Lock-in period for Investments under income tax
Many taxpayers fail to understand that many deductions under Section 80C of the Income Tax Act has a lock-in period. If you discontinue the investment or try to withdraw any amount from your investment, then be ready to sacrifice the tax benefit claimed on it.
I have tried to explain few such investments and there lock-in periods and related legalities of the Section.
LIFE INSURANCE POLICY
Suppose you buy an attractive LIC policy and realize in the second year that the policy may not be a good investment as per your needs and you want to surrender the LIC Policy, remember you will have to forego the tax deductions for this year. As per the IT Act, if you terminate the policy before you have paid premium for two years, the tax benefits given for the previous years will also be revoked.
If you buy a ULIP (Unit Linked Insurance Policy), the lock-in period is a term of 5 years.
A policy will be terminated for two reasons 1. You surrender the policy 2. You stop paying the premiums.
Investors whose income is less than Rs 10 lakh can invest up to Rs 50,000 in this scheme and claim a 50% deduction. For more info on this scheme, read this FAQ
Lock-in period is 3 years, including an entry blanket lock-in period of 1 year. We are not allowed to sell or pledge any of these securities during the fixed lock-in period.
REPAYMENT OF HOUSING LOAN PRINCIPAL
Lock-in period is 5 years. If violated, the entire amount of deduction claimed under 80C in prior years on the amount of the principal repayment including registration fees & stamp duty will be taxable in the year of sale.
This revokal is applicable only to deduction under Section 80C. Interest Deduction claimed u/s 24 (b) on will not be revoked. We can still claim interest on home loan.
SENIOR CITIZENS SAVINGS SCHEME
Senior Citizens Saving Scheme (SCSS) yields a very attractive interest of 9.3% pa; however, there is a lock-in period of five years. Premature withdrawal including the principal and the interest accrued thereon will be taxable in the year of withdrawal.
POST OFFICE TIME DEPOSIT
There is a lock-in period of five years. Premature withdrawal including the principal and the interest accrued thereon will be taxable in the year of withdrawal.
EMPLOYEES PROVIDENT FUND
Employee has to continuously serve a minimum period of 5 years before withdrawing the PF amount otherwise be ready to pay tax on withdrawal.
CAPITAL GAINS TAX EXEMPTIONS
Long term capital gains are attracted if we sell a Long term asset say a housing property held for more than 3 years. However, if we can invest the sale proceeds and buy another house, then we can claim exemptions from Capital gains tax .But, there is a condition, If you sold this new house within three years from its purchase or construction, you will not get this exemption.
If you purchase any other additional house property again within two years after the sale of the long term capital asset, you will again lose the exemption
REC Bonds & NHAI Bonds have a lock-in period of three years
A very informative article. The confuson is never ending thanks to complex laws. The articles lists the lock in periods at one place and nicely presented.
Can i get an insight into the reason behind the lock in period specified that comes hand with 80C deductions...!
a. Is government banking of Investement funds made by individuals under section 80C for government spending ( Turnaround of funds- in short rolling of funds).
b. Is the tax savings the individual makes by investing is cost to govt (Ex-chequer), as govt tends to loose tax on the savings amount from individual.
C. Are the yeild rates of Reserve bank of India, govt Treasury rates for terms of 3-5 years are in line with investment made under relevant tax savings schemes..?
d. Is this tax savings creating a mess in government expenditure in terms of delayed yield return based on spending of these funds on infrastruture projects..?
Though investment is one decision for a individual, the funds creats various chas among people planning the govt funds and its yield pattern. If you have some insights pls. share.
CA. S Kamath