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.
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 Income | Tax Slab |
| Up-to INR 200,000 (for senior citizens 250,000) | Nil |
| Between INR 200,000 to 500,000 | 10% |
| Between INR 500,000 to 1,000,000 | 20% |
| Above INR 1,000,000 | 30% |
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, 28,348 hits)
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View Comments
Sir,
Please clarify what is the maximum amount that can be carried over
to RBI Bonds for purpose of LTCG on property when capital gain is
itself over 3crores? Will indexation apply as on 1Apr 2000 from this
year as per DTC(because this can make a huge difference in tax?
Kindly reply each query individually.Thanks!
@Mani
Maximum amount that can be invested to capital gains bonds u/s 54EC is 1 crore (50 lakhs is max limit per financial year and it has to be done in 6 months from sale of property, so if 6 month period fall in two FYs then 1 crore can be invested).
After direct tax code, capital gain computation will have to be done with indexation with base year as 2000-01. Fair market value as on 1st April 2000 will be considered as purchase price. After this computation, whole gain will be added to taxable income and taxed as per your slab rates.
Hi Pankaj,
It kinda off-topic but related to the tax impact under the DTC. What are best govt issued tax savings bond that you would suggest both for Indian citizens and NRI's? Thanks.
@Ravi
What sort of tax saving bonds you are looking for.
Pankaj - I am looking for any kind of long-term bonds with a good rate of return and preferential tax treatment.
@Ravi
You can invest in long term infrastructure bonds (issued by IDFC, L&T, PFC etc). Duration will be 10 years and interest around 8%.
But max exemption available will be 20,000 only.
Sir,
Sincere thanks for the information.Now the Q arises as to whether it would be wiser to effect transaction during FY2011-12 than FY2012-13. If the Capital Gains is high(over3crores)will it be better off to be taxed at 20% (after providing 1.5C for new property, 50+50L for 54EC) than be taxed next year based on income slab (even after taking indexation base date as 1Apr 2000) Which in your opinion is Tax-smart?
@Mani
Yes it will be better to execute transaction in FY 2011-12 before DTC comes into picture. It will save you 10% of income tax.
Sir,
I heard that there will be no effect for seafarers. Please clarify. Some news from websites say so. Thank you.
@Sekhar
Can you please share the details or the link where you got the news for seafarers.
Hi Pankaj,
its a nice article but I think you missed out completely on the the NRI segment.
Clause 4 of New Direct Tax Code says
4. (1) An individual shall be resident in India in any financial year, if he is in India—
(a) for a period, or periods, amounting in all to one hundred and eighty-two days or more in that year; or
(b) for a period, or periods, amounting in all to
(i) sixty days or more in that year; and
(ii) three hundred and sixty-five days or more within the four years immediately preceding that year.
(2) The provisions of clause (b) of sub-section (1) shall not apply in respect of an individual who is—
(a) a citizen of India and who leaves India in that year as a member of the crew of an Indian ship; or
(b) a citizen of India and who leaves India in that year for the purposes of employment outside India.
Although this might appear tricky but it clearly says the following which is exactly same as mentioned in Income tax act, 1961
1) Anyone who has stayed for more than or equal to 183 days outside India will be considered as NRI.
2) Anyone who has stayed in India for more than 365 days in 4 financial years and has stayed in India for 60 days or more will not be considered as NRI except in cases where a person leaves India for the purpose of employment outside India or joins as Crew member of an Indian Ship. This means that even if you spend 365 days+ in last 4 years and spend 60 days + in India in that financial year, you can still be considered to be an NRI provided you leave India for the purpose of employment outside India or Join as a Crew member of Indian Ship. If at all you are outside India without any emplyment for other purposes like Higher studies, leisure etc, you will not be considered as an NRI.
Hi Pankaj,
Great article. 2 quick questions.
QUESTION 1
========
Previously, when NRIs became resident, they would be treated as RNOR (reisdent but not ordinary resident) for 2 further FYs (provided they were NRIs in 9/10 prior years & sum of visits in last 7 FYs <730 days).
My understanding is that RNOR is being removed from FY2012/13. However, the government is allowing residents an exemption for 2 further years (just like RNORs).
Is this correct?
QUESTION 2
========
My undertsanding is that the benefits of becoming an RNOR is :
1. You don't pay income on global income (just the Indian portion),
2. You don't need to convert your NRI a/cs to resident A/Cs right away.
Is this correct? And will these benefits be available to people the government is allowing a one-off exemption of 2 years to on 1 Apr 2012?
Many thanks in advance
@Sib
1. Under Direct tax code, ‘Resident Not Ordinarily Resident (RNOR)’ category has been removed to simplify the tax laws. After DTC, only residents and non-residents status will be there.
After DTC, NRIs who become residents may not be required to pay tax on their global income, if they satisfy any of the below conditions.
a. they have been a non-resident in India in nine out of ten preceding financial years; or
b. they havebeen in India for less than 730 days, during the seven preceding financial years
2. While status of individual is that of RNOR, his foreign income is not taxable in India and NRI accounts can also be kept during this time period.
Hi Pankaj, there is a rumour that sea farers will still be exempted from this limitations of 62 Day, is it true???
Please also advise what sea farers can do as I dont want to migrate to any other country like Canada or Australia where the taxes are high but you get some sort of social securities in return????
@Manoj
I don't have such information. Do you have a relevant section in news somewhere?
I only heard it as a rumor but not sure where it spread from, but can you advise us what sea farers should do as we are away from families when we are on ship so we have to come back to India for at least 4 to 6 month per year which is obviously above then 60 days.
We can migrate to better countries like Canada, Australia where the taxes are around 40% but in return we get social securities, free education for kids, medical cover and many other benefits but emotionally its dosent suits to many of us.
regards
@Manoj
Moving to foreign countries is a personal choice, which some people take.
India has still a low rate of income tax and there are more opportunities in India now than anywhere else in world.
My income is less than 5 lacs and i am sr citizen. my pension and interest income less than 5 lacs. Whether i have to submit 15 H/or any other form to the bank and request them not to deduct Tds @10% of interest income. Earlier 15 H was not accepted since i was above 60 and not 65. Now this condition i removed and all are treated as sr citizen above 60 treated as sr citizen for the purpose of income tax.
@EliasMiranda
You still will have to submit form 15-H to bank to request them not to deduct TDS on bank interest.
Hi ... I was not clear about the Housing Loan part. Are you saying that we are not getting exemption for the interest paid for the housing loan under DTC? Thanks.
@Anil
You will be getting same exemption on home loan interest even after DTC implementation.
Thank you very much Arun Goyal for your message dated June 19th, however I still have a doubt under Clause 4 (2) (a). Does this apply for sea farers joining foreign ships also?
Hello Pankaj,
Iam an IT professional and i do browse so many tax blogs but i found your blog interesting and informative
I would like to know about short term capital gain tax on shares,how the broking firm calculated?
If we transfer shares from one broking firm to other broking firm will it fall into the STCG tax category?but the shares fall into the LTCG tax because i hold for more than 1 years or so
@Sunil
If you transferred shares from one brokering firm to another it should not fall under STCG, as sale of shares have not been done.
If overall holding of shares has been more than a year, it will come under LTCG.
I agree with you but how come the broker come to know that the shares which i hold is more than one year?
Tell me one thing,according to the DTC,long term cap gain tax is not exempted from the tax,let me know how much % they will deduct from the profit?
@Sunil
if you have bought shares from same broker, it will have data about your transactions, so it can show your long term and short term gains.
Even after direct tax code, long term gains from shares/mutual funds are exempted from income tax, if STT has been paid on transactions.