It was a fine morning, and certainly not the kind of day to gag on one's morning cup of tea. But that's what happened to Ujjwal Deb, 28. His wife, Aditi Chatterjee, 27, detected the culprit immediately. It was the newspaper. A taskforce on direct taxes, under Vijay Kelkar, had recommended tearing up decades of tax policy, and resetting the scales for salaried individuals to a simple two-slab it system (20 per cent for Rs 1-4 lakh income, and 30 per cent above that), with no exemptions.

It was quite a blow for Deb, who works for Sapient Corporation, and his wife, who works for ICICI Prudential. Together, they earn over Rs 10 lakh a year, and stay in Deb's parents' house in Sarvodaya Enclave, a posh South Delhi locality. So far, they have invested in government of India bonds, some mutual funds and some insurance policies, besides putting money in their public provident fund (PPF) accounts. Much of what they do is driven by the need for safety, and the prospect of income tax (IT) exemption. That's not the only reason they are upset. The young couple wanted to buy an apartment, perhaps in a Delhi suburb like Gurgaon, on a loan-and were planning to pay tax-deductible instalments.

Deb and Chatterjee, however, are reacting to the news only on the basis of the status quo-in which they have a stake. Their plans may get overturned, they fear, and their minds are dominated by the thought of losing their tax sops. But have they really given serious thought to the issue?

Common Sense, Please

What the Kelkar Committee proposes, is to wipe the slate clean-to end the so-called Exemption Raj. No more sops for this, that or the other. No more state-directed investing. This is part of the reforms agenda.

From a market perspective, the broad idea is to allow demand and supply to function unhindered, and thus ensure that tax policy does not distort your investment decisions. The logic: your money should go where you see your returns (or benefits) getting maximised, not where the government wants it to go.

From a citizen's perspective, it's common sense that the simpler a taxation regime, and more understood by the barely-literate, the more equitable it is, with no question of one sort of lifestyle (home loan, endowment insurance policy et al) being favoured over another.

"The report is good in the sense that it makes taxation matters simple. Why should you need consultants to understand them?" asks U.R. Bhat, Director and Chief Investment Officer, JF Asset Management (India) Private Ltd, part of JP Morgan Fleming Asset Management, India. Compliance, he says, goes up when taxation is seen as simple and fair, and when the system is efficient, ensuring a timely refund.

Mindless concepts, such as the 'standard deduction' will now be history, if Kelkar's report is accepted. Also, as Dhirendra Kumar, Managing Director, Value Research, says, "The report does away with surcharges." Good. All surcharges do is complicate tax calculations.

Still, there are many people who might prefer all the complications- so long as they get to pay less tax. Psychologically, taxation hurts.

But would the new recommendations slam salaried folk with more tax? That's still not clear. For most people who don't have a housing loan and who haven't done all their investments in search of tax-saving instruments, the proposals are welcome.

But what about Deb and Chatterjee, who have done everything they legally could to minimise their tax burden? They have reason to be unhappy. Unhappy, but not crestfallen. It wasn't as if they have escaped taxes altogether, so far. Let's presume that each of them earns Rs 5 lakh per annum. Given the permissible limit on tax-deductible investments of Rs 1 lakh, a housing loan would have helped the couple since an interest of Rs 1.5 lakh is tax deductible-and everything would have been hunky-dory.

But now, if Kelkar's suggestions are taken, then housing sops will start getting axed from next year's Budget; Kelkar has proposed a three-year phase-out, with the deduction limit falling to Rs 1 lakh in 2003-04, Rs 50,000 in 2004-05 and nil the following year.

Would that leave the couple at the mercy of the taxman? Well, yes, since their taxable income would go up. But maybe they can redirect their savings and investments to higher-return avenues to make up for what they lose by way of taxes. As for the apartment, maybe they ought to go for it only if they value in owning property, rather than as a tax break.

Tough Decisions

Change is never easy. Deb and Chatterjee are not the only ones who might find that they have to make their own investment decisions, putting money where it gets a good return instead of where it saves taxes, as they used to before.

What should people do?

Here's some advice from two experts for people in their thirties, forties and fifties:

Thirties: Stockmarkets are dicey. But there is money to be made, at least on well-researched picks, if you time your purchase well. Bhat's advice to you is that you don't dabble in stocks you know little about. Mutual funds may open a better route to this market. Debt mutual funds are perhaps even better, not to mention PPF and well-rated bonds. Buy a house only if you plan to live in it.

Forties: Now is the time to put your money in aggressive growth funds and equities, feels Bhat. By now, you have probably accumulated a corpus of PPF, and have already bought a house (move to a bigger one). "Buying a house should never be looked at as an investment," says Kumar, because it delivers no return. Play the stockmarket, if you have a large enough war chest to put at risk.

Fifties: First thing first: write a will. And if you still haven't bothered to buy a medical insurance, "do that now, before insurance companies start turning down your application", says Bhat. Also, time to start turning the investment portfolio safer. Take a fresh look at your life insurance policies. This is also the time to study the pensions and annuity scheme markets. Not the time to buy a house, though.

All in all, it seems like the Kelkar Committee recommendations are not all that bad, once the shock of change is overcome (after all, reforms aren't as a rule sweet deals). What you, the individual, must do now is to start thinking seriously about where you would put your hard-earned money-not to save tax, but to get the best returns.