The Direct Tax Code or the DTC bill which was presented in Parliament has raised much confusion among the tax payers and the investors. Let us try to understand the implications of Direct Tax Code Bill.

In today’s date, there are many instruments in which one can invest like employees provident fund (EPF), public provident fund (PPF), pension plan, insurance policies, equity-linked savings schemes (ELSS), Unit Linked Investment Plan (ULIP) and children’s tuition up to Rs 1.10 lakh. In addition to this, one can also invest Rs 10,000 in infrastructure bond and Rs 15,000 in health insurance. All this makes a sum of Rs 1.35 lakh. In case of an investor with an annual income of Rs 10 lakh, the investment can be of Rs 1.5 lakh.

1)    Tax Rates under the Direct Tax Code (DTC)
(i)    Exemption Limit:

Provision of DTC bill: The proposed limit is at Rs 200,000 (for senior citizens it’s Rs 250,000).

Existing Tax Provision: The limit is Rs 160,000 for me and for women it is Rs 190,000 and for senior citizens it is Rs 240,000.

(ii)    Slab rates:

Provision of DTC bill:

< Rs 5 lakh —> 10%,   5–10 lakh —> 20%     and Income > 10 lakh —> 30%

Existing Tax Provision:

< Rs 5 lakh —> 10%,  5–8 lakh —>20%   and Income > 8 lakh —> 30%
Implication: Gives a saving of Rs 24,000.

2)    DTC continues EEE (Exempt – Exempt -Exempt)

(i)    Govt PF/recognized PF/Public PF:

Provision of DTC bill: Same as present.
Existing Tax Provision: 12% salary of the employee to be contributed to PF with an eligibility of Rs 100,000 for overall deduction.
Implications: Beneficial

(ii)    Superannuation fund:

Provision of DTC bill: Exempt on employees’ eligibility to overall deduction of Rs 100,000. No tax on maturity payments.
Existing Tax Provision: Exempt on Rs 100,000 per annum on employees’ contribution and also withdrawal.
Implications: No tax liability on end-payments.

(iii)    Life insurance policies:

Provision of DTC bill: Up to deduction limit of Rs 50,000 (including mediclaim & tution fees) premia is eligible and for policies with premium>5% premia is not deductible. For premium<5%, exempt on maturity proceeds and death. 5% tax on equity linked life insurance.

Existing Tax Provision: Up to deduction limit of Rs 100,000 premia is deductible and for policies with premium<20%, it’s an exempt on the sum.

Implications: Cash back insurance policies would result in an amount to be taxed. Low threshold of 5% of sum. The effective yield of equity linked insurance schemes would lower due to 5% distribution tax.

(iv)    Mediclaim Insurance premium:

Provision of DTC bill: For self/spouse/children/dependent parents, deduction limit is of Rs 50,000.

Existing Tax Provision: For self/spouse/children deduction limit is of Rs 15,000 and for parents, additional deduction of Rs 15,000 is entitled.

Implications: Helps parents to be independent.

(v)    Investment avenues reduced substantially:

Provision of DTC bill: No deductions on avenues.
Existing Tax Provision: Rs 100,000 deduction.
Implications: Adverse

3)    Salary Components

(i)    House rent allowance:

Provision of DTC bill: Continuation of exemption.
Existing Tax Provision: Availability of exemption.
Implications: Beneficial

(ii)    Leave encashment:

Provision of DTC bill: Specification on retirement up to limits for exemption to be allowed.

Existing Tax Provision: In specified cases, exemption is up to 3 lakh and for govt employees it’s fully exempt.

Implications: Exemption available.

(iii)    Medical facilities/reimbursement:

Provision of DTC bill: No tax on medical facilities but Rs 50,000 exempt on medical expenses.

Existing Tax Provision: No tax on medical treatment but Rs 15,000 exempt on medical bills.

Implications: Advantageous

(iv)    Leave travel concession:

Provision of DTC bill: Exemption removed.
Existing Tax Provision: Exempt subject to conditions.
Implications: Should be taxable.

4)    Retirement benefits

(i)    Gratuity, VRS, commutation of pension:

Provision of DTC bill: Exempt on such benefits is subject to conditions.
Existing Tax Provision: In specified cases exemption is available (for gratuity 5 lakh and VRS 10 lakh).
Implications: Alleviates hardships.

5)    House property income:

(i)    Notional rent taxation stopped:

Provision of DTC bill: Rent only if received/receivable is taxed.
Existing Tax Provision: Rent even if not let out is taxed.
Implications: Beneficial

(ii)    Deduction for repairs:

Provision of DTC bill: Deduction of 20% of gross rent.
Existing Tax Provision: Deduction of 30%
Implications: Not favorable.

(iii)    Interest on housing loan for self-occupied property:

Provision of DTC bill: Deduction is up to Rs 1.5 lakh.
Existing Tax Provision: For an individual not having one house property the deduction is up to Rs 1.5 lakh.
Implications: Beneficial

6)    Capital Gains
(i)    Securities Transaction Tax:

Provision of DTC bill: To be continued as present.
Existing Tax Provision: On recognized stock exchanges.

(ii)    Equity fund shares/equity oriented mutual units(STT paid) :

Provision of DTC bill: 100% gains allowed if held>12 months else 50%.
Existing Tax Provision: If held<12 months, 15% gains is allowed.
Implications: Beneficial

(iii)    All other investment assets:

Provision of DTC bill: Holding period is reduced to 12-24 months. Benefits by 1 April 2000.
Existing Tax Provision: Holding period is of 36 months. 20% of gains taxable if long term else as per slab rates
Implications: Beneficial

Hope this article clears some of the confusions arising out of the Direct Tax Code Bill. Please share your views and concerns regarding to the Direct Tax Code bill here.

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