Are you ready for tomorrow?

The draft Direct Taxes Code (DTC) has received its fair share of bouquets and brickbats since it was unveiled in August 2009. While the expansion of tax slabs has been welcomed by taxpayers, the removal of certain deductions and introduction of the exempt-exempt-tax (EET) regime have raised their hackles. Many feel that the large-scale changes in the taxability of investments will deplete their finances. Thankfully, the DTC is only a draft and many of its provisions might be amended before it becomes a law. Even so, it is important that taxpayers err on the side of caution and structure their finances in accordance with the imminent changes. This is especially true of tax-saving investments because their lock-in periods extend beyond April 2011, when the DTC is expected to come into effect. MONEY TODAY looks at how you can prepare yourself for the change.

Invest in PPF: Under the EET model proposed by the DTC, contributions to the EPF and PPF would be taxed at the time of withdrawal. However, investments made till 31 March 2011 and the interest they earn will not be taxed. So, it would be a good idea to invest the maximum Rs 70,000 in your PPF account this year. Do so even if you have exhausted your Section 80C limit. Ditto for the EPF. Raise your contribution to the maximum to fatten your account before EET kicks in. "The grandfathering clause will ensure that the accumulated balance up to 31 March 2011 is not taxed," says Neeru Ahuja, tax partner, Deloitte India. Repeat this exercise in April this year to derive maximum benefit from the tax-free status of the PPF. A word of caution: don't let these investments skew your overall asset allocation.

Avoid traditional insurance plans: As mentioned earlier, income from traditional endowment and moneyback life insurance policies will be taxed under the DTC. There is a debate whether this will be with retrospective effect or if the government will set a cut-off date as it has done for the PPF and EPF. Till there is clarity on the taxability of income from such policies, avoid buying new plans. If the insurance income is made taxable, the 6-7 per cent returns earned from traditional plans will dwindle to 5.4-6.3 per cent in the tax slab of up to Rs 10 lakh income. In the higher bracket (up to Rs 25 lakh), the returns will be lower at 4.8-5.4 per cent, and 4.2-4.9 per cent for the highest slab.

Spread your investments: If a person's income is below the tax threshold, he can avoid TDS by submitting a declaration at the time of making a bank deposit. The DTC has complicated rules on TDS. The declaration will have to be submitted to the tax department, which will then issue a certificate. A better way would be to spread investments to avoid TDS if your income is below the taxable limit.

Don't surrender Ulips: The DTC has raised the tax-saving investment limit from Rs 1 lakh to Rs 3 lakh and reduced the number of options. Ulips will continue to be tax-saving instruments though the income will be taxed if the annual premium is more than 5 per cent of the sum assured. "Ulips offer investors the dual opportunity of providing financial security to deal with eventualities as well as reaping market-linked returns," says Frederick D'Souza, senior vice-president, underwriting and claims, HDFC Standard Life Insurance. So, don't even think of surrendering your Ulip. It could be your best tax-saver under Section 66 of the DTC.

Skip insurance premium: We said earlier that you should invest the most in the PPF this year. However, it may be difficult to spare the money if you pay a big life insurance premium. If you have paid at least three years' premium on your endowment and money-back policies, skip the premium this year. Insurers levy a small penalty for missed premiums but the policy does not lapse.

Avoid long lock-ins: Fifteen months from now, all investments and incomes will be governed by the DTC. Therefore, experts are advising investors against fresh, long-term investment commitments. "Avoid instruments where the lock-in period extends beyond April 2011," says Sanjay Grover, tax partner, Ernst & Young. Go for diversified equity schemes instead of ELSS if your Section 80C limit is exhausted. You won't be able to redeem ELSS investments before 2013.

Go for the dividend option: The dividends you receive from mutual funds are tax-free, but certain funds are subject to dividend distribution tax (DDT), which is paid by the fund house and deducted from your fund's NAV. Equity funds are exempt from DDT but debt-oriented funds pay 15 per cent of the payout, while liquid funds pay 25 per cent. It is likely that the DTC will levy a 15 per cent DDT on equity funds as well. Even so, the dividend option will be a better bet for those with an income of over Rs 10 lakh a year. They will be required to pay only 15 per cent compared with the 20 per cent marginal rate of tax. For those with an income of Rs 25 lakh a year, the dividend option will reduce tax on capital gains from 30 per cent to 15 per cent.

Prepay home loan: The tax incentives on home loans are only meant to reduce the burden of the borrower. Under the DTC, tax deduction under Section 24B is proposed to be withdrawn. This means prepaying your home loan may be the best investment idea for home loan customers in 2010. In any case, the year is expected to be lacklustre. Other investments may not be able to earn the 10 per cent you are paying on the loan without any tax benefits.