Direct Tax Code at Glance (released 15th June, 2010)

Direct Tax Code at Glance (released 15th June, 2010)

Summary Points

The new direct tax law proposes sweeping taxation changes to promote long savings and retirement benefits. Save more money and save more tax, that seems to be the principle guiding the government's new direct tax code that allows higher tax exemptions for long term savings and retirement benefits.

1

Provident fund investments would continue to be treated under exempt exempt and exempt (EEE) regime which means that the investments would be tax exempt at the investment stage, earnings stage (when interests are earned) and withdrawal stage.

The new draft has proposed EEE method of taxation for Government Provident Fund (GPF), Public Provident Fund (PPF) and Recognised Provident Funds (RPFs) and the pension scheme administered by Pension Fund Regulatory and Development Authority. Approved pure life insurance products and annuity schemes will also be subject to EEE method of tax treatment.

Investments made, before the date of commencement of the DTC, in instruments which enjoy EEE method of taxation under the current law, would continue to be eligible for EEE method of tax treatment for the full duration of the financial instrument.

2

the current distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset will be eliminated. Income under the head Capital Gains will be considered as income from ordinary sources in case of all taxpayers including non-residents. It will be taxed at the rate applicable to that taxpayer.  Indexation facility would be available to all investment assets held for more than one year.

The cost of acquisition is generally with reference to the value of the asset on the base date or, if the asset is acquired after such date, the cost at which the asset is acquired. The base date will now be shifted from 1.4.1981 to 1.4.2000.

Currently, short-term capital gains arising on transfer of listed equity shares or units of equity oriented funds are being taxed at 15 per cent and long term capital gain arising on transfer of such assets is exempt from tax. The withdrawal of this regime will raise the tax liability and may cause fluctuations in the capital market.

3

Personal Income Tax Rates

1.60 lakh annually : Nil tax liability. (1.6 lakh for men, Rs 1.9 lakh for women, and Rs 2.4 lakh for senior citizens)

Rs 1.6 to Rs 10 lakh per annum : @ 10%  (Existing Rs. 1.60 to Rs. 5 Lakh)

Rs 10-25 lakh per annuam:  @ 20% (Existing Rs. 5 to Rs. 8 Lakh)

over Rs 25 lakh per annuam: @ 30% (Existing over Rs. 8 Lakh)

4

Reduciton in Wealth Tax

net wealth in excess of Rs 50 crore will be charged at 0.25 per cent as wealth tax. (Existing in excess of Rs. 30 lakhs @ 1%)

5

80C Limit Increase

It is proposed in the New Direct Tax Code to increase the 80C limit to Rs 3 lakhs from the current Rs 1 lakh. There may be a marginal increase in this limit in the current budget. The increase in limit is proposed to be applicable to individuals and HUFs (Hindu Unified Families).

6

Rent Deduction Reduction

In case of rental income 30% was the deduction allowed for maintenance of the property. The New Direct Tax code plans to reduce this to 20%.

Any service tax paid for receiving services related to the house property is deductible. This is a feature which is currently not available on any income for individuals.

7

Perks to be Part of Salary

This will negate the increase in the tax slabs to some extent. The impact will be felt by all salaried persons as currently items like Leave Travel Allowance, House Rent Allowance and Medical Reimbursement can be tax free (or less taxed) if supporting expenses documents are provided.

8

MAT

MAT to be computed on the basis of Book Profit (In earlier draft it was proposed on Gorss Assets but particularily for loss makiing Company and Companies having long gestation period would find it difficult to Pay MAT on Gross Assets)