Direct Tax Code Impact

Direct Tax Code Impact on Individual Tax Payers

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CA Santhosh.N, Deputy General Manager - Finance,

Vodafone South Limited.

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Direct Tax Code Impact on Tax Deductions

Existing Provisions

Particulars Existing Limit
Deductions (Sec 80) PF/PPF/NSC/ELSS/Life Ins premium/Housing loan principal etc 1,00,000
Additional deduction Investment in Infrastructure bonds 20,000
Total deduction 1,20,000

DTC Provisions

Particulars Existing Limit
Deductions (Sec 80) Govt PF , Recognized PF, PPF and New Pension Scheme of Govt and other approved funds. Amount received on maturity not taxable, subject to conditions. 1,00,000
Additional deduction Life Insurance Premium, Medical Insurance premium and children tuition fees 50,000
Total deduction 1,50,000

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Direct Tax Code Impact on Superannuation Fund

Provision of DTC Bill: Employer’s contribution to approved superannuation funds exempt;

Employee’s contribution eligible for overall investment deduction limit of Rs 100,000; Maturity payments on retirement/ achieving certain age/incapacitation not taxable.

Existing tax provision: Employer’s contribution up to Rs 100,000 per annum is exempt; Withdrawal is exempt based on prescribed guidelines

Implications: (Beneficial) Continuance of EEE(Exempt Exempt Exempt-contribution, accumulation and withdrawals ) would mean no tax liability on end-payments;

Removal of present anomaly of part double taxation of employer’s contribution will help.

Premium paid for self/spouse/children/dependent parents eligible for overall additional deduction limit of Rs 50,000, against the existing provision of deduction of Rs 15,000, and additional deduction of Rs 15,000 (Rs 20,000 in case of senior citizens) for parents.

Implications: (Mixed impact) Overall additional deduction limit although increased, is merged with life insurance and tuition fees;

Parents need to be dependent, if premium is to qualify as a deduction.

No deductions for avenues such as mutual fund investments (ELSS), housing loan repayment (principal), etc, wherein at present such payments were eligible within the overall 100000 limit.

Implications: (Adverse) These avenues will no longer be eligible for deduction.

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Direct Tax Code Impact on Life Insurance Policies

Provision of DTC Bill: Premium eligible for overall additional deduction limit of Rs 50,000 (with mediclaim & tuition fees); Premium paid on policies with premium › 5% of sum assured not deductible;

Maturity proceeds exempt, if the premium paid in any year ‹ 5% of sum assured & received on completion of original insurance period. Proceeds received on death are completely exempt; Equity linked life insurance schemes subject to 5% tax on distribution.

Existing tax provision: Premium deductible up to Rs 100,000; Sum received on life insurance policy (including bonus) exempt if premium in any year is ‹ 20% of sum assured.

Implications: (Adverse) Overall additional deduction limit not only lowered to Rs 50,000, but is also merged with mediclaim insurance and tuition fees;

Amounts received during the term of the insurance contract under cash back insurance policies would become taxable;

Threshold of 5% of sum assured seems to be too low — may affect even genuine policies; No grandfathering provisions for presently issued policies; 5% distribution tax on equity linked insurance schemes would lower the effective yield of such instruments.

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Direct Tax Code Impact on Salary

HRA( House Rent Allowance) & Leave Encashment

Provisions would continue in DTC also and hence employees would continue to avail the exemption.

Medical Facilities and Medical Expense Reimbursement

Medical facilities continue to be exempt.

Reimbursement of medical bills exemption limits increased to Rs.50000/- from the existing Rs.15000/-

Implications (Favorable) -Continuation of exclusion of medical facilities out of perquisite net is a very welcome move; Increase of medical expenses reimbursement limit to Rs 50,000 is also commensurate to the increased medical costs.

LTC ( Leave Travel Concession)

LTC exemption has been removed

Implications (Adverse)-No benefit of LTC travel cost exemption.

Gratuity, VRS, commutation of pension

Terminal benefit such as gratuity, VRS, commuted pension are exempt, subject to conditions, against the current exemption limits of gratuity up to Rs 10 lakh, VRS up to Rs 5 lakh etc) in specified cases subject to conditions.

Implications: (Favorable) Continuance of exemption will mitigate hardship of tax burden on such payments.

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Direct Tax Code Impact on Income from House Property

Concept of Notional income stopped

House property income taxable only where rent is actually received/receivable, as against the current provision of taxing the house property(other than self occupied) based on deemed rent, even if the property is not actually occupied

Implications: (Favorable) Removes anomaly of tax levied on non-existing income.

Deduction for Repairs

20% on gross rent allowable towards repairs, etc, against the current 30%.

Implications: (Adverse) Given increasing costs of maintenance of properties.

Interest on housing loan for self-occupied property

Deduction of Rs 1.5 lakh (including pre-construction interest installment) allowed.

Implications: (Favorable) The move to allow deduction of interest on housing loan is a reason to cheer for the tax payer.

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Direct Tax Code Impact on Capital Gains

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

If held > 12 months, 100% gains are allowed as deduction, ie entire gains not taxed.

If held < 12 months, deduction of 50% of gains will be allowed, as against the current provision of no tax for securities held >12 months, and 15% tax on securities held <12 months.

Securities Transaction Tax

Same provisions to continue.

Implications: (Favorable) Continuance of NIL tax on gains from sale of shares/equity oriented units held for more than a year is a welcome move; 50% deduction mechanism would result in lower tax impact (5%, 10% or 15%)

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All other investment assets

Holding period for indexation/ exemption benefit is one year from end of financial year post acquisition; Indexation and rollover benefit (subject to conditions) available with reference to purchase price, or optionally, fair value as on 1 April 2000, if asset acquired before that date, as against the current provision of Holding period for classification as long term/indexation/exemption benefits is 36 months;

If long term, gains taxable @ 20%, subject to indexation benefit (inflation indices starting 1981);

If short term, gains taxable at applicable slab rates.

Implications: (Favorable) Holding period for indexation/exemption benefit is reduced to 12-24 months maximum; Unrealized gains up to 1 April 2000 would go untaxed completely.

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Direct Tax Code Impact - Some Philosophies from an Aam Admi Perspective!

The door on the tax breaks front has been shut for the principal amount paid on home loans, bank deposits, equity linked savings schemes of mutual funds, national savings certificate, infra bonds and unit linked pension plans.

The government has, however, opened a new window, empowering itself to notify schemes for tax breaks and exempting such schemes from tax at all three stages — contribution, accumulation and withdrawals.

Only long term savings schemes such as the public provident fund, new pension scheme, recognized provident funds will qualify for the tax deduction of Rs 1 lakh under what is now called Section 80 C of the Income Tax Act and be exempt from tax at all stages.

The move to allow an Exempt Exempt Exempt (EEE) method of tax treatment will help individuals build a retirement nest as the country does not have a social security net, which is existing in some of the Western countries.

Residential Status

The requirement of being present in India for 730 days in the preceding seven years, essential for qualifying as an ordinary resident, is being dropped.

However, with regard to taxation on worldwide income for a person resident in India, the condition will still be valid.

So, while the status of not ordinarily resident (NOR) as defined in the Act will no longer exist, the concept will remain as first-time expatriates working in India will become taxable on their worldwide income only after they have been in India for 730 days or more in the preceding seven years.

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Direct Tax Code Impact Summary

The DTC would come into force on the date it is given effect.

The concept of previous year replaced with a new concept of financial year which inter alia means a period of 12 months commencing from the 1st day of April.

Every person is liable to pay income-tax in respect of his total income for the financial year at the rates/conditions specified in the Schedules to the DTC after allowing credit for pre-paid taxes (including foreign tax credits).

Income has been proposed to be classified into two broad groups: Income from Ordinary Sources and Income from Special Sources.

Income from Ordinary Sources refers to:

  1. Income from employment
  2. Income from house property
  3. Income from business
  4. Capital gains
  5. Income from residuary sources

Income from Special Sources to include,

  1. specified income of non-residents,
  2. winning from lotteries,
  3. horse races, etc.,

However, if such income is attributable to the PE of the non-resident it would not be considered as Special Source income. Accordingly, such income would be liable to tax on net income basis.

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Direct Tax Code Impact on Losses

Losses arising from Ordinary Sources to be eligible for set off or carry forward and set-off against income only from ordinary sources without any time limit.

Similar treatment would apply for set off and carry forward of losses from Special Sources.

Loss arising from speculative business, losses under the head capital gains, and losses from the activity of owning and maintaining horse race to be set off only against such income in the same or succeeding financial years.

In case of delayed filing of return of income for any particular year, only losses pertaining to that year would now not be allowed to be carried forward for set off in future years.

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