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3 Sep, 2012, 05.

15PM IST, The writer has posted comments on this articleET Bureau

DTC 3.0: Seven personal taxation areas that need a change


The original bill was a path breaking reform, but was watered down in 2010. Here are some ways it can be improved now. Any taxpayer who has just filed his return will tell you how easy the process has become. While filing the return has been simplified, computing the taxable income, calculating the tax and preparing the return are still mired in difficulties. The average taxpayer easily loses his way in the maze of deductions of the Income Tax Act, 1961. Three years ago, the government raised hopes of sweeping changes with the Direct Taxes Code, but Pranab Mukherjee watered it down. Now Finance Minister P Chidambaram has promised to review the DTC once again. ET Wealth identifies seven areas in personal taxation that need to be changed. Exemptions and deductions Original proposal: Did away with most exemptions and deductions. Revised DTC: Reinstated all the sections of the Income Tax Act. What needs to be changed: Every month, millions of Indians fill out fictitious bills to claim tax-free reimbursements and allowances. The average private-sector employee gets 20-30% of his net take-home salary as tax-free reimbursement. Doing away with these exemptions and deductions will simplify the tax structure and plug tax leakages. Tax slabs Original proposal: No tax on income up to Rs 2 lakh; up to Rs 10 lakh taxed at 10%; up to Rs 25 lakh at 20%; and 30% tax on income beyond Rs 25 lakh. Revised DTC: Brought down tax slabs. Basic exemption of Rs 2 lakh; up to Rs 5 lakh at 10%; up to Rs 10 lakh at 20%; and over Rs 10 lakh at 30%. What needs to be changed: If exemptions and deductions are removed, the tax slabs must also be raised to cushion the taxpayers from the impact. The change will not hit the income tax collections because of the higher income in the tax net. Tax-saving limits Original proposal: Higher annual tax-saving limit of Rs 3 lakh for an individual. Revised DTC: Retained the limit, but included in it the home loan benefit of Rs 1.5 lakh. It also set a sublimit of Rs 50,000 for life and medical insurance.

What needs to be changed: It's a throwback to the Section 88 era, when the government decided how one should split tax-saving investments. The sub-limits should be removed and the allocation of Rs 3 lakh should be left to the taxpayer. Real estate Original proposal: Removed the tax benefits on home loans. Rent presumed at 6% of value. Standard deduction reduced to 20% of rental income. Revised DTC: Reinstated home loan benefits and did away with 6% presumptive rent. No change in reduction of standard deduction. What needs to be changed: Any change in tax benefits should be from prospective effect. It would be unfair for existing borrowers if the rules are changed midway. The presumptive 6% rent checks tax leakage and should be reinstated. Capital gains Original proposal: Removed all distinction. All gains were to be uniformly taxed as income. Tax could be deferred by investing in Capital Gains Savings Scheme. Revised DTC: 50% of the long-term capital gains on equities to be tax-free and balance to be taxed at marginal rate. Capital Gains Savings Scheme shot down. What needs to be changed: The original proposal had simplified the tax structure but the revised bill introduced a complex calculation. A uniform tax on all gains, be it from equity, debt or gold (short- or longterm), will simplify things. Life insurance Original proposal: Tax benefits only if the cover is 20 times the annual premium. Revised DTC: No change, but later hinted at lower limit of 10 times the annual premium. What needs to be changed: Life insurance is the favourite tax-saving option for a lot of Indians. The original proposal had sharpened the focus on life cover offered by an insurance policy. This might make it difficult for people above 40 years to claim tax benefits on life insurance policies, but it will also make people buy life insurance for the right reasons and encourage longer terms. Retirement planning Original proposal: One umbrella Retirement Benefit Account (RBA) were to hold all retirement savings of an individual. Revised DTC: Dropped the RBA because it was difficult to build and maintain such a huge data base for individuals. What needs to be changed: The RBA can allow the investor to switch between options without any tax

implications and withdraw only after he is 60. The flexibility it offers can be an impetus for retirement savings. The excuse given in the revised draft that it is difficult to implement is not tenable.