There was lot of expectation from Direct Tax Code (DTC), which is going to replace the Income Tax Act.1961.But when it was tabled in the parliament on 30th August.2010, the big reforms are missing. It can still undergo minor changes because, the date of implementation is 1st April.2012.
There will be 3 slabs for the calculation of Income Tax. 2 – 5 lakhs, 5 – 10 Lakhs and above 10 Lakhs. The rates of tax will be 10%, 20% and 30 % respectively. There will not be any higher education cess and Surcharge. For Women the slabs and rates will be the same, but for senior citizens (above age 65), the 1st slab start at 2.5 Lakhs.
Direct Tax Code-Major Changes
1. Annual medical reimbursement eligible for exemption has been increased to Rs.50000/- from the current Rs.15000/-
2. Employer’s contribution to superannuation funds in excess of Rs. 1Lakh pa is taxable now. This will become tax free under Direct Tax Code(DTC).
3. Employee contribution upto 1Lakh p.a to New Pension Scheme (NPS) is tax exempt.
4. Withdrawal from NPS will be tax exempt.
5. Sec. 80C allows an exemption of 1.5 Lakhs under Direct Tax Code(DTC). Out of this, 1 Lakh will be allowed for PF, Gratuity, Superannuation funds, NPS, PPF etc. Another 50000 is reserved for Life Insurance Premium, Premium for health Insurance and tuition fee.
6. 80C benefit for Life Insurance will be allowed only if the annual premium is within 5% of the Sum Assured. This means, most of the endowment and ULIPs will go out of tax benefits. Only term plans will qualify for tax benefits.
7. Principal repayment for Home Loan will not enjoy tax benefits under Direct Tax Code(DTC). Interest paid will continue to enjoy benefits upto 1.5 Lakh. Interest paid on educational loan will also qualify for exemption.
8. Investment in NSC, Senior Citizen’s scheme, ELSS etc. will not enjoy any tax benefits under Direct Tax Code(DTC).
9. Standard deduction of 30% is reduced to 20% for calculation of tax exemption for housing property in case of multiple properties.
10. Concept of notional rent is no more while calculating taxable income in the case of multiple house property.
11. The base date for calculation for indexation is changed to 1.4.2000 from 1.4.1981.
12. Any investment product such as gold, real estate etc. if held for more than 12 months from the end of the financial year in which it was bought, shall qualify for indexation benefits. This will make the exit from such schemes more tax efficient.
13. Long term capital gains arising from equity/equity related products will be tax free. This will make mutual fund investment for more than 1 year very attractive.
14. At present, short term capital gains from equity/equity related products will attract 15% short term capital gain tax. The Direct Tax Code(DTC) plans to exempt a portion of such gains. The rest will be taxed as per the normal slab rates.
15. Capital gains from any investment assets if reinvested in a residential house property shall be eligible for exemption. Similarly, investing capital gains from the sale of an agricultural land into another agricultural land will also get exemption.
Direct Tax Code(DTC)-Conclusion
Investments in equity/equity mutual funds will be the best avenue for long term investments. We can save through SIP (Systematic Investment Plans) and withdraw money through SWP (Systematic Withdrawal Plan) tax free. Traditional Insurance Plans and ULIPs will lose its charm and a combination of Term plan with mutual fund will be the ideal investment for salary class. They can go for a mediclaim and avail tax benefits on tuition fee also under 80C. NPS and PPF will become very attractive with EEE benefits. Going for multiple housing loans will not be attractive in the current situation.
What are your views on Direct Tax Code(DTC)?