The New Direct Tax Code (DTC) is said to replace the existing Income Tax Act of 1961 in India - and would be presented in the winter session of the Parliament. It is expected to be passed in the monsoon session of 2010 and is expected to be enforced from 2011. During the budget 2010 presentation, the finance minister Mr. Pranab Mukherjee reiterated his commitment to bringing into fore the new direct tax code (DTC) into force from 1st of April, 2011.
The new code will completely overhaul the existing tax proposals for not only individual tax payers, but also corporate houses and foreign residents. It has been drawn with inspiration from the prevailing tax legislation in US, Canada, UK. It is a topic of interest and a matter of concern for every taxpayer in India. The new DTC also seeks to take the bold step of moving from EEE (Exempt-Exempt-Exempt) to EET (Exempt-Exempt-Taxed) system of taxation for various investment avenues, most importantly the PPF.
The most striking feature is the rationalization level of tax slabs at various levels. The proposed slabs suggest a major overhaul in the intent of CBDT. A glimpse of the intended structure has already been seen in the Union Budget 2010 wherein the tax slabs have been liberalized to a great extent. More on Budget 2010 here:
Here are some of the salient features and highlights of the DTC:
1. The concept of “Previous Year” has been replaced with “Financial Year”, which essentially means the year beginning from 1st of April of the respective year. Thus financial year 2009-10 would mean the year beginning on 1st of April, 2009.
2. Income has been broadly classified into two heads, which are:
- Income from Ordinary Sources
- Income from Special Sources
3. Income from Ordinary Sources includes:
- Income earned as Salary
- Income from Business or Profession
- Income from House Property (rental income)
- Capital Gains
- Residual income from miscellaneous sources
4. Income from Special Sources includes:
- Winning from Lotteries
- Winning from Horse Race etc.
- Specified income of Non Residents
5. Any losses arising of Ordinary Sources may be eligible to be set off or carried forward against income from Ordinary Sources ONLY without any time limit. Similarly for Income from Special Sources.
6. Scope of income is expanded to include value of perks, gifts, profit in lieu of salary and capital gains but excludes farm income.
7. DTC removes most of the categories of exempted income. In order to make up for the same, the tax rates and slabs have been modified. In effect on the first glance the tax liability looks a lot less with the new rates and slabs – however, there needs to be calculations made to get the true impact of overall tax liability. This particularly holds true for people who have been claiming the “home loan” tax benefits.
8. The tax rates and slabs have been modified. The proposed rates and slabs are as follows:
| Annual Income | Tax Slab |
| Up-to INR 160,000 | Nil |
| Between INR 160,000 to 1,000,000 | 10% |
| Between INR 1,000,000 to 2,500,000 | 20% |
| Above INR 2,500,000 | 30% |
9. The DTC abolishes the difference between Short Term Capital Gain and Long Term Capital Gain - and makes Long Term Capital Gain taxable. Therefore, the “Capital Gains” on shares and securities is to be taxed as income. Capital gains on investment assets (equities and units of equity oriented funds) held for more than a year to be computed after deducting a specified percentage, without indexation, and added to total income of the taxpayer.
Capital gains on asset held for less than a year from the end of the financial year in which it is acquired to be computed without specified deduction or indexation.
10. The securities transaction tax or STT has been abolished.
11. The upper limit on Tax Savings based investment has been hiked from INR 100,000 to 300,000.
12. The long term savings schemes (e.g. PPF) would be moved from EEE (Exempt-Exempt-Exempt) to EET (Exempt-Exempt-Taxed) method of taxation.
- The savings are exempted from Taxation (subject to the INR 300,000 limit)
- The accretion of income till withdrawal is exempted
- Any withdrawal made is taxable with the only exception of: Withdrawals pertaining to approved Provident Fund accumulated balance as on 31 st of March, 2011.
As per changes on 15th June, 2010, Tax exemption at all three stages—savings, accretions and withdrawals—to be allowed for provident funds, pension scheme administered by PFRDA, pure life insurance products & annuity schemes. Earlier DTC wanted to tax withdrawals.
13. ULIPs, Equity MF (ELSS), Term deposits, NSC (National Savings certificates) and house loan principal repayment will loose tax benefits. Only GPF (general provident fund), PPF (public provident fund), NPS (New pension scheme by PFRDA), annuities and pure life insurance (term insurance) schemes will be exempt from tax at all 3 stages.
14. No tax deduction is allowed on interest payable to banking firms and insurers.
15. Dividend will continue to be tax-free in the hands of investors.
16. For incomes arising of House Property, the Gross rent is to be calculated as the higher amount of:
- The contractual value of the rent’
- Presumptive rate of six percent of rateable value / construction cost / acquisition cost
17. Deductions towards interest payment of House Loan for the self occupied property would not be allowed in the DTC. Exemption will remain same as 1.5 lakhs per year for interest on housing loan.
18. Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent.
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I want to ask for DTC that will HRA,medical component, LTA would be eligible still?
@Amit
There won’t be any deductions for HRA, Medical and LTA in new direct tax code as of now. However, Its applicable from Apr’ 2011. So lets hope some more clarity in that matter comes till that time.
please give me updates on dt code & when i t is applicable
@Chander
It will be applicable from April 2011.
Dear Mr Pankaj,
I have worked in two companies in this financial year.1) April- July 2) August- March(till data).How should the tax be charged and the slabs of tax should be taken for clculating tax.My present company is taking annual slabs for tax calculation (for example 100000 limit 80 C).Is it correct.Wont i be paying less tax and then while filling return ,i will have to pay the difference .Please advise. Thanks & regards, Pravin
@Pravin
Please download tax calculator from this link: http://www.pankajbatra.com/india/income-tax-calculator-india-2008-2009-2010/
You have to add income from both companies in order to calculate total tax.
You must inform your current employer to include income from previous employer for tax calculation. If its not done now, you will have to pay yourself.
in PY 2009-2010 my income from sale of shares is 78000. How is this going to affect my tax liability. I am a salaried person with salary income of 400000.
@Pramod
Tax computation for income from sale of shares depends upon how long you kept shares with you. Taxation is different for long term and short term capital gains.
Hi Pankaj,
I have LIC unit link policy whose current value is Rs.210,000/-. If I sell it off now then will be the amount taxable?
@Suman
As of now, returns from ULIP are tax free except pension plans.
Hi Pankaj,
I have a couple of questions.
1. Can you elaborate on what is meant by EEE and EET method of taxation
2. From Apr 2011 what will be the policy for education loan and housing loan repaymnets?
@Mukund
E means Exempt, T means Taxable.
First letter is for investment stage, 2nd for Earnings stage, 3rd for Withdrawal stage.
Almost all of the investment schemes are exempt at investment stage, slowly govt is moving all other towards EET or ETT.
As of now, there is a talk to remove Housing loan benefits in DTC, but there is not much details out, it be clear in future when Govt comes out with details.
Dear Pankaj Batra
I am salaried person in a psu bank and have opted pf not pension
Due to my health condition i wish to retire and was waiting for bank wage stllement outcome which is due on 15th april 2010.
WHat would be my tax liabailty on my pf fund and employer’s pf fund and gratuity and leave encashment. WIll it be taxed if i opt to retire after 1st april 2010.
Please guide me
@Sanjay
If you have more than 5 years in EPF account, then the redemption is non-taxable. Leave encashment amount is also non-taxable at time of retirement or leaving the job. Gratuity is non-taxable upto Rs 3.5 Lakhs. Rules are same after 1st April, 2010 also.
I am salaried person.
I have two questions:
1. I invest in shares. In 2009-2010 financial year, i earned Rs.78000 in intra day trading and earned Rs. 15000 from the shares which i invested 1 year back. In between i received many dividents of Rs. 1500 from companies. Should i pay tax for this income as well? And how much?
2. Do i need to pay tax for the interest received from Saving Bank Account, NSC etc?
@Suman
1. Capital gains from more than one year investment into shares (where STT is paid on transaction) is non-taxable.
For capital gains with less than one year investment, its charged @ 15%.
Dividends from shares are tax free.
2. Interest on Saving account or NSC is taxable at normal tax slab rate, according to your salary.
Hmm,
Fixed deposit interest, just curious is it Ordinary Income or income from other sources ?
Makes a big difference in how one is taxed
Pankaj, Thank you for explaining DTC in simple manner
Can you excplain little bit about income from Farming
Scope of income is expanded to include value of perks, gifts, profit in lieu of salary and capital gains but excludes farm income.
If say i earn 20lk from farming ( the crop belongs to vegetable criteria) and i have no other income am i still need to pay tax on it ?
@Vinod
Income from agricultural land is not taxable at this point. More clarification will only come in Union Budget 2011.
Thank you so much for the clarification
Pankaj,
My understanding is that income earned as interest from fixed deposits are to be taxed @20% flat . Is that changing ?
@Drprab
Income earned from interest is taxable at normal tax rate in which a person all. It can be zero or 10-30% based on other income.
20% TDS is only deducted if PAN is not provided by investor.
Hmm. I thought that in the new Direct Tax code , All interest is considered as income from other sources and incurs a flat 20% tax. And u cannot use this income to apply any deductions.
I am totally lost on how the code states it ?
Hi Pankaj,
Nice article on DTC. Have a basic qn. Can we set off past Short term capital loses filed say in 2009 and now in 2010 against salary income for fy 2011-12? If not how do we set off past ST loses after DTC comes into effect as capital gains is merged with salaries under single head called ordinary sources. Reponse will be greatly appreciated.
Thanks
Ravi
@Ravi
A short-term capital loss can be set off against any income under the head capital gains (whether short-term or long-term) and can also be carried forward for eight years.
Details of taxation details for DTC still not out so we cannot comment on this at this moment.
Dear Sir.
Once this is in force wef 1/4/11-would there still be indexation for capital tax gains?? If not what about very old properties which were purchased for lacs and now sell for crores.That would be a hefty tax to pay and even investing in bonds to save tax is only Rs50,00,000 per annum , so one would have to pay tax for the difference.
@Mahesh
Still detailed explanation of DTC has not been released and it will be out by July end this year. Once that is out, we will know the indexation and capital gain taxation rules.
Hi Mr.Batra.
Quick query on rental income. If you let out a portion of the house you are living in for rental purposes , can you claim a portion of property taxes as deductions and how would you declare the income. I was not sure how the 30% or the proposed 20% maintence deduction will work in that case.
Will appreciate your response.
@Drprab
Yes, you can claim maintainence deduction, its a percentage of rental income and not the house value.
Thanks Mr Batra , how about taxes ? can we claim a portion of it
@Drprab
Yes, you can deduct proportionate house tax on rental income.
why are some of the things striked??
@Siddhartha
Earlier, the striked items were also a part of Direct tax code, but with latest notification some parts have been changed.
Dear Sir,
I have two houses First self occupied No loan on this house Also No income from this house ( As self occupied)
Second One given On rent Hence Earning income from this house
I have two queries
1) Which Form Should I use For filling return For A.Y. 2010-11 ITR 1 OR ITR 2 ?
2) While claming Housing loan interest Can i claim actual amount ( i.e more than 1,50,000) Pl. calrify?
@Rajendra
1. You have to fill ITR 2.
2. You can claim any amount (even more than 1.5 L) for home loan interest payment, if the same house has been given on rent and you show rental income in your return.
Mr. Pankaj Batra I have read all your answers to all the different queries raised by different persons. Your answers were quite upto point. I have came to get many of my own doubts solved by reading them. Good job……
@Esha
Thanks a lot!
mr pankaj
ye dts bilkul galat hai, tax limit minimum 160000 hai. jisse medium family mare jayenge. aamiro ke liye limit exceed kiya gaya hai bt what for poors?
Annual Income Tax Slab
Up-to INR 160,000 Nil
Between INR 160,000 to 1,000,000 10%
Between INR 1,000,000 to 2,500,000 20%
Above INR 2,500,000 30%
jo jyada earn kar rahe hain unhe tax ka load kam hi hai
minimum slab 300000 hona chahiye.
it is totally unfair with medium classs.