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At first sight the revised proposals under DTC give an impression that exemptions are back where they were. But a closer look at the details reveals that there is a twist in the tale. While it has brought cheer to investors, but financial advisors say other proposals in the revised Direct Tax Code (DTC) could pose some serious problems.
Draft Provisions of DTC: DTC proposed to do away with the exemption available in respect of Leave encashment received at the time of retirement (presently Rs 3 lakh in specified cases and fully exempt in case of government employees).
Draft Provisions of DTC: DTC has proposed to tax the HRA component, which would increase taxable salary. Presently exemption is available to the extent of lower of the following-
Draft Provisions of DTC: Currently medical treatment in specified hospitals is not taxable, nor is payment of medical insurance premium. More so, reimbursement of medical bills is exempt up to Rs 15,000. The DTC seeks to tax all of the above.
Draft Provisions of DTC: DTC has proposed to remove the exemption available. Presently, an employee can claim LTC in respect of travel expenses for self/ family, subject to certain limits. 2 such trips can be availed in a block of 4 calendar years.
Draft Provisions of DTC: DTC has proposed to tax perquisite in respect of accommodation provided in hands of all employees (including government) — valuation rules were to be prescribed.
Draft Provisions of DTC: DTC has proposed to remove exemptions available in respect of these allowances.
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Shift from EEE regime to EET regime for retirement benefits
Draft Provisions of DTC: DTC’s proposal to shift towards the EET mechanism in respect of all retirement investment schemes came in for much criticism.
This meant while deposits and accretions to the retirement benefit accounts, wherever applicable, would remain un-taxed, any withdrawal made would be taxed in that year at the applicable rate.
Grandfathering provisions, which stated that accumulated savings, including those in PF up to March 2011 would not be taxed, were the only saving grace. Revised Discussion Paper (RDP): The RDP has sought to continue with the EEE mechanism in certain instances. However in a few cases, there is a move towards EET.
The focus is to ensure long term savings and uniform rules for contribution and withdrawal would be introduced. Beneficial: Continuance of the EEE regime in case of various investments will ensure that the investors do not suffer any hardship. Further investments made before the date of the commencement of DTC which enjoy EEE method of taxation, would continue to be eligible for the EEE treatment for the full duration of the financial instrument.
The implications are analysed scheme wise below (It remains to be seen whether the limits for the schemes will be part of the proposed overall Rs 3 lakh eligibility cap for each fiscal).
Draft Provisions of DTC: DTC proposed to tax the employer's contributions to PF at contribution stage (presently exempt). In line with EET principle, DTC proposed to tax any amount withdrawn, which is not grand-fathered.
Revised Discussion Paper (RDP): Employer contribution to these schemes within limits (to be prescribed) would not be taxed. Employee contributions would continue to be allowed as a deduction within the overall savings/ investment cap. Withdrawals would be exempt, if they conform to the rules/ restrictions to be prescribed.
Beneficial: EEE continued in these schemes, i.e. it is proposed that withdrawals continue to be exempt.
Draft Provisions of DTC: DTC proposed to tax employer's contribution as salary (currently exempt up to Rs 1 lakh). In line with EET principle, DTC proposed to tax any amount withdrawn, including from RBA (which is not grand-fathered.
Revised Discussion Paper (RDP): Employer contribution would not be taxed (limits to be prescribed) and employee contribution (within prescribed investment limit) would continue to be permitted as a deduction. Further, withdrawals would not be taxed.
Beneficial: Continuance of EEE is beneficial. However, withdrawals may be subject to certain restrictions such as end use or lock in period.
Draft Provisions of DTC: DTC increased the eligible deduction limit for life insurance premium paid to Rs 3 lakhs (presently Rs 1 lakh). However, the maturity proceeds were taxed in case where the premium paid in any year is more than 5% of the sum assured (presently 20%) or the sum is received before the death/completion of insurance term.
Revised Discussion Paper (RDP): EEE continued for all presently issued policies. For new policies issued after DTC implementation, only ‘pure life insurance’ products would be eligible for EEE.
Beneficial: Continuation of EEE for present life insurance policies would ensure consistency & clear tax treatment. Therefore, terminal proceeds from these policies would not be taxed on maturity/death.
If the government prescribes the ‘pure life insurance’ criteria to restrict EEE benefit to plain vanilla life insurance products without any survival benefits, then it could have a large impact on other policies, which have a provision of some maturity benefit even if the insured person survives the term.
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