The Direct Taxes Code 2010 (DTC) has prompted tax payers to reconsider investment plans. The key difference lies in the exclusion of certain savings schemes from the list of items eligible for deduction of up to Rs 1,00,000 from gross total income. Ulips and ELSS have been left out and only approved funds like PF, superannuation fund, gratuity fund and pension fund have been retained for deduction. DTC also provides for an extra aggregate deduction of up to Rs 50,000 for payment to life insurance (annual premium not exceeding 5%, against the current 20%) of the capital sum assured); health insurance premium and tuition fees for full-time education of up to two children.
Due to the exclusion of ELSS and Ulips, there appears to be a certain apprehension that equity-oriented funds would lose attractiveness. This may also be driven from the understanding provident funds and pension funds invest substantially in government bonds and/or debt instruments.
However, a person currently contributing Rs 1,00,000 annually in provident fund/pension fund would remain indifferent towards this exclusion of EOFs from the list of eligible investments in DTC, since the overall benefit is capped at Rs 100,000. Moreover, under DTC, certain tax benefits would continue to be available to EOFs that would not be available to non EOFs i.e. debt oriented funds (DOFs).
In short, while investment in EOFs may not be eligible for deduction, certain benefits will continue or turn even better.
However, before deciding between EOFs and DOFs, one should watch the risks associated with the fund (generally higher risk with EOFs), returns, etc. Moreover, the New Pension Scheme, which has generated an average return of 12% (14.82% for central dovernment employees) in the first year of its operations, may also be considered while deciding the investment instruments.