Earning Less than 8 Lakh in Financial Year 2012-2013? Your Tax will Go Up

The taxpayers have one more reason to get frustrated with the recent budget. The Finance Minister not only kept the tax-saving limit under Section 80C unaltered, but the deduction under Section 80CCF for infrastructure bonds has been removed. This will cut down the total tax savings from 1.2 lakh to 1 lakh which will thrust up the payable tax for individuals.

The deduction was increased two years ago and it has to be extended every year through an amendment. Tax experts had dreaded the worst when the finance minister did not mention it in his budget speech this year. Finance Ministry sources now authenticate that the 20, 000 deductions has been allowed to tumble this year.

It has come clean by now that the change will not burn those with an income of less than 5-6 lakh a year. The taxpayers in this section generally did not invest in infrastructure bonds in a huge way as the tax benefit is lesser for this slab. In a lot of cases, these taxpayers failed to exhaust even their 1 lakh deduction limit under Section 80C.

Though for investors with an income of up to 8 lakh, the scrapping of Section 80CCF means that they will have to pay up to 2,060 more tax next year. It will be more difficult for female taxpayers, but the cruelest gust is held back for senior citizens and very senior citizens. These taxpayers will end up paying almost 4, 120 more as tax. Add the burn of the hike in service tax and you can see a bigger serving of your income going as taxes next year.

Strangely, the elimination of the deduction overlaps with the government's plan to boost the funds to be lifted up by infrastructure lenders in 2012-13. This limit has been doubled to 60, 000 crore. This is the cause, the experts thinks that the deduction should have been allowed to persist. Moreover, it comes at a time when the government wants to raise money for the cash-hungry infrastructure sector. "It is a blow to individual investors as it will actually push up their tax burden. The deduction should be restored immediately,” said DS Rawat, Secretary-General, Assocham.

From Deduction to Exemption

Spending too much time worrying about the scrapped tax deduction is not worth it.  On the contrary, we should think about the exemption you can gain through the tax-free infrastructure bonds. Contrasting to the tax-saving bonds under Section 80CCF, these bonds will not cut your tax outgo. Nevertheless, the interest they earn will be tax-free. The interest earned on Section 80CCF bonds is fully taxable, which decrease the post-tax yield for investors. Besides, the tax has to be paid every year, not on the maturity of the bond.

Alternatively, the income from tax-free infrastructure bonds is completely exempted. What's more, unlike the 20, 000 ceiling in the tax-saving bonds, there is no limit to the amount that a retail investor can park in these bonds. Kamal Rampuria, Senior Vice-President, AUM Capital Market  said, "While the tax-saving bonds under Section 80CCF gave better returns, even tax-free infrastructure bonds are a good option for investors in the highest income bracket.”

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