Cracking the code: More money and a greater incentive to save

This simply means that all fresh investments made in PPF after April 1,2011 will be exempt from tax at investment and during the vesting phase. However,the withdrawal amount will be clubbed to your income and taxed as per your income tax rates. For a person in the highest tax bracket,the pre-tax yield amounts to 12.12 per cent right now. However,due to the EET regime,this return will generate around 5.28 per cent post-tax returns for a person in the highest tax bracket.

“Since most of the small saving instruments have been brought under the EET regime,you will have to plan your investments very judiciously and see how the taxability can be lowered. PPF should be used only as a retirement tool now,” said Surya Bhatia,a Delhi-based financial planner. “Globally,the savings instruments are taxed at one of the three stages,the proposed taxation regime is in line with the international practices. However,it is also important to note that in India we do not have a comprehensive social security plan and there are only a few instruments where individuals can invest for their retirement needs,” said Vikas Vasal,executive director,KPMG.

Apart from this,there are several other changes proposed in the tax code,which if accepted,can virtually mean a complete overhaul of your personal finance as well. The government has proposed revised tax slabs as well. As per the new code,a man earning up to Rs 1,60,000 a year will be exempt from tax. Anything over and above this up to Rs 10,00,000 will be taxed at 10 per cent. Income above Rs 10 lakh and below Rs 25 lakh will be taxed at 20 per cent plus Rs 84,000. Income above Rs 25 lakh will be taxed at 30 per cent plus Rs 3,84,000. For a man earning Rs 6,00,000 a year,this will directly translate into a saving of Rs 41,200 per annum.

“The increase in slabs is a welcome change as it will effectively decrease the tax liability and increase the income in the hands of the individuals. The difference can be ploughed into savings,investment and consumption,which in turn will boost the domestic demand,” Vasal said.

While the government has relaxed tax slabs,leaving substantial savings in your hands,it has devised ways to mop up more tax through other means. As per the proposed regulations,the government will levy tax on the gross salary,which means all the perquisites,be it your car allowance or any other perks doled out by your company,all of them will now be added to your salary and taxed.