Section 88 of Income tax Act allows rebate in payment of income tax on certain payments of the Insurance premia, contribution to provident funds and other mentioned payments to an individual and H.U.F.

The amount of rebate from assessment year 2003-04 under section 88, I.T. Act is as follows :-

REBATE UNDER SECTION 88 OF INCOME TAX ACT :-

If two following conditions are satisfied 30% of the net qualifying amount is available as rebate;

1. Income chargeable under the head "salaries before giving deduction u/s.16" does not exceed Rs.1,00,000 and;
2. Income chargeable under the head salaries is not less than 90% of gross total income;
3. If gross total income does not exceed Rs.1,50,000 tax rebate of 20% is available of the net qualifying amount.
4. Tax rebate of 15% is available if it exceeds Rs.1,50,000 but does not exceed Rs.5,00,000.
5. No rebate is available if it exceeds Rs.5,00,000.

The maximum Rs.70,000/- can be deposited in Public Provident Fund Account and Rs.10,500/- rebate in the Income Tax can be availed, if income is more than Rs.1,50,000/-.

REASONS FOR DELETING REBATE U/S.88 OF INCOME TAX ACT:

1. Kelkar Committee's Final Report has dealt with Income Tax exemptions and savings and savings instruments extensively in vide paragraphs 4.69 to 4.100 of the Report. The paras 4.98 to 4.100 are reproduced herewith :-

   "4.98 The wide range of tax incentives for savings is inefficient and iniquitous. The apprehension about the adverse effect of the elimination of these incentives on national savings is also misplaced. Therefore, the Task Force recommends the elimination of the tax incentives for savings under Section 88, section 80L, Section 10(15)(i), Section 10(15)(iib), Section 10(15)(iiic), Section 10(15)(iic), Section 10(15)(iid), Section 10(15)(iv)(h), and Section 10(15)(iv)(i) of the Income Tax Act. These benefits must be withdrawn with immediate effect and not through a sunset clause."

   "4.99 Further, with a view to overcoming the problem thrown up by individual myopia, we also recommend the continuation of the deduction under Section 80CCC for contribution to the pension fund of LIC or any other insurance company. The ceiling on the deduction should, however, be increased from the existing levels of Rs.10,000/- to Rs.20,000/-. This income-based deduction u/s. 80CCC be converted to a tax rebate at the minimum marginal rate of 20 per cent 53. Consequently, the ceiling on tax rebate for contribution to the pension fund should be Rs.4,000/-. The new ceiling has been proposed keeping in view the needs of the smaller tax payers with income below Rs.2 lacs. The scope of Section 80CCC may also be extended to a larger number of pension/annuity schemes within the overall ceiling of Rs.20,000/-. Since savings in these pension funds will be taxable at the withdrawal stage, the tax benefit for such savings will be consistent with the EET method of tax treatment.

   "4.100… However, any sum received under a life insurance policy (including bonus) will continue to enjoy tax exemption under section 10(10D) of the Income Tax Act. Similarly, any withdrawal (including interest) from the provident fund will continue to enjoy tax-exemption under section 10(11) and 10(12) of the Income Tax Act. As a result, the tax treatment of savings in these scheme will confirm to the TEE method as against the existing EEE method. To this extent, the change will be economically efficient. Our recommendations for not modifying the tax treatment of other saving plan u/s.88 or u/s.80L or u/s.10(15) either along the EET method or TEE method is primarily based on the consideration that the rates of return are considerably higher, or the maturity period is not long enough to discourage "round-tripping".

2. Rebate in tax and tax free interest both benefits cannot be given and Rebate in payment of tax should be deleted.
3. Due to double benefit, the Central Government borrowed monies at the rate of 20% to 24% from year 1987-88 to 1999-2000 as 12% tax free interest was given and the Government lost Rs.18,000 tax income and gave Rs.12,000/- rebate in payment of tax to P.P.F. holder on his depositing Rs.60,000/- in the account. The rebate u/s.88 should be deleted which can generate Rs.15,000/- crore per year as additional income tax.
4. The Government should take only 5% of salary in Employees Provident Fund instead of 10% contribution in the Provident Fund Scheme. The Government will get additional income tax on 5% of income of employee.
5. The P.P.F. account holder should have P. A. number and tax free income should be given to income tax assessee only.
6. Misuse of Public Provident Fund Account : The Public Provident Fund Account can be opened in any Post Office or any notified Nationalised Bank. The individual, and minor's account is to be opened through guardian. Section 88 provided that an amount of Rs.70,000 could be deposited in Public Provident Fund Account to come out of the taxable income of the assessee. But in practice it was very difficult to ascertain that the payment has been made out of fully taxable income.
   In The Finance Act 2002, the said condition has been deleted and there is a far reaching effect in implementation of this Public Provident Fund Scheme and taking the rebate under the Scheme. The account holder can withdraw Rs.70,000 from his account as provided under the P.P.F. Scheme and next day again he can deposit Rs.70,000 and get rebate upto 20% or 15% according to his income slab as provided in the Finance Act, 2002.
7. Public Provident Fund :
   The Public Provident Fund Act and Scheme were introduced in year 1968. The depositor gets interest free of income tax. Rate of interest was 4.8% in year 1968-69 which was increased to 12% during this period which continued upto 14-1-2000. The rate of interest was reduced from 12% to 11% to 9.5% and at present 8% per year.
   It is reported that Rs.11,000/- crore are deposited every year. On deposit of Rs.70,000/- rebate is given at 20% or 15% on payment of tax. The writer has written a Book on P.P.F. under Capital Freedom From Earning through Public Provident Fund (The Public Provident Act and Scheme 1968).
8. P.P.F Scheme can be discontinued :-
   • No new Deposits to be credited from existing Account holders.
   • No new Account to be opened.
   • If new deposits are not accepted, question of rebate u/s.88 I. T. Act does not arise.
   • To continue existing Account holders accounts and pay interest as fixed under the Act and Scheme.
   • To allow Account holders to close account.
9. Loan :
   Provision of loan, repayment of loan and interest are mentioned in para 10 and 11 of the Scheme and loan is allowed only within initial period of five years of opening of the P.P.F. account and loan is to be repaid in 36 months and only 25% of amount is allowed as loan. The above provision is not useful to the account holders as account holders do not deposit maximum amount in the account within first five years.

Suggestions :

Above paras should be amended and loan should be allowed on completion of five years and loan should be allowed till the account is closed.

• 25% of balance as on 31st March of earlier year can be given as loan.
• Loan can be given @ 8% interest + 1% service charge.
• If one loan is taken, second loan cannot be granted till the first loan with interest is repaid.
• Repayment of loan is not eligible for rebate under Section 88 of Income Tax Act.
• Loan should be repaid in 24 months. If instalments are not paid in time, the amount of instalment can be adjusted from the balance of the account.

Advantages to Government, account holder and industry :

• The Central Government revenue receipts are estimated at Rs.2,31,000 crores for the year 2001-2002 and the government have to pay Rs.1,13,000 crores towards interest payment, which is 49% of revenue receipts.
• The Government's liability to pay interest will reduce and there can be income from service charge, if loan is allowed to P.P.F. account holders.
• The account holder can get loan @ 8% + 1% service charges i.e. at 9% p.a. without executing documents and he can spend his own moneys during his life time.
• If loan is granted, it will benefit the business and industry as there will be liquidity with the consumers and there will be tendency with the account holders to spend and enjoy their own savings in their life instead of giving large amounts of their heirs.
• The Central Government is considering proposal to transfer management of Provident Funds to the Private managers, who can invest in share market and can give more return than 8%. The above proposal is dangerous and ruinous in view of our past experience, if proposal of loan is accepted, there is no need to transfer management to private parties."

10. Additional amendment in view of Finance Act, 2003 :

The Central government should take appropriate steps (i) to require the old account holders to give declaration under Form "A" which has been prescribed in the year 2000, (ii) only individual should be allowed to contribute in his account who has his P. A. number, (iii) Minor's and H.U.F. account should not be allowed to open the P.P.F. Account. There should be computerisation of P.P.F. account as there is possibility that an individual may have also more than one account. At present, black money can be invested and an individual can earn 8% free of income-tax on the said amount as there is no checking of opening of a P.P.F. account. P.P.F. account should be allowed only to depositor who has got Income Tax Permanent Account Number and there should be computerization of P.P.F. account.

11. Estimate of Revenue receipt :

Abolition of Rebate under Section 88 :

There are 2 crore 30 lac assesses and 2 crore new assesses can be brought within the tax net. On rough estimate, Government can have additional revenue income to the extent of Rs.15,000 crore only which the government is losing on account of rebate under Section 88. On computerization of accounts of P.P.F. misuse of the scheme can be prevented and avoided.