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Tuesday, March 27, 2012

Budget 2012 - Even More BAD News For Tax Payers - Sec 80CCF Scrapped

In the previous article we saw that, the change in income tax slabs doesn’t benefit us by much. I had also mentioned in that article that there isn’t much clarity about the Infrastructure Bonds that give us tax benefit under Sec 80CCF. It is now almost confirmed that Sec 80CCF is no longer valid from the next financial year. This means that, next year you wont be able to invest in Rs. 20,000/- in Infra bonds and save an additional amount on income tax. This article is about how this ruling affects us.

What is this Sec 80CCF?

The Section 80CCF covers investments in Infrastructure Bonds issued by authorized finance co’s that will be used for the infrastructure development of India.

Investments upto Rs. 20,000/- was exempt under this section, which means a tax saving of around Rs. 6000/-, Rs. 4000/- and Rs. 2000/- respectively for people in the 30%, 20% and 10% tax slabs.

What is this New Ruling?

As per the budget 2012, this Sec 80CCF is no longer valid. So, Tax Payers are left with only 1 lakh exemption under Sec 80C thereby bringing down the overall limit from Rs. 1.2 lakhs (80C + 80CCF) to 1 lakh.

Why Did the Finance Minister remove Sec 80CCF?

This Sec 80CCF was introduced two years ago for a period of 1 year to fund infra projects in India. However, it was extended for one more year during the previous budget (In 2011). However, this time around the the finance minister did not mention it in his budget speech. As expected, the Finance Ministry has let this Rs 20,000 deduction to lapse this year.

There is still not much clarity about why this happened.

What is the Impact of this Ruling?

Frankly speaking, removal of this segment does not impact people in the low or the high income group by much. People in the 5-6 lakhs income category will come under the 10% or at most 20% tax slab making the impact of this ruling minimal for them.

However, for investors with an income of up to Rs 8 lakh, the scrapping of Section 80CCF means that they will have to pay up to Rs 2,060 more tax next year. It will be tougher for female taxpayers, but the most severe blow is unfortunately for the senior citizens and the Very Seniors. These taxpayers will end up paying almost Rs 4,000 more as tax.

An Example Calculation:

Let us look at how someone with Rs. 8 lakhs income be affected depending on which category they fall into. A point to note here is that, I am only considering the Sections 80C & 80CCF for calculation. The person’s total income less investments in 80C & 80CCF is what is considered for calculations. All other deductions like house rent, transport deduction etc are not considered.

Tax Payer CategoryTax If 80C+80CCF Available (in Rs)Tax If only 80C Avaliable(In Rs)Additional Tax Liability (In Rs)
Male68000700002000
Female67000700003000
Senior Citizen61000650004000
Very Senior Citizen36000400004000

Note: A Cess is payable on top of the Tax amount which might further drive up the total tax liability

As you can see, Senior Citizens are the worst affected. They end up paying Rs. 4000/- as additional tax this year when compared to last year. Women are the second worst affected as they are paying an additional Rs. 3000/-. Very Senior Citizens and the Common Man are going to incur an additional burden of Rs. 2000/- this year.

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