• Higher deduction:
  

  Section 88 provided for rebate from tax liability as under:
  

  1. where gross total income is Rs 1,50,000 or less, 20% of such investments;

  2. where the income under the head "salaries" does not exceed Rs 100,000 and the "salaries" income is not less than 90% of the gross total income, deduction eligible is 30% of such investments;

  3. where the gross total income is between Rs 1,50,000 and Rs 5,00,000, 15% of such investments;

  4. where the gross total income is more than Rs 5,00,000, no deduction shall be available.

  The new scheme provides for a deduction from income rather than from tax, and provides for a deduction of an investment of Rs 1,00,000 irrespective of the income slab of the assessee. The effect of this is that while the earlier scheme provided for a deduction, which was lower as the gross total income of the assessee increased, the new scheme, in fact, provides a higher deduction for assessee having higher income. An assessee, who falls under lower tax slab would get less effective benefit than an assessee in higher tax slab.
  
  

  Spotlight: Budget 2005
  
  

• Sectoral caps removed:
  

  The earlier law provided for maximum qualifying amount in respect of many of the investments. Thus, it provided for a limit of Rs 70,000 in respect of specified savings, which also included repayment of housing loans (with a limit of Rs 20,000) and tuition fees (with a limit of Rs 12,000 per child, with a maximum of 2 children), and an additional limit of Rs 30,000 in respect of infrastructure shares, debentures and bonds. The amendment does away with all internal limits, and provides that all specified investment shall be covered irrespective of the amount of each investment. For example, the assessee shall now have an option of utilising the full limit by making a payment of Rs 1,00,000 towards PPF. This means a considerable flexibility for the taxpayers, and a great deal of simplicity in assimilating the provision. The only sectoral limit that now remains is in respect of the education expenditure being restricted to any of the two children.
  
  

• Can we implement the EET system? :
  

  The Memorandum to the Bill clarifies that 'the existing provisions of Income Tax Act do not accord a homogeneous to the taxation of financial savings'. 'There is a considerable variation in the taxation of the contributions made to savings schemes, the tax levied on the accumulation, and the tax treatment at the final stage of withdrawal.' The Memorandum further explains that the desire of the Govt. is to remove this distortion and tax the income on EET basis. Under this scheme, the contribution to the specified savings is exempt from tax (E), the accumulation is also exempt from tax (E), but the withdrawals from the savings are taxed (T).

  The Memorandum confesses that 'shift from the existing EEE method to EET method is likely to impose transitional administrative problems'. 'It is therefore proposed to set up a committee of experts to work out the roadmap of moving towards the EET'. The proposed amendments to the law seem to be the first step in moving towards the EET. The deletion of S.80L, which had partially exempted the accrual, is another step in this direction. But whether an absolute shift to EET could be possible especially in respect of investments committed in the past is a difficult question to answer.

  Some of the savings are made with a longer time horizon, and under the existing laws, they enjoy exemption from taxes on withdrawal. For example, S. 10(0D) exempts from tax all sums received from LIC. If an attempt is made to put this sum to taxable, it would amount to taxing the amount which, was spent by the assessee when the law provided for exemption on withdrawals. It is not possible to apportion the amount between the amount, which was paid when the EEE scheme was prevalent, and the amount paid during the existence of EET regime. Any attempt to put the old investment to tax would mean a breach of promise on the part of the Govt.

  If a scheme like EET is to be implemented within the framework of the existing laws, the law would be required to be amended to provide that the specified savings made after the specified dates, would fall under the tax net. Payments made in respect of policies contracted earlier would continue to be under the EEE scheme. Even when implemented on this pattern, it would entail a detailed record keeping by the assessees, lest it results in a mix-up causing confusion. This is not easy to implement. Until then the taxpayer can have his cake and eat it too.
  
  

• Old wine in old bottle:
  

  This method of taxation of specified savings is not new. The savings were taxed till 1990, under the same S.80C which was omitted by the Finance Act, 1990. The apparent reason which seems to have prompted the shift to this method is, 'a large number of countries have adopted this method and many countries are moving towards it'. However, it seems the implementation issues may make the shift to EET difficult, which may mean a bonanza for the taxpayer: he would continue to get higher deduction, with no tax being put on withdrawal.
  
  

• "Out of his income chargeable to tax":
  

  The Finance Bill had proposed that the deduction u/s 80C shall be allowable only if the amount deposited was 'out of his income chargeale to tax'. On second thought the lawmakers decided to delete these words, as it could have led to frivolous litigations. The Act does not require the amount invested to be out of income chargeable to tax.

Taxation of income from Zero Coupon Bonds:

The Act provides that the income from transfer of zero coupon bonds shall be treated as income from capital gains. Zero coupon bonds have been defined in the newly inserted clause 48 to S. 2, to mean a bond:

1. issued by any infrastructure capital company or infrastructure capital fund or public sector company on or after the 1st day of June, 2005;

2. b. in respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company or infrastructure capital fund or public sector company; and

3. c. which the Central Govt may by notification in the Official Gazette specify in this behalf.

For the purpose of this provision, "infrastructure company" means such company as has made investments by way of acquiring shares or providing long term finance to an enterprise wholly engaged in business referred to in S. 80-IA(4), or a housing project referred to in S. 80IB(10) or an approved hotel or hospital project. An "infrastructure capital fund" means such fund operating under a trust deed, registered under the provisions of the Registration Act, 1908 established to raise monies by the trustees for investment by way of acquiring shares or providing long term finance to an enterprise wholly engaged in referred to in S. 80-IA(4), or a housing project referred to in S. 80IB(10) or an approved hotel or hospital project.

The definition of the term transfer, in relation to capital gains, given under clause 47 of section 2 has been amended by inserting a new clause (iva) to include the maturity or redemption of a zero coupon bond. Amendment has also been carried out in the definition of "short term capital asset" to include a zero coupon bond held by the assessee for a period of not more than 12 months. Provisions of S. 112 have also been amended to provide that where the tax payable in respect of long term capital gains on zero tax bonds exceeds 10% of the amount of capital gains before giving effect to the second proviso to section 48, then such excess shall be ignored for the purpose of computing the tax payable by the assessee, thus bringing it on parity with other securities. The effect of this is that the zero tax bonds will be taxed at 10% if the assessee does not claim the benefit of indexation.

In S. 194A(3) clause (x) has been inserted w.e.f 1st June 2005 to provide that no tax shall be deducted at source from the amount paid or payable in relation to zero coupon bonds issued on or after 1st June, 2005.

The impact of these provisions is likely to be very positive on our economy. Zero coupon bonds are usually an instrument of long term financing, and treating income from such bonds as capital gains, shall help companies and institutions float tax-payer-friendly long term bonds.

Deduction to the issuer of the zero coupon bonds:

Section 36 has been amended by inserting clause (iiia) to provide for deduction from income from business of profession of the assessee who issues the zero coupon bonds, of the pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond. For this purpose the 'discount' has been defined to mean the difference between the amount received or receivable by the infrastructure capital company or fund or the public sector company issuing the bonds, and the amount payable by such company on maturity or redemption of such bonds. The period of life of the bonds, means the period commencing from the date of issue of the bonds and ending on the date of its maturity or redemption.

Zero coupon bonds, as the name explains, are bonds where no interest is paid. The bonds are issued at a discount, from the face value of the bonds, and the face value of the bonds is payable on maturity. This provision provides for pro rata deduction of the discount on such bonds over the life of the bonds.