When you could lose tax exemptions??

Tax-payers spend a lot of time calculating the likely tax savings and returns before finalising their investments to claim tax breaks. Most of them, however, devote very little time to read the fine print, especially the crucial one on under what circumstances the tax benefits can be rolled back or revoked. For instance, if a taxpayer does not fulfil the criteria laid down for allowing exemption/deduction, then the exemption already allowed shall be withdrawn. In such cases, it is the taxpayer's duty to report the withdrawal of exemption in the tax return and pay the requisite taxes as applicable. Many individuals fail to note that every investment under Section 80C of the Income Tax Act comes with a lock-in period. If they try to discontinue or withdraw money, they may have to forgo the tax break claimed on it. For example, many individuals don't know that they can't just get rid of the insurance policy they bought in a hurry before two years. There are many more such conditions.

Following are the 5 instances under which these exemptions could be withdrawn:

1.       Termination of life insurance policy

Many individuals end up buying a life insurance policy to save taxes under Section 80C. Premiums paid towards life insurance policy are exempt under Section 80C, up to a maximum of Rs 1 lakh. If you purchased a policy and you realise next year that the product does not suit your needs and decide to surrender the policy, you will have to let go of the tax benefits earned this year. As per tax laws, if the policy is terminated before premiums for two years have been paid, the tax relief granted earlier will be revoked.

2.       Withdrawing Provident fund amount before five years

If the amount contributed to provident fund (PF) is withdrawn before five years of continuous service (subject to specified conditions), the exemption / deduction availed at the time of making the contribution shall be withdrawn in the year of PF withdrawal.

3.       Capital Gains tax exemptions

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 can claim exemption under section 54 of the Income Tax Act. However, if you sell the second house within three years from the date of its purchase or acquisition, then the exemption claimed earlier will be withdrawn.

4.       TDS not deducted

Businessmen or self-employed persons are allowed deduction for various kinds of expenditure incurred as part of their business. For instance, money paid to a vendor or contractor or salary paid to staff, and so on. In case the tax deducted at source (TDS) is not deducted before making the payment, then the taxpayer is required to pay tax on the entire expense incurred. However, if the taxpayer pays the TDS before the due date of filing the returns, then the exemption on the expense will be allowed.

5.       Roll back of Tax Incentive under RGESS

This year, you are likely to get a lot of promotional calls for the newly-introduced Rajiv Gandhi Equity Savings Scheme, too. New retail investors who earn less than Rs 10 lakh can invest up to Rs 50,000 in this scheme and claim a 50% deduction.

However, the scheme comes with a lock-in period of three years, including an initial blanket lock-in period of one year. Now, you are not allowed to sell or pledge any eligible security during the fixed lock-in period. "If the new retail investor fails to fulfill the above conditions, the deduction originally allowed to him under Section 80CCG, shall be deemed to be the income of the assessee of such previous year and shall be liable to tax.

 

This Article has been Shared by Student of ICAI Palak Aggarwal. She can be reached at aggarwal.palak2809@gmail.com

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