Early withdrawal could lose your Tax Benefits under Section 80C

March is always a hectic month for many salaried tax-payers and concentrate all their energy into tax savings. They spend a lot of time in searching of the financial products in which they could save more tax because of their obsession with Tax saving as primary motto. Most of them, however fail to note that every investment under Section 80C of the Income Tax Act carries with a lock-in period in the range of 3 to 15 years.  In the rush to optimize the tax breaks at the last minute, they do not read the fine print, especially the crucial one on under what circumstances the tax benefits can be rolled back or revoked, if they early withdraw from their PF, insurance and other schemes.  Therefore, before taking leap the process of finalising investments, read verbose the fine print to avoid the nasty surprise later.

With the tax-saving season, many individuals end up buying a life insurance and investment ULIPs policies to save taxes under Section 80C and they don’t know that they can’t just get rid of the insurance policy they bought in a hurry before two years. There are many more such conditions. For, if you realize next year that the product does not suit your needs or unable to pay the premium due to paucity of funds and decide to terminate the policy, you will stand to lose several benefits. The tax break that your first year premium earned for you will be one of them, it will not get anything back if you stop your policy without paying for 3 years. What’s more, the deduction that you claimed for previous premium payments will also be revoked and added back to your taxable income of the year in which the policy is terminated or ceased to exist.  A policy can be terminated either by surrendering it or simply not paying the premiums.

PF is automatically deducted from your salary. Both you and your employer contribute to it. While employer’s contribution is exempt from tax, your contribution (i.e., employee’s contribution) is counted towards section 80C investments. You also have the option to contribute additional amounts through voluntary contributions (VPF) and also qualify deduction under section 80C. But, this is one exemption that you might not have to work towards. If the PF balance is withdrawn by you before the expiry of five years of continuous service with the same employer, then deduction provided under section 80 in earlier years, will be drawn and liable to be taxed in the year in which the withdrawal took place.  However, this will not be applicable in case of your employment has either been terminated for reason of ill health or discontinuance of the employer’s business or reasons beyond the control of the employee, that amount will be tax-exempt.

Buying house property for investment purposes and selling it later at a higher price has attracted either short term or long term capital gain tax, which the seller needs to be aware of. If you sell a house property, held for more than 3 years, any gain made would subject to long-term capital gains tax; you will not be taxed, if you invest the proceeds into another new house property. But, this leeway will come to revoke, if you decided to sell a same new house property, which was purchased to claim exemption under section 54 within three years from the date of its purchase or construction, will come into play of your taxable income, hence to be taxed in the year of sale proceeds.

Another darling tax-saving avenue is a repayment of housing loan principal is allowed as deduction up to Rs1 lakh under section 80C.  If an individual sells this house before the expiry of five year from the end of year in which he gets possession or receives the loan, then the amount of deductions under section 80C in prior years, allowed as repayment of home loan principal will be added back his taxable income in the year of transfer or receipt. However, this rollback is not applicable on deduction claimed under Section 24 (b) on interest payable on such loan.

Senior Citizen Savings Scheme permits investment for all individuals who have attained the age of 60 years and above, 55 years for those who have retired on superannuation or under a voluntary or special voluntary scheme or above on the date of opening of the account. It fetches an attractive interest of 9.20% per annuam subject to a minimum lock-in period of five years and eligible under Section 80C. Premature withdrawal of principal is not permitted before the expiry of 5 years under this scheme. However, premature closure of the account shall be allowed subject to the charges from 1% to 1.5% depending upon the closure years.  An amount of withdrawal of such closure may have to pay a heavy price, will be considered part of your taxable income in the year of closure of account.

Although, the maturity period of the account is 15 years and the entire corpus in your account could be withdrawn only on maturity, you are however, permitted partial withdrawal in case of financial emergencies which is allowed, at any time after the expiry of 6 years from the end of the year in which  the initial investment was made. But such withdrawal amount will be clubbed with your income for that year. So, basically whatever amount you withdraw from PPF, is taxable if you withdraw it before maturity (i.e. before 15 years of account opening).

Whilst investing to save on tax, you must avoid these situations as outline above under which you may end up losing the benefit. In the rush to optimize the tax breaks at the last minute, you should full pay attention to the possibility that what has been saved once need not remain in the saving kitty forever.