Ellen Glasgow said; “All change is not growth, as all movement is not forward.” The much awaited and debated Direct Tax Code is an attempt to change the archaic tax laws which has so far fuelled many discussions on its merits and the changes that it proposes. One will have to wait and watch if it actually keeps up with its timeline.
Decoding and gearing up to DTC
When antiquated rules have to be replaced with new ones, the changes must be dramatic and path breaking, P Chidambaram, was the finance minister when he had stated so while releasing the draft Direct Tax Code, 2009 for public comments. A lot has flown under the bridge since then, Chidambaram is no more the finance minister, and the tax code has since been through revision to emerge as the DTC Bill, which was introduced in the Parliament in August 2010. The revised proposal on DTC has been a welcome pragmatic document that has maintained the basic direction of the legislation and has at the same time rubbed off some of the angularities of the proposed legislation.
Though the 319 Sections and 22 Schedules in DTC 2010 looks more confusing than the 298 Sections and 14 Schedules in the Income Tax Act, 1961; it is simplified tax structure and legislations. And, with just few more months to go before the new tax code comes into effect, a lot has to change, especially the way individuals plan their taxes and invest.
Income Tax Rate
The proposed tax slab rates do not have the very senior citizen category which is currently present and is likely to be introduced. Differential tax slab for women has been done away and senior citizens will have exemption up to Rs 2.5 lakh.
Definition of residency and scope of income
The category of ‘Not Ordinarily Resident’ is abolished and only two categories of taxpayers proposed—residents and non-residents. The additional condition of 729 days is retained only to ascertain taxability of overseas income.
A citizen of India or person of Indian origin living outside India and visiting India will trigger residency by staying in India for more than 59 days compared to the more than 181 days proposed earlier.
Source of Income
Unlike the past when the five heads under which income was categorised; the new code has clearly defined income under two heads which takes care of all possible sources of income that one can have.
Currently, the Income Tax Act offers individuals an annual deduction of Rs 1 lakh under Section 80C that can be used for investments in instruments such as PPF (up to a cap of Rs 70,000), PF, NPS, ELSS, premium for pure life insurance or ULIP, principal repayment of home loan, NSC, fixed deposits with a maturity of five years, payment of tuition fees for full-time education for up to two children. Moreover, in the current financial year (April 2011 through March 2012), one can get an additional deduction of Rs 20,000 for investing in certain notified infrastructure bonds under 80CCF. Additionally, 80D gives a deduction of Rs 15,000 towards medical insurance.
Under the DTC Bill, some of the deductions have changed. What was available as the 80C deduction of Rs 1 lakh is now available as a deduction towards investments only in retirement products such as PPF, PF, NPS and in savings schemes as notified by the Government. These are all eligible for taxation under EEE treatment, wherein EEE refers to the tax incidence—exempt at time of investment, exempt during accumulation and exempt at withdrawal. These will be available for the tax year starting April 1, 2012.
There is also no mention of LTA or LTC in the exemptions, indicating that the sop has been done away with.
Additionally, an aggregate deduction of Rs 50,000 is available towards premium payment of pure life insurance, health insurance and tuition fees for two children. As a result, the total deduction available is Rs 1.5 lakh. Two products, tax planning mutual funds and Ulips were eligible for deductions under Section 80C as was the deduction towards repayment of principal for an outstanding home loan; however, under the DTC Bill all these three options are no longer eligible for deductions.
Housing loan comprises 50 per cent of the total deduction of up to Rs 3 lakh on savings. Income from equity-oriented mutual funds or life insurance schemes will be subject to tax at 5 per cent as against being tax free at present. Capital gains on listed securities held for more than a year will not be subject to tax. For those listed securities held for less than a year, it will be taxed at 5-, 10- or 15 per cent depending on the marginal tax rate of the assessee. Securities transaction tax, however, will continue.
Tax Deduction at Source
•The rates for deduction of tax at source on payments to residents range from 2 per cent to 30 per cent.
•The rates for deduction of tax at source on payments to non residents range from 10 per cent to 30 per cent.
•Failure to furnish PAN (permanent account number) continues to result in deduction of tax at a higher rate of 20 per cent.
•Tax officers authorised to issue certificates for tax deduction at nil or lower rate.
•Central Government to notify instances wherein taxpayer is required to report payments made without deduction of tax.
Impact on Deductions
•An aggregate deduction stipulated at Rs 50,000 towards life insurance premium, health insurance premium and tuition fees for two children.
•Deduction to a person with disability and for medical treatment and maintenance of a dependent person with disability stipulated subject to prescribed conditions.
•Deductions in respect of contributions or donations to certain funds or non profit organisations proposed.
•An individual not receiving house rent allowance allowed deduction towards payment of rent up to a maximum limit of Rs 2,000 per month, subject to prescribed conditions.
•The deduction for interest paid on loans for higher education for a period of eight years to be restored.
Points to Ponder
•The DTC does not talk about the amount up to which the interest paid on education loan would be exempt from income tax. Does it mean any amount of interest is exempt?
•The DTC does not talk about deduction of up to Rs 20,000 under section 80CCF available on investment in infrastructure bonds. Does it mean it won’t be available under DTC?
•Bank fixed deposits of five year duration enjoy deduction under section 80C. Would this be allowed under the Direct Tax Code (DTC)?
•The DTC does not talk about the limits up to which retirement benefits like gratuity, leave salary, etc. will be exempt from income tax.
•The DTC does not talk about the treatment of perquisites like company car, employer provided housing accommodation and others.
•The DTC is not clear about continuing exemption to investments in Senior Citizens Savings Scheme (SCSS), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS), life insurance premiums other than term insurance.
•The DTC is not clear about taxation of returns from insurance products other than term insurance (For example, Unit Linked Insurance Products - ULIPs).