Get ready for the DTC

Source: ET Wealth - 7 Mar 2011

 

Insurance: Stiff Conditions:

·         Under DTC, a policy should give a life cover of at least 20 times the annual premium to be eligible for tax deduction. If this condition is not met, not only will you not get any tax deduction on the premium but even the income from the policy will be taxable.

·         Right now, income from insurance is tax free. The tax deduction limit for life insurance itself will get reduced from the present 1 lakh a year to only 50,000 a year. Besides, this annual limit of 50,000 would include the amount paid for tuition fees of children as well as medical insurance. So, an insurance policy with a very large premium will get deduction of only up to 50,000.

·         In Ulips, that might mean a higher amount being deducted as mortality charge for providing the life cover, but this is necessary if you want tax deduction. The DTC will also nudge policyholders to take a long-term view of their investments. Premature withdrawals from Ulips will be taxed. Don't believe the agent when he tells you that surrender charges have been capped and you can withdraw after 5 years without paying a penny.

 

Real Estate: Mixed Bag

·         The principal repayment of your home loan will not be eligible for tax deduction under the DTC.

·         There is a removal of tax on notional rent. Right now, people who own more than one house have to pay tax on notional rental income even if the second house is lying vacant. Paying tax on your earnings is bad enough, but having to pay tax on the income you haven't received is worse. The DTC will end this anomaly and make investments in second homes more tax efficient.

·         Another landlord friendly move is that advance rent received from a tenant will be taxed in the year to which it relates, not when it was received. In some cities, landlords take up to 6-12 months rent in advance. Similarly, by retaining the tax benefits on the interest paid on a home loan the DTC has cushioned the impact of high interest rates. The tax benefits reduce the effective cost of the loan.