Domestic households savings contribute significantly to India's overall domestic savings rate.

The credit goes to the Indian tax laws to a certain extent, as they provide tax incentives to individuals to invest in some specified tax-saving instruments.

Section 80C of the Income Tax Act (Act) provides for a deduction of 1 lakh in certain investments (tax saving instruments )/ payments made during the year.

The various investments which are eligible for deductions under Section 80C are equity-linked savings schemes (ELSS) offered by LIC and mutual funds, unitlinked insurance plans (Ulips) for self and/or spouse, children, life insurance policies for self, and/or spouse, children, employees contribution to recognised provident funds (PF), approved superannuation fund, contribution to public provident fund (PPF); deposits in post office schemes such as National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), if it applies and the post office five-year time deposits, term deposit with a scheduled bank for a period of at least five years, investments made in bonds issued by the National Bank for Agriculture and Rural Development (Nabard) and debentures issued by specified companies.

In addition to the above investments, the following payments also qualify for deduction under Section 80C: payment of tuition fees for full-time education in any Indian university, college, school, educational institution (available for any two children), and repayment of the principal portion of a housing loan.

Besides Section 80C, one can also make an investment up to 20,000 in specified infrastructure bonds to save tax.

Further, an individual gets a deduction of up to 15,000 ( 20,000 where the individual is a senior citizen) for the health insurance of self and his family.

There is an additional deduction of 15,000 where the health insurance is taken for the parents ( 20,000 where any of the parents is a senior citizen).

However, the situation may undergo dramatic changes after the Direct Taxes Code (DTC) comes into play.

DTC, 2010, proposes to restrict the deduction of 1 lakh only to some approved fund(s)such as an approved provident fund, pension fund, super-annuation fund, PPF among others.

However, an additional deduction of 50,000 has been proposed to cover payments such as life insurance premiums (premium not to exceed 5% of sum insured), health insurance premiums and the tuition fee.

That means an individual wont get any tax incentives for existing tax-saving instruments other than those covered in the DTC.

Non-resident Indians (NRIs) visiting India, will need to be more vigilant, post the DTC regime. Under DTC, if their stay in India exceeds 60 days during a year and 365 days for the past four tax years, then they may be considered as residents of India.

Currently, they become residents only when their stay exceeds 182 days.

Once they become a resident, they may have to pay tax on their global income , if their stay in India for the past seven tax years exceeds 729 days and if they are residents in two out of the past 10 tax years. In a nutshell, NRIs run the risk of triggering worldwide taxation soon if they spend a significant time in India.

The DTC proposals relating to individual taxation have undergone significant change since the DTC was proposed in August 2009. One will really need to wait for the final bill, which will become operational from April 1, 2012.