What Direct Tax Code has for You?

Tax system in India is guided by its own set of laws. Reforms in these laws are carefully watched by many, who look for reduction in the amount of tax they pay. ‘Direct tax code’ which is expected to change the face of taxation in the country has been a topic of discussion among businessmen, employees, corporates and many others since last two years. This content attempts to educate people in various areas of the new tax law, ‘Direct Tax Code (DTC)’.

 

Direct Tax Code occupied the table of parliamentary debate in 2009. The complexities in the existing tax laws, a need for tax law that can match the rapid economic growth of the country lead the search for new tax law. Direct Tax Code has similarities with tax laws of United States of America and United Kingdom. According to our finance minister Mr. Pranab Mukherjee, DTC has been proposed with an intention to create a larger base to include more number of tax payers and lessen the burden on individual tax payer. The proposed DTC was referred to a committee headed by a former Finance Minister Mr.Yashwant SInha. The proposed DTC with changes recommended by the committee is expected to be enforced from 1st of April 2012 and this article will enhance your awareness on the same.

 

Income slabs: One of the major changes made in DTC is the existing income slabs for taxation. The changes in comparison with the income tax act of 1961 are mentioned below.

 

 

Medical allowance: The allowance or exemption on medical expenses of a salaried person that is allowed during a year is extended to Rs 50,000 a year from the earlier limit of Rs 15,000. With the increase in the prices in health care field this change is very much appreciated.

 

Leave Travel Allowance: The Leave Travel Allowance (LTA) to be abolished.

 

Home loan: There is good news and there is bad news when it comes to repayment of home loan. The repayment part of the home loan that goes towards principal amount of the loan is not exempt from tax. The part of installment that goes towards interest on home loan is exempt from tax. This exemption is limited to Rs 1,50,000 per year. This feature is applicable for a house that is self occupied. For a house that is rented, the rent received will be taxed in accordance with total amount received as rent per year. This amount excludes the property taxes paid to municipal authority.

EET or EEE: One of the drafts of DTC had introduced tax in the third stage (collecting return from a scheme) for investments in few areas like provident fund and pension schemes. This is changed to EEE where investment, interest accrual and withdrawal of accrued amount from scheme are exempt from tax.

 

Exemption Limits: The tax exemption limit is proposed to be increased to Rs.1, 50,000 from the current Rs.1, 20,000. Currently, Rs.1, 00,000 can be invested in approved funds and principal repayment of housing loan and the balance Rs.20,000 can be invested in infrastructure bonds. As per the proposed DTC, Rs.1,00,000 can be invested only in Provident funds, New pension scheme ( NPS ) , superannuation funds and gratuity fund. Investments in NSC, principal repayment of housing loan, fixed deposits, etc. is removed from the approved list of tax saving instruments. An additional Rs.50, 000 can be claimed only if the amount is used to buy pure life insurance policies where the sum assured is 20 times the annual premium paid, medical insurance, health insurance and tuition fees of children.

 

Wealth Tax: The wealth tax to be increased from the current Rs.30,00,000 to Rs.1 crore and thereon to be taxed on slab basis.

 

Capital Markets: The Securities Transaction Tax (STT) to be abolished and the short term gains and long term gains should be appropriately calibrated. The distinction between listed and unlisted companies is to be removed.

 

Dividend Tax: The equity mutual funds will now be levied with a 5% dividend distribution tax and the dividend on non-equity mutual funds will be taxed in the hands of the investor as per his income slab.

 

Corporate Tax and MAT: For corporates the taxation under DTC has some changes. It has reduced the existing tax limit from 33% to 30%. Minimum Alternate Tax (MAT) is a phenomenon that is applicable to capital-intensive companies that cover their book profit. MAT is increased from 18% to 20% under the DTC.

 

Resident status: Non Resident Indians and foreigners who have their source of income in foreign countries will be taxed on that income, if they have stayed in India for more than 730 days when 7 years preceding the financial year is taken into account.

 

Foreign companies: A large number of FIIs invest in India through Mauritius to avoid paying tax on capital gains in India by claiming exemptions on the basis of Double Taxation Avoidance Agreement (DTAA). The government should ensure that the FIIs don’t escape Capital Gains tax. The corporate bodies that have their origin abroad and hold more than 50% of its assets in India are likely to pay capital gain tax based on percentage of asset holding in India.