaks you have claimed if you tinker with these tax planning instruments? No? Well, here is the scoop. Such instruments come with various conditions and if you violate them, you stand to lose all the tax breaks. Exercise caution right at the outset.
"While making the decision about investing for tax-saving, you should ascertain whether the investment can be encashed or redeemed before its maturity or lock-in period or not. You should also study the tax implications of the same," says Vaibhav Sankla, director, with tax consultancy firm H&R Block.
EPF & Insurance Saving tax for most people is about claiming a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. And the first thing they do to is find out how much extra is needed to save after accounting for employees provident fund (EPF) contribution.
In fact, many rich tax-payers don''''''''t make additional investments to save tax under Section 80C as their contribution to EPF often takes care of the entire limit.
But most of them don''''''''t know that they will have to give up the tax benefits claimed earlier if they withdraw the money from EPF account before five continuous years of employment.
The withdrawals are exempted from tax only if the organisation shuts shop or the employee loses job.
Life insurance policy is often the go-to tax-saving instrument. However, many of them realise much later that they purchased the wrong product in their hurry to save taxes.
Naturally, the next step is to terminate it, which will result in losing the tax benefit claimed earlier.
"Tax deduction under Section 80C will be rolled back if the policy is terminated within two years from the date of policy issuance," says Sankla.
On the interest paid claimed (under Section 24) on the housing loan will remain intact.
Profits made on sale of residential property attract long term capital gains tax if it is held for more than three years.
Many people invest the profit in another house or certain designated bonds to save taxes. However, most of them don''''''''t know that they stand to lose the tax break if they decide to sell the new house within three years from the date of purchase. The exemption amount claimed earlier will be added to the short-term capital gains tax you have to pay on this transaction.
In simple words, the benefit granted to you on gains made on the sale of your first house will get reversed.
Senior Citizens Savings Scheme Many elderly tax payers favour senior citizens saving scheme (SCSS), as it offers a combination of attractive and secure returns (9.2% per annum) as well tax benefits under Section 80C.
However, most tax payers don''''''''t know they will have to surrender tax exemption claimed earlier on premature withdrawal of money from the scheme -that is, if the money is withdrawn before the expiry of the five-year lock-in period. The tax relief claimed during the period will be treated as income in the year of withdrawal.
Click here to file your taxes today!
Source: Economic times
News Category: - Media Coverage