New Income Tax code – It’s time to act

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Recently the draft of the Direct Tax Code was released by Finance Minister Mr.Pranab Mukherjee. The idea is to finalise the Direct Tax Code Bill for introduction in Parliament sometime during the winter session and if it gets the approval it will be implemented for assessment year 2011 (Financial year 2010-11)

This code proposes some sweeping changes. While retaining the basic exemption limits at Rs 1.6 lakh (for individuals), Rs 1.9 lakh (for women) and Rs 2.4 lakh (for the retired), the slabs have been hiked substantially. The following table shows the newly proposed income slabs for taxation.

Proposed Rates of Income Tax
I) In the case of every individual, other than women and senior citizens:
(1) Where the total income does not exceed Rs 1,60,000 Nil
(2) Where the total income exceeds Rs 1,60,000, but does not exceed Rs 10,00,000 10 per cent of the amount by which the total income exceeds Rs 1,60,000
(3) Where the total income exceeds Rs 10,00,000 but does not exceed Rs 25,00,000 Rs 84,000 plus 20 per cent of the amount by which the total income exceeds Rs 10,00,000
(4) Where the total income exceeds Rs 25,00,000 Rs 3,84,000 plus 30 per cent of the amount by which the total income exceeds Rs 25,00,000
II) In the case of women below the age of 65 years at any time during the financial year:
(1) Where the total income does not exceed Rs 1,90,000 Nil
(2) Where the total income exceeds Rs 1,90,000 but does not exceed Rs 10,00,000 10 per cent of the amount by which the total income exceeds Rs 1,90,000
(3) Where the total income exceeds Rs 10,00,000, but does not exceed Rs 25,00,000 Rs 81,000 plus 20 per cent of the amount by which the total income exceeds Rs 10,00,000
(4) Where the total income exceeds Rs 25,00,000 Rs 3,81,000 plus 30 per cent of the amount by which the total income exceeds Rs 25,00,000
III) In the case of senior citizens:
(1) Where the total income does not exceed Rs 2,40,000 Nil
(2) Where the total income exceeds Rs 2,40,000 but does not exceed Rs 10,00,000 10 per cent of the amount by which the total income exceeds Rs 2,40,000
(3) Where the total income exceeds Rs 10,00,000 but does not exceed Rs 25,00,000 Rs.76,000 plus 20 per cent of the amount by which the total income exceeds Rs 10,00,000
(4) Where the total income exceeds Rs 25,00,000 Rs 3,76,000 plus 30 per cent of the amount by which the total income exceeds Rs 25,00,000

Sea Change:

Along with this, the limit of Section 80-C, which has been renamed as Section 66, has been hiked from Rs 1 lakh to Rs 3 lakh. But please don’t get carried away by this hike in exemption. It’s probably a negative move as far as salaried class is concerned. For a salaried person, who gets house rent allowance, medical and other perks until now, will not get tax benefits anymore. Further, leave travel allowance, medical reimbursement, leave encashment etc will now be included as a part of the salary. All the perks in the direct tax code are brought under the tax net. This means the taxable income will now be higher.

Also, while the saving limit has been hiked, the number of instruments that are eligible for tax exemption are less as per the proposal. The prominent tax saving instruments until now eligible for exemption such as Equity-link savings scheme, deposits with banks, repayment of principal for any housing loan taken, and investment in PPF etc., will not be taken into account under Section 80C any more.

Incentives for medical treatment have been retained. So, individuals will continue to enjoy tax benefits on insurance premiums up to a maximum of Rs 15,000 (Rs 20,000 senior citizens) and an additional Rs 15,000 (Rs 20,000 for senior citizens).

For medical treatment of the disabled, an amount of Rs 50,000 (Rs 75,000 for severe disability) and for prescribed diseases, an amount of Rs 40,000 (Rs 60,000 for senior citizens) will still be allowed.

In the Rs 3-lakh exemption under Section 80C/newly proposed Section 66, deduction for the interest paid on loan received for higher education has been included which was hitherto a separate exemption.

Home loan borrowers getting a waiver on interest payments of up to Rs 1.5 lakh would no longer get this benefit, if they are staying in their own house. This is because the gross rent on a self-occupied house is considered to be nil. Therefore, there will be no benefits either on capital or interest payout will be available. However, if the same house or a second house is given on rent, the person will get the tax benefits on interest payout and that too, for unlimited interest payment. On the other hand, the deduction available in the form of rebate (towards repair work carried out) on the rent income has also been capped to 20 percent from the prevalent 30 per cent.

Exempt-Exempt-Tax (EET): New tax regime will be in force for all provident funds, superannuation funds, life insurance and New Pension Scheme (NPS). These investments are to be taxed on withdrawal. Presently returns in these schemes except NPS are totally exempted

The bottom line is New Direct Tax code has plugged all provisions for exemption and leaves no scope for tax-planning for an individual.

It’s time to act:

Though this code is still a proposal for which public opinions are called for and it requires parliament approval before it gets enacted. It’s highly advised that we the salaried class should participate in the public debate by placing our comments in the Finance Ministry’s official site given below.  You can also record your comments by mailing to directtaxescode-rev@nic.in.

We feel that the changes highlighted below would directly affect the salaried class and ultimately there will not be any benefit for salaried class on account of so called increase of saving limit, widening of tax slabs etc., boasted by the finance minister as beneficial features of New Indirect tax code.

  • Exclusion of saving instruments such as investments in the mutual funds in the form of ELSS, long term bank deposits from the purview of Section 80 C though the exemption limit in this section has been proposed for increase from Rs. 1 lakh to Rs. 3 lakhs,
  • Denial of exemption in respect of interest on housing loan if the property is self occupied.
  • Exclusion of Allowances such as HRA, leave travel allowance, medical reimbursement etc., from the purview of exemption, which were hitherto allowed to be deducted from income before calculating tax on income.

Download New Direct Tax code

Participate in the debate by posting your comments to Finance Ministry

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