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, 26,429 hits)

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      • Tax slabs are real dampner, it is almost the same tax slab for people earning upto 8lakhs, on the contratry all allowances will be taxable, so tax slabs should start from min 3 lakhs and 10% till 8 to10 lakhs and 20 % till 15-20 laks minimum.

  1. tax slabs in original DTC :1.6 to 10 L = 10%
    10L to 25L = 20%
    25L above = 30%

    Though no tax txemptions was given even then it was too good.

    In modified DTS some tax exemptions were given but because of modification in tax slad,
    it converted into toilet tissue paper.

  2. Now that there are elections in 5 states, the budget would be presented post 05th March, 2012. Does it mean that we have to wait till end of March to know if DTC would be applicable for f.y. 2012-13? If this is the case how one would make his/her own budget for next year?

    • @Sunil
      You can start planning now as well for next year considering DTC will be applicable from 2012-13.
      There are some chances of DTC getting postponed again to next year, but it should not be a point of worry. You can plan with PPF, term insurance, medical insurance and NPS. All these would be allowed with or without DTC.

  3. भाई लोगो, पगार बँक मे जमा होती है. पगार जमा होते ही जमा रक्कम पार आय कर काट लो… करोडो रुपये खर्च होनेवाला आय कर विभाग बंद कर दो. करोडो रुपये बच जायेंगे. सरकार को हर महिने पैसा मिलेगा. और हमे झुटे बिल/ रिटनस फाईल करनेकी जरुरत नाही पदेंगी. सब का काम सरल होगा. कुल आय कर का ४०% केंद्र सरकार का, ३०% राज्य सरकार का ३८% उस जिले का या तहसील कार्यालय का… २% बँक का.. खेल खात्म और सभी नेता लोग खुश 🙂

    • ऐक बात बताना भूल गया था… ऐसा आय कर सिस्टम चिये तो जन लोकपाल को आंदोलन मे सामील हो जो… पैसा बचावो… देश बचावो… कला धन वापस लावो…

  4. Re: Income from 2nd House (Rented) Property. If the deduction (maintenance plus interest on house loan) exceed Gross Rent, can we set off negative amount against other income to arrive at IT liability in FY 2011-12 and will it remain so under DTC?

    • @T bala
      In FY 2011-12 if interest on home loan exceeds rent income (after 30% deduction for maintenance), it can still be claimed for exemption. There is no upper limit of interest exemption in case a rented house.
      Under DTC, this won’t be allowed, but interest would only be deductible against rental income. If interest is more, no benefit would be provided for the extra amount.

  5. Dear Pankaj,

    Please clarify if contribution to PPF will qualify for deduction/exemption after DTC is implemented. I am under the impression that after DTC implementation, only PF and NPS are the option.

  6. What will be the saving instruments under 80C for senior citizens as PPF is a long term savings unsuitable for senior citizens.

    • @J P Gupta
      There won’t be enough options left for senior citizens to save income tax after DTC.
      All options on saving side in 1 lakh bucket are long term (PPF and NPS). Lets see, if finance minister does some changes in this bill in budget to be presented in March 2012.

  7. Hi Pankaj,

    Thanks for, great elaboration to DTC.
    I need to know that people who have existing ULIP policies will be able to exempt tax or not?

  8. Dear Pankaj
    According to the income tax act of 1961, to retain NRE status
    is satisfying just 182 days or less stay in India, enough or even the 365 days in past
    4 years and 60 days in the previous year to be satisfied.
    Thanks and regards

  9. Currently, amount spent by employee on Fuel & Maintenance of car is reimbursed if car is used by employee for partly official and partly personal purpose. Perquisite value is considered as Rs. 1800 per month for cars having engine capacity less than 1600 c.c. and perquisite tax is applicable on this amount. However, expenses exceeding Rs. 1800 p.m. are non-taxable (subject to some limit).

    Will this continue under DTC?

  10. The Congress Govt is not taking any action on the froud done by MP’s & MLA’s with billons of INRs. How shame to think of the getting the revenue with NRI tax. They donot have common sense of thinking the reality. Any body who works in the Europe need to pay 40% of Tax from Gross income, then if he pays once again 30% to Indian Govt. How could it be lead a life in the europe with rest 30% of the income ? The worst politician will not think of the reality.

  11. Is there no way for the Senior Citizens to save tax under Sec 80C? PPF is practically ruled out, a new PPF investment does not make sense for those who are advanced in age.

  12. it is we seafarers who are trapped…we work really hard for 6months out there at sea takin all risks..and we r paid for the work and risk we take…and it is for that reason that we are given a long vacation as at sea we are really standby for 6months *7days*24hours…and now if its said we cant stay 4 more dan 60days so as to make our earnings non-taxable…is it fair…this govt has done nothing good to the people and now y are they imposin such a cruel rule…also now the govt can earn lot as der are lot of seafarers out there in india….and as foriegn countries use for development wil our govt use…i dont think so…most of this wil go to the politicians themselves…and wen it comes to some bills like lokpal they shrinks their forehead…they want money for just themselves…this wil surely reduce the number of seafarers 4m india 2 less dan 50% from the now number….as its better 2 work abroad or even india..instead of mayin 30% of wat u earn wit risk and stayin away 4m family, dat too with steppin on land…