September 13, 2010

INDIA: Direct Tax Code has nasty surprise on seniors who have an income

.
NEW DELHI, India / The Economic Times / Personal Finance / Tax / September 13, 2010

By Dhirendra Kumar

SENIOR citizens have got a raw deal in the Direct Taxes Code (DTC), and not just because they have lost the tax rebate they enjoy now. There is a potentially more serious side-effect of DTC on senior citizens that has not yet been noticed widely or commented upon publicly:

Seniors, who have any kind of income, are left with no practical avenues for making tax-saving investments.

DTC (and most of us who have commented on it) assumes that income from work ends at retirement. However, this is not true for a significant number of seniors. Many still do part-time work or irregular work after their formal retirement, while a significant number have rent income.

Earlier, they could use many of the investment types covered by Section 80C. They were making tax-saving investments in ELSS mutual funds, Ulips as well as tax-saving deposits in bank. One characteristic of senior citizens’ tax-investments is that they prefer shorter lock-in periods. They are typically a little uncertain about how long they will be fit and healthy enough to earn, and so are not confident about when they will go from accumulation mode to withdrawal mode. ELSS mutual funds, Ulips and five-year deposits in banks fitted earning senior’s time-frames well.

However, all these are gone now. Now, we have National Pension Scheme (NPS) and provident fund, both of which are retirement solutions. And then there’s PPF, whose 15-year framework is way too long for older people. The result is that if you still have an income after 60, DTC will either force you to pay more tax than necessary, or to put money into channels that are unsuitable for you.

I don’t know how many seniors fit this profile, but there’s no reason that the DTC should give them a raw deal. The person who first pointed this out to me was a retired PSU employee in his mid-60s who earns a reasonable `5-7 lakh a year (though somewhat irregularly) as a project engineering consultant. I don’t know how many people are there who roughly have this profile, but there’s no reason to cut them off from tax-saving investments on top of taking away their tax-rebate.

While the removal of the tax-rebate to senior citizens is regrettable, that is something that has been done consciously and was intentional. However, I think it’s quite clear that this other impact on senior citizens is an unintended side-effect of changes made for other reasons. It would be good if the finance minister — who himself happens to be exactly the kind of working, productive senior citizen I’m talking about — takes note of this problem and introduces some measure to solve this problem.

Copyright© 2010 Times Internet Limited.