in Finance, Income Tax, India

Direct Tax Code (DTC): Highlights and Impact

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, 27,430 hits)

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474 Comments

  1. plot purchased in 2000 for Rs. 55000/- and sold on 01.07.11 for Rs. 240000/-. On this my software is showing a long term capital gain of rs. 143682/-. Whether this amount of long term gain is taxable?

    • @Rani
      Yes, long term gain would be taxable @ 20% rate.

      Purchase Year = 2000-01, Purchase Cost = 55000, Cost Inflation Index (CII) for purchase year = 406
      Sale Year = 2011-12, Selling price = 240000, CII for sale year = 785
      Indexed Purchase price = 55000 x (785/406) = 106342
      Long term capital gain = 240000 – 106342 = 133658
      Income tax on capital gain = 133658 x 20% = 26731.6

    • So is the DTC coming at all from April 1 ,2012 or likely to be postponed.Am more interested in the residence limit(60 days etc) for guys going out of India on work /NRI etc…
      Who, if any is exempted from this condition

  2. Hi Pankaj.

    I asked you clarification re DTI and NRI snow birds(Seniors coming to spend their winters in India. Some western countries like Canada, U.S. and U.k have tax treaties with India and hence, we are exempt from the 60 day rule( the old 180 rule still applies). Is this true? Thanks

    • @Baldev
      Direct tax code is still a bill and not been passed in parliament yet.
      Please wait till it gets passed as there are news that old 180 days rule would continue.

  3. Hi.. I am planning to take ICICI LifeStage waelth 2 Policy in FY13. Do I get any Tax benifit from FY13 onwards??

  4. my client has business income of rs. 15717/- and long term capital gain of Rs. 143682 and also income from other sources is Rs. 54750/-and deduction u/s 80c is rs. 100000/- and 80D is .rs. 15000/-. what is his tax liability.

    • @Rani
      Deduction for 80C and 80D are not available against long term capital gains. So deduction would be limited to 15717+54750 for 80C and 80D.
      Rest capital gains would become taxable, but as this amount is less than taxable limit, no tax would be payable.

  5. Hi just going thru following extracts of DTC : So if any person fulfills any one of following condition will be treated as Resident on India … will that persona will be allowed to enjoy all the rights as Indian Citizen e g Passport , Driving Licence , take part as a voter to vote for Countries Parliament etc ….
    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

  6. So what are your expectations from this budget 2011-12?

    Insurance sector will have an impact on this: This is what CEO of Aviva India has to say – The insurance industry in India is at a nascent stage and taxing the maturity proceeds under the proposed DTC will adversely impact the life insurance business and the industry. It will discourage investors to invest in long-term savings as it may result in unjustified tax burden especially on those customers who do not avail the benefit under Section 80C.

  7. dear sir i work in passanger crusies from the last 8yrs and in 12 months period i work for at least 10 to 9 months on ship my salary comes some times 45 to 50 thousand ruppees per month depending on the rate of pound and dollars in india. m i liable for tax and if yes how much i should and where should i pay?

  8. hi pankaj sir.
    i want to know .
    Only income earned in India would be taxable in case one gains a non resident status.
    or othars country income also texable

  9. Hi Pankaj,

    I have taken a insurance policy in dec 2011 in which sum assured is less than 20 time of premium. Do i need to pay tax on premium after implementation of DTC.(most probabily after 2013)?

  10. So is the DTC coming at all from April 1 ,2012 or likely to be postponed.Am more interested in the residence limit(60 days etc) for guys going out of India on work /NRI etc…
    Who, if any is exempted from this condition

  11. Que(1)I got a Capital Gain of Rs.23,00,000/- by selling a Flat.
    Registration is done by the party who purchased a flat in the month of April 2012.
    Will this be considered as the date of selling for me?

    Que(2)If answer to Que(1) is YES, Can I invest this amount in FD for one year i.e. till May2013 without getting taxed for this LTCG?

    Que(3)I’m not planning to purchase any property now as I want to utilise this amount for my Kid’s future. In such case, how can I best utilise the LTCG. I mean is there any option that I can invest in any kinds of Infrastructure bonds and forever get rid of Tax on LTCG? If the answer is YES, I want to know what are those bonds, what is the locking period, within how much period of selling the flat these bonds need to be purchased and how much is the annual rate of interest? Once, the locking period is over, can I get rid of LTCG and make use of this amount in opening FDs, etc.

    Que(4)Since, I got LTCG of Rs.23,00,000/- from selling of a Flat, can I make use of this amount in purchasing a land of around Rs.10,00,000 and remaining amount of Rs.13,00,000 being utilised for constructing the house on the same purchased land?

    • @SharadaG
      1. The day you handover property to buyer (possession date) would be assumed as date of sale. Generally transfer sale deed date is also accepted for same.
      2. You can invest this amount anywhere before 31th July 2013, without loosing tax benefit u/s 54.
      3. If you don’t want to purchase residential property and get tax benefit u/s 54, you need to invest capital gains into capital gains bonds u/s 54EC to ave tax. This must be done within six months of sale. Amount would be locked for three years. Rate of interest is 6% p.a. Interest would be taxable like normal income as per slab rates. After lock-in period, you can use amount wherever you want.
      4. Long term gains can be used to buy land and constructing house on it and get tax benefit u/s 54. House construction should be completed by three years time from date of sale.

      • Thanks Pankaj.
        Need one more clarification from you;
        (1)I’ve registered a Flat in the year June 2008 for Rs 14,00,000 and sold the property to the purchaser for Rs 37,00,000.
        If the purchaser registered the Flat on April 2012 for Rs 23,00,000. What will be the capital gain for me?
        (2)I’ve paid Rs 50,000/- to the land owner for Generator connection and Rs 1,50,000/- to the Agent towards Commission from the amount I received from the purchaser. Can I deduct this amount from the capital gain?

        • @SharadaG
          1. Capital gains would be computed on basis of registered sale deed value. If assumed as 23 lakh, your gains would be around 2.6 lakh. This is assuming CII for 2012-13 as 850, its not been declared yet.
          2. Amount paid to property dealer can be deducted from sale consideration but generator connection amount won’t be applicable.

  12. Hi Pankaj,
    Can you please clarify my below question:
    I have booked a under construction flat this year and I would be paying Stamp Duty and Registration by this year end but I will be getting possession of the house by next financial only.
    Can I claim charges incurred towards Stamp Duty and Registration for income tax deduction under Section 80C in this financial itself?
    Thanks in advance!

    • @Parimal
      As per rules, stamp duty and registration charges are deducted u/s 80C for residential house property purchase. Even if possession is received later, deduction can be claimed.