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Direct Tax Code (DTC): Highlights and Impact

Posted in Finance, Income Tax, India.

The New Direct Tax Code (DTC) is said to replace the existing Income Tax Act of 1961 in India. DTC bill was tabled in parliament on 3oth August, 2010. There are big changes now in monsoon session and There are now much less benefits as compared to what were in the original proposal.

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, but same could not be fulfilled.

Again, as per budget presented on 16th March, 2012, Implementation of Direct tax code has again been deferred and won’t be applicable from 1st April, 2012. Also check out changes in taxation in 2012 budget.

Highlights of Direct Tax code

1. Removal of most of the tax saving schemes: DTC removes most of the categories of exempted income. Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will loose tax benefits.

2. New tax saving schemes: Tax saving based investment limit remains 100,000 but another 50,000 has been added just for pure life insurance (Sum insured is atleast 20 times the premium paid) , health insurance, mediclaims policies and tuition fees of children. But the one lakh investment can now only be done in provident fund, superannuation fund, gratuity fund and new pension scheme (NPS).

3. Tax slabs: The income tax rates and slabs have been modified. The proposed rates and slabs are as follows:

Annual IncomeTax Slab
Up-to INR  200,000 (for senior citizens 250,000)Nil
Between INR 200,000 to 500,00010%
Between INR 500,000 to 1,000,00020%
Above INR 1,000,00030%

Men and women are treated same now 🙂

4. Home loan interest: Exemption will remain same as 1.5 lakhs per year for interest on housing loan for self-occupied property.

5. Short and long term gains: Only half of Short-term capital gains will be taxed. e.g. if you gains 50,000, add 25,000 to your taxable income.
Long term capital gains (From equities and equity mutual funds, on which STT has been paid) are still exempted from income tax.

6. EEE and EET: As per changes on 15th June, 2010, Tax exemption at all three stages (EEE) —savings, accretions and withdrawals—to be allowed for provident funds (GPF, EPF and PPF), NPS (new pension scheme administered by PFRDA), Retirement benefits (gratuity, leave encashment, etc), pure life insurance products & annuity schemes. Earlier DTC wanted to tax withdrawals.

7. Education Cess: Surcharge and education cess are abolished.

8.  Income arising from House Property: Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent.

Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not put to rent. But, under the Direct Tax Code 2010 , such a concept has been  abolished.

9. LTA (Leave travel allowance): Tax exemption on LTA  is abolished.

10. Education loan: Tax exemption on Education loan to continue.

11. Corporate tax: Corporate tax reduced from 34% to 30% including education cess and surcharge.

12. Taxation of Capital gains from property sale : For sale within one year, gain is to be added to taxable salary.

For long term gain (after one year of purchase), instead of flat rate of 20% of gain after indexation benefit, new concept has been introduced. Now gain after indexation will be added to taxable income and taxed at per the tax slab.
Base date for cost of acquisition has been changed to 1st April, 2000 instead of earlier 1st April, 1981.

14. Medical reimbursement : Max limit for medical reimbursements has been increased to 50,000 per year from current 15,000 limit.

15. Tax on dividends: Equity mutual fund will attract 5% dividend distribution tax (DDT). DDT has been removed from debt and non-equity based mutual funds but now dividends on non-equity funds will be taxable in investor’s hand as per his slab rates. There will also be a TDS 0f 10% (20% in case of NRI and companies)  if dividend is more than 10,000 Rs for non-equity funds.

15. News for NRIs : As per the current laws, a NRI is liable to pay tax on global income if he is in India for a period more than 182 days in a financial year. But in new bill, this duration has been changed to just 60 days.

An NRI will be deemed as resident only if he has also resided in India for 365 days or more in the preceding four financial years, together with 60 days in any of these fiscal years.  Even if an NRI becomes a resident in any financial year, his global income does not immediately become liable to tax in India. Global income would become taxable only if the person also stayed in India for nine out of 10 precedent years, or 730 days in the preceding seven years.

This is very unfair to Seafarers. To avoid any income tax, an Indian sailor employed with a foreign ship will have to stay maximum for 60 days in India.

You can download the bill tabled in parliament from below link:

  Direct Tax code bill (1.1 MiB, 24,503 hits)


474 Responses

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  1. BhanuMurty says

    Let’s see the reverse engineering approach. the FM wants to live on:
    1. Exempted Income of Rs.200000
    2. HRA of say Rs.120000(After exemption)
    3. Tax saving of Rs.150000
    4. Exemption of Rs.10000 on Bank Interests
    5. Professional tax of Rs.2400
    6. EPF of Rs.9360
    7. All other allowances of Rs.35000 approximately
    8. Balance salary account after expnses; Say Rs.100000, as surplus
    9. Other Annual Expenses, without a home loan: Rs. 23000
    In Total, You should have at least Rs.500000.
    Come on, he is reasonable in his calculations. You need not pay a single paisa on tax upto 5 Lakhs!
    REALLY?

    • BhanuMurty says

      So, what is the secret?
      I should live on Rs.360000 approximately! That means Rs.30000 per month. That means 1000 rupees a day!By the way, for a family of 4, it means Rs250/- per day, which in MSAhluwalia’s calculations is far above the Rs.23 per day mark.
      REMARKABLE!
      Because, you need not worry about your future, as the government will take care of you with a PENSION SCHEME

  2. Vaibhav says

    1. I understand that post DTC premium paid for insurance policies will loose tax benefit if sum assured <20 times premium paid. What happens to the premium paid for the policies where sum assured <20 times premium paid, but are purchased before commencement of DTC?

    2. Also, house loan principal repayment will loose tax benefit once DTC is implemented. What happens if loan is taken before DTC? Whether principal repayment will continue to enjoy tax benefits for such loans?

    • Pankaj Batra says

      @Vaibhav
      1. Most likely, benefit for policies purchased before DTC applicability would continue as it is.
      2. Tax benefit for principal repayment would go away most likely even on existing loans.

      Having said that, these are just assumptions. What will happen actually, would come out only when DTC bill is enforced by Finance minister.

  3. Enki says

    Hi Pankaj! Now that DTC hasn’t been implemented, what is the status of taxation of Dividend plans Vs Growth plans of Mutual funds? DTC proposed a 5% Dividend distribution tax, is that in force yet?

    • Pankaj Batra says

      @Enki
      As DTC is not in force yet, all existing rules (which were present in FY 2011-12) would continue.

  4. Deepak Malik says

    Dear sir
    i want to know about the full detail of all tax if u r taking full knowledge of all tax plz tell which book i have purchase my future thanks

    • Pankaj Batra says

      @Deepak
      We have not read any book on income tax. The knowledge is only from online articles and daily newspaper.

  5. Pratibha says

    Hello Pankaj,

    Since DTC implementation not yet in force, any investment made in ELSS will get tax benefitive? Can FM enforce it retrospectively (eff 1 apr,2012) declaring it say in the month of oct or nov or dec, 2012

    • Pankaj Batra says

      @Prathibha
      Tax benefit for tax saving mutual fund would continue this financial year as well.
      Its highly unlikely that finance minister would remove this tax benefit in middle of the year. There would be strong mutual fund industry pressure too to keep it going for whole year.

  6. Sundar says

    Hi Pankaj

    I am now working overseas (NRI) and my salary is transferred to my Indian acct from overseas by my company
    I now hear that our company is considering the option of paying for staff in the currency of their home country and payment may be made out of their entity in India.
    Will my income then become taxable(I will still work overseas) and also will i still keep my NRI status.

    Pl. advise
    Regards
    Sundar

    • Pankaj Batra says

      @Sundar
      All income received in normal Indian savings account would be taxable in India.

  7. Swapan Kumar Sen says

    The IT website notifies that tax-payers having income above Rs. 10 lakhs have to file returns for 2012-2013 electronically. Does this mean that persons having taxable income (after allowing permissible deductions) above Rs. 10 lakhs will have to file the return electronically?

  8. Raj says

    Do we need to submit bills for LTA..?

    • Pankaj Batra says

      @Raj
      You need to have bills for LTA. There may not be a need to submit same to employer, but income tax department may ask for same later.

  9. sushil says

    But original bills of LTA/LTC are submitted to employer for claim. How a employee can keep records/bills ?

    • Pankaj Batra says

      @Sushil
      There is no need to submit original bills to employer. One must only provide a photocopy to employer.

  10. Naveen says

    sir am getting month salary 30,000. so how much i have pay income tax? i dont any policies, loans . plz tel me sir

  11. Anilkumar says

    I am a NRI for past 8 year and senior citizen. I have only interest income in India.
    I have a PPF account 25 years old. I have deposited Rs. 1 Lakh in this. Do I get 80C benefit for this as this account was opened while I was a resident.
    My LIC policies are almost getting matured and hence Premium has diminished to around 20,000.
    I have also contributed Rs. 1 lakh to ICICI Prudential policy debt+equity with life cover.

    Now, can I take benefit of 80C full value of Rs. 1 lakh?

    • Pankaj Batra says

      @Anilkumar
      Deductions towards investment into existing PPF account would be available u/s 80C.

  12. Mrs.Saraf says

    hello mr.pankaj,
    if i open a NPS account today, will the withdrawals be tax free after application of DTC?

    • Pankaj Batra says

      @Mrs Saraf
      Withdarwals from NPS tier1 account would be tax free even after DTC also.

  13. Nitin says

    Hi Pankaj,

    I’m currently investing a SIP of 2000 each in the following:
    DSP Blackrock Eop 100 Equity fund, HDFC Top 200 fund, HDFC Equity fund and IDFC Premier Equity fund.
    Now I want to have a new SIP for our newborn baby. Could you please suggest some good options for the same.

    I don’t want to invest in any tax saving scheme as I already have the 80C deduction for my home loan principal amount.

    Thanks,
    Nitin

  14. sundar says

    Hi

    The FM said during Budget speech that DTC is with Standing Committee and will be implemented from April 1,2013.
    Any idea :
    1) If it will be implemented from April 1,2013
    and
    2) Residency norms for NRI’s

    Regards
    Sundar

    • Pankaj Batra says

      @Sundar
      Can’t say when it would be implemented as it would need to be passed in parliament as law first.

  15. Jaiprakash Agarwal says

    where I Put the Medical Allowance in income tax calculation in f.y.2013-14 of pankaj batra .com Excel Sheet.

    Please repy.

    • Pankaj Batra says

      @Jaiprakash
      You need to put medical allowance under Row 21 (Medical Reimbursement row)

  16. mayank sharma says

    Q Can u tell me what are the major changes brought about in DTC bill 2009 and present ?

  17. prashant says

    Which of the following will now be replaced by the new direct tax code?

1 9 10 11



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