9/6/2010 Decoding Direct Tax Code

Publication: The Economic Times Mumbai;Date: Sep 6, 2010;Section: ET Investors Guide;Page: 27

Decoding Direct Tax Code

While the latest DTC provides some relief to tax payers, it still
leaves much room for improvement
BAKU L CH UGAN TONGIA ET I NTELLIGENCE GROU P

THE much-awaited Direct Tax Code (DTC) Bill, which aims to replace the existing Income-Tax Act, 1961, has finally
been presented in the Parliament and once approved by both Houses, it will be enacted as a law, effective from April
1 2012. While a lot had been anticipated from the DTC in terms of widening of tax slabs and reduction in tax rates,
the proposal in its current form does not have a great deal for the aam aadmi. For one, though the tax slabs for
individual tax payers have been widened, the resultant savings in the hands of the individual tax payers is just a
pittance.

TAX SLABS: The DTC proposes to increase the limit of income exempt from tax to 2 lakh from the current 1.6 lakh
for individual and to 2 lakh from 1.9 lakh for working women. This will result into a minimum saving of 4,000 per annum
for individuals and 1,000 per annum for women.

On the positive note, the new proposal aims to abolish the distinction between the individual and a women tax
payer, bringing both of them at par — at least as far as payment of taxes is concerned. But given the rising cost of
living with each day, an additional disposable income of about 4,000 and 1,000, respectively, does not sound much
appealing.

Moving higher on slab rates, income falling between 2 lakh and 5 lakh will now attract a tax rate of 10% while that
falling between 5 lakh and 10 lakh will be taxable at 20%. This proposal, if implemented, will replace the current tax
structure where income falling between 1.6 lakh and 5 lakh is taxed at 10% while that between 5 lakh and 8 lakh is
taxed at 20%. Thus, there is a marginal relief for those who have income between 8 lakh and 10 lakh.The DTC also
proposes to raise the income slab rate, which attracts the maximum tax rate of 30% from the current 8 lakh to 10
lakh. The maximum amount that a tax payer can save, if the DTC proposals are approved in its current form, is
24,000 per annum.

DEDUCTIONS: Under the current tax laws, Section 80C is probably one of the most popular sections of the Income-
Tax Act as it allows a deduction up to 1.2 lakh from the taxable income if the same has been invested productively in
selected investment avenues. The DTC has not only proposed to retain the structure but also enhanced the limit of
the deductions up to 1.5 lakh. It has, however, modified the basket of investment avenues eligible for deduction under
this clause.

The DTC proposes to include only contribution to funds like PPF, PF, superannuation fund and the New Pension
Scheme (NPS), up to a maximum of 1 lakh, as eligible investments for deduction under this clause. An additional
deduction of 50,000 shall be allowed for payments made towards insurance premium, tuition fees and premium paid
towards mediclaim. Thus, the current deductions under Section 80D with respect to mediclaim premium up to 15,000
for self and an additional 15,000- 20,000 for dependent parents shall stand redundant once the new DTC comes into
play with the maximum amount of deduction for mediclaim, insurance premium and tuition fees being restricted to
50,000 only.

What also falls out of the investment ambit is the tax-saving mutual fund schemes (ELSS), unit-linked insurance
plans (Ulips) and the five-year tax saving bank fixed deposits. In fact, equity mutual funds and Ulips shall now attract
a dividend distribution tax (DDT) of about 5% if the current proposals are accepted. This means that any income
received as dividends from equity mutual funds and Ulips will be taxed at 5%.

The DTC proposals also raise doubt about the prospects of infrastructure bonds which were introduced by the
finance minister earlier this year, promising an additional deduction of 20,000 with respect to investment made in
these bonds as the current proposals are silent on this front.

The proposals continue to allow deduction on interest repayment of up to 1.5 lakh on housing loans. But the new

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code has done away with the deduction on repayment of principal on such housing loan, which is currently
admissible under Section 80C up to a maximum sum of 1 lakh.

POINTS TO PONDER

Thumbs Up?

The DTC proposal to increase the limit of medical reimbursement will bring in some cheer

The long-term capital gains arising from equity investments continues to be tax exempt even under the new DTC

Thumbs Down?

The deductions under Sec 80D with respect to mediclaim premium up to 15,000 for self and an additional 15,000-
20,000 for dependent parents shall stand redundant once the new DTC comes into effect Know Your Numbers Well

EXEMPTIONS: While there is nothing much to rejoice as far as the reorientation of tax slabs and deductions from
income are concerned, the DTC proposal to increase the limit of medical reimbursement will bring in some cheer.

With medical expenses going off the roof, the DTC proposes to enhance the limit of reimbursement made by an
employer for medical expenses incurred by an employee from the current 15,000 to 50,000.

DTC is also set to introduce an allowance payable by an employer to an employee to meet his personal expenses.

CAPITAL GAINS: For the relief of many, especially those investing in equities either directly or through mutual funds,
the long-term capital gains arising from such investments continues to be tax exempt even under the new DTC. Long-
term gains on these instruments arise if the same have been held for more than one year.

As far as the short-term capital gains are concerned, that is gains made on listed equities or equity mutual funds
held for a period less than one year, the DTC proposes to tax the same at the rate of 5% or 10% or 15% depending
upon the individual tax payers’ tax slab of 10% or 20% or 30%, respectively. Thus, for a person earning an income of
9 lakh per annum, the applicable tax slab will be 20% and correspondingly any short-term capital gains made shall be
taxable at 10%. This appears more benign on investors’ pocket considering the 15% short-term capital gains tax
applicable currently.

bakul.chugan@timesgroup.com

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