For most of us (especially salaried tax-payers) ‘saving some taxes’ is the primary motto to invest in a financial product. I am sure you must be aware of most of the Tax Savings investment options that are available in the financial markets.
Most of us, however, may not know on what conditions / circumstances that the tax benefits can be rolled back or revoked. Most of the Tax Saving investments under Section 80c have lock-in periods. But, you can withdraw or discontinue some of your investments.
Now, the question is, If you discontinue your investments, what happens to the income tax benefits / concessions that you might have already claimed during previous Financial Years?
You may have to forgo the tax concessions. Yes, you will lose your income tax benefits. Kindly be aware of the conditions to be satisfied in respect of certain contributions qualifying for tax deductions, especially under Section 80c.
In this post, let us now understand about the qualifying conditions of various tax saving options for income tax benefits and the consequences thereof for non-compliance. What are irrevocable and revocable tax deductions?
1) Termination or Discontinuation of Traditional Life Insurance Policies – Most of the tax-payers invest in a money-back Plan or an Endowment plan to save some taxes. These plans are often bought at the last minute (typically in the months of Jan-Mar) to claim tax deduction under Section 80C. They do not understand that it is a long-term commitment and later may realize that their selection is a bad one. They end up either discontinuing (not paying the premiums) the policy or surrendering it.
“Restriction on Termination” – As per income tax laws, if the policy is terminated before premiums for two years have been paid, the tax relief granted earlier will be revoked.
In case of non-compliance with the above condition, the tax deductions that you claimed for previous premium payment(s) will be revoked. You need to add them back to your taxable Income of the year in which the policy is terminated. So, the tax deduction so claimed will be treated as the ‘Income of the previous year’ in which deduction was claimed.
The termination can be due to surrendering the policy or simply not paying the Policy premiums. (In case of Single Premium Traditional Plans, the policy should not be surrendered within 2 years, else you may lose the tax breaks)
2) Termination of ULIPs (Unit Linked Insurance Plans) – If you have an ULIP and terminate (or discontinue) it before making contributions for 5 years, benefits of tax savings have to be forgone. Meaning, the aggregate (total) of tax deductions availed earlier in respect of the plan will have to be considered as the ‘income’. You need to add this to your Taxable Income.
3) Sale of Residential House & Repayment of Housing Loan Principal – Your Home Loan EMI consists of Principal and Interest component. The principal component is allowed as deduction under Section 80C. However, if you sell your residential house within five years, you may have to forgo your tax benefits. The entire amount of deduction claimed under Section 80C in prior years on the amount of the principal repayment will be added to the taxable income in the year of sale of the property. Also, no income tax deductions shall be allowed in respect of repayments made during the year of sale of the property.
Kindly note that this rollback is applicable only to deduction(s) claimed under Section 80C. Deductions claimed under Section 24 (b) on interest payable on your home loan will not be withdrawn.
4) Senior Citizen Savings Scheme – This is one of the very popular tax saving options for Senior Citizens. SCSS has a lock-in period of 5 years. However, premature closure is allowed after one year. If any amount, including the accrued interest is withdrawn by the contributor (tax-assessee) before the expiry of 5 years (from the date of deposit), the amount so withdrawn shall be deemed to be the income of the individual in the year of withdrawal, and shall be liable to tax.
5) Post Office’s Tax saving Time Deposits – Same as 4th point (Senior Citizen Savings scheme). (The 5 year tax saving bank FDs can not be closed before the completion of five years)
6) Withdrawal of Employees Provident Fund – If you are a salaried person then you might be contributing to EPF. This is automatically deducted from your salary on a monthly basis. Both you and your employer contribute to it. Your contributions are eligible for tax deduction under section 80C.
If you withdraw your PF balance before the expiry of five years of continuous service, then it is taxable in the year in which withdrawal has happened. In addition to this, your employer’s contributions along with the accumulated interest amount will be taxed as “profits in lieu of salary”. Interest accumulated on your (employee) contributions will be taxed under the head “Income from other sources”. The tax deductions claimed on your contributions will be revoked or rolled back, and shall be liable to tax
7) Withdrawals from Public Provident Fund – PPF account has a lock-in period of 15 years. But, partial withdrawals are allowed after 5 years. Such withdrawals are taxable.
8) Sale of Property & Long Term Capital Gains – If you sell a house property you owned for more than three years, you have to pay long-term capital gains tax on the profit made. However, if you invest the proceeds in buying another house, you will not have to pay tax on LTCG. However, the tax exemption will be revoked if this new house is sold within three years from its purchase or construction. The exemption amount shall be added to your income and liable to tax in the year of sale of the new property.
Do note that tax deductions claimed on PPF contributions, NSC (National Saving Certificates), Bank / post-office 5 year Tax Saving Deposits, child’s tuition fees and ELSS investments (Equity Linked Savings Scheme) are irrevocable deductions.
So, some tax deductions are revocable i.e., can be taken back in later years and some others are irrevocable. Therefore prioritize the deductions. This would help plan your taxes more efficiently. Do share your views. Cheers!
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)