You might be ready to book the losses from the investment, but are you okay with tax benefits being rolled back?
We often make hasty investments during the tax season and end up investing in bad products. If we stay with these investments, we have a liability that doesn’t match our financial goals.
If we decide to forgo, we lose returns and the tax benefits.Here is a quick list of common tax saving investments and things you should take care of before you tinker with them.
Employees’ provident fund
If you withdraw your EPF before 5 years of service, the entire amount, including the interest earned on it, gets added to your income and therefore is taxable.This can actually make a big dent in your pocket.
Even a small salary of Rs 25,000, the 12% EPF contribution works out to be Rs 3,000 a month. That is, Rs 36,000 a year. The rule applies even if you quit the job and then withdraw your EPF , unless, the reason for termination is beyond your control.
Unit-linked insurance plans (ULIPs) have a lock-in period of five years and terminating the policy before that would mean the premium along with the returns earned so far gets added to your net income.The Irda guidelines apply the five year lock-in criteria on top-up premiums as well.
Tax benefits get rolled back if you terminate the plan before two years. Ending an endowment plan before three years is anyway a losing proposition as you receive the guaranteed surrender value only when you have paid premium for at least three years.
The benefits claimed under section 80 C gets added to your taxable income in the year of withdrawal. Which means, if you have invested Rs 1 lakh so far (two annual premiums of Rs 50,000), you’ll have to cough up an additional tax of at least Rs 10,000.
Last budget increased the limit under Sec 24 B by Rs 1 lakh and now you can claim a deduction of up to Rs 2 lakh every financial year for interest paid on home loans. The catch here is that you should get the possession of the property within three years of purchase.
However, this rule is only applicable for self-occupied properties. A rented second house, or deemed as rented, is not bound by such restrictions Also, for the second house, there is no cap on the amount claimed as interest paid.
If you sell the house on loan within 5 years of purchase, for that year, the principal amount gets added to your income and you will be taxed according to your income slab.
Sale of Property
Some people invest in new properties to avoid capital gains tax arising from sell transfer of an older property . However, remember that, selling of property , which is exempt from capital gains (section 5454F), within three years of purchase will make the transaction taxable. Similarly, specific security bonds issued by NHAI and REC, exempted under Section 54 EC, are also bought to save capital gains tax.
For Guidance Visit: http://www.raaas.com