Most individuals invest in various tax-saving schemes and claim tax deduction to reduce the overall tax payout. Though the Union Budget 2020-21 introduced a new tax regime which offers concessional rates with seven slabs without any tax exemptions, the old tax regime remains popular due to the various exemptions. However, these tax exemptions can be reversed if the terms and conditions for such investments are not met. Investors must avoid closing these investments before the specified time period or else all the deductions claimed at the time of investing will be reversed and the amount will be taxable.
Surrendering life insurance policy
A taxpayer gets tax deduction under Section 80C of the Income Tax Act for paying life insurance policy premium subject to certain conditions. However, if the policy is surrendered within two years, then the deductions claimed in earlier years would become taxable in the year in which the policy is discontinued. Moreover, the insurer will deduct the full amount of the premium if it is discontinued after one year. If one surrenders after the second and third year, then only 30% of the total premium will be paid back.
Home loan principal repayment
An individual can claim tax exemption of up to Rs 2 lakh under Section 24B on the interest paid for a home loan and up to Rs 1.5 lakh on the principal repayment under Section 80C in a financial year. However, if he sells the house within five years from the end of the tax year in which possession of the property is obtained, then tax deduction for principal repayment of the house claimed in earlier years will be taxable in the year of sale. The deduction for interest payment on the housing loan will not be withdrawn. The capital gain on the sale will also be taxed.
Senior Citizens Savings Scheme
For a regular cash flow after retirement, many invest in the Senior Citizen Savings Scheme (SCSS) as a lumpsum for five years. The principal amount deposited in SCSS is eligible for tax deduction under Section 80C. However, if it is withdrawn before five years, then the deductions claimed will be reversed and will be treated as income for the next tax filing year. Moreover, a penalty will be levied for premature withdrawal.
Withdrawing money from EPF
Most salaried people subscribe to Employees’ Provident Fund to build their retirement corpus. An employee contributes 12 % of his basic and DA to the EPF account and the employer also makes an equal contribution. The amount deposited is eligible for tax deduction under Section 80C and the interest earned is tax-free. As EPF is for long-term savings, if the subscriber withdraws money before completing five years of continuous service, then the deduction claimed at the time of making the contribution will be withdrawn and he will have to pay tax on the entire amount in the year of the withdrawal. Even the employer’s contribution and the interest earned will be taxable. However, in case the service is terminated because of an employee’s ill health or closure of the business then the employee will not have to pay any tax.
ELSS and Ulips
Investments in equity-linked savings schemes (ELSS) of mutual funds and unit-linked insurance plans (Ulips) of life insurance companies are eligible for tax benefits under Section 80C. While ELSS schemes have a lock-in period of three years, Ulips have a lock-in for five years. If funds are withdrawn during the lock-in period, the tax deductions claimed will get reversed.
- If you surrender your life insurance policy within two years, deductions claimed on premiums paid are taxable
- If house bought with loan is sold within five years, then tax deduction on principal
repayment is reversed
- On closure of EPF, SCSS or Ulip within five years or ELSS within three years, tax deductions are reversed