New Delhi: Saving for the future in insurance, provident fund and pension schemes may get more attractive with a higher relief at Rs3 lakh against the present provision of Rs1 lakh if the proposed Direct Taxes Code becomes a law.
The draft Direct Taxes Code unveiled by finance minister Pranab Mukherjee on Wednesday proposes raising the tax exemption limit on savings to Rs3 lakh.
“The limit for deduction for savings has been substantially increased to Rs3 lakh,” an official statement said on the new tax code, which has been put up for public comments.
However, the code proposes imposing a tax on the money withdrawn from savings schemes like PPF, EPF and GPF. At present, tax is not imposed on withdrawal from these schemes.
The proposal is progressive and a move towards doing away with the existing taxation structure for savings, said tax expert Aseem Chawla, who is a partner with law firm Amarchand Mangaldas .
“The tax code wishes to implement the Exempt, Exempt Tax (EET) mode of taxation which is very good but it has to do it in a gradual manner,” he said.
With regard to withdrawals from savings schemes, the code suggested that these should be taxed under the EET (Exempt Exempt Taxation) mode of tax, implying that the tax should be levied at the time of withdrawal while contributions and returns should be exempt from tax.
On this, Chawla said, the move in the short to medium term could be beneficial, but not in the long term like 15 years.
With regard to PPF and other pension fund schemes, the code said the government should continue the tax exempt status to withdrawals of amounts accumulated up to 31 March 2011.
The contributions to the PPF and pension schemes after the commencement of the code, it added, should be subject to EET mode of taxation.
Withdrawals, it said, should be included in the income of the assessee during the relevant year and taxed accordingly.
The EET mode of taxation, the code said, would encourage long term savings by the people.
Also, the code suggested that retirement benefits would be exempt from tax if saved in the Retirement Benefits Account.