Direct Tax Code

It was only for the good of his subject that he collected from them, just as the sun draws moisture from the earth to give it back a thousand field Kalidash in Raghuwansh.

Introduction of DTC
The New Direct Tax Code (DTC) is said to replace the existing Income Tax Act of 1961 in India. It is expected to be enforced from April, 2013. DTC bill was tabled in parliament on 3oth August, 2010. There are big changes now in monsoon session and There are now much less benefits as compared to what were in the original proposal.

salient features and highlights of the DTC:

1. DTC removes most of the categories of exempted income. Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds, Term deposits, NSC (National Savings certificates), Long term infrastructures bonds stamp duty and registration fees on purchase of house property will loose tax benefits. Tax saving based investment limit remains 100,000 but another 50,000 has been added just for pure life insurance (Sum insured is at least 20 times the premium paid) , health insurance, mediclaims policies and tuition fees of children. But the one lakh investment can now only be done in provident fund, superannuation fund, gratuity fund and new pension fund. Exemption will remain same as 1.5 lakhs per year for interest on housing loan for selfoccupied property. Only half of Short-term capital gains will be taxed. e.g. if you gains 50,000, add 25,000 to your taxable income. Long term capital gains (From equities and equity mutual funds, on which STT has been paid) are still exempted from income tax. As per changes on 15th June, 2010, Tax exemption at all three stages (EEE) savings, accretions and withdrawalsto be allowed for provident funds (GPF, EPF and PPF), NPS (new pension scheme administered by PFRDA), Retirement benefits (gratuity, leave encashment, etc), pure life insurance products & annuity schemes. Earlier DTC wanted to tax withdrawals.

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Surcharge and education cess are abolishe. For incomes arising of House Property: Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent. Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not put to rent. But, under the Direct Tax Code 2010 , such a concept has been abolished.
Tax exemption on LTA (leave travel allowance) is abolished. Tax exemption on Education loan to continue. Corporate tax reduced from 34% to 30% including education cess and surcharge. Taxation of Capital gains from property sale : For sale within one year, gain is to be added to taxable salary. For long term gain (after one year of purchase), instead of flat rate of 20% of gain after indexation benefit, new concept has been introduced. Now gain after indexation will be added to taxable income and taxed at per the tax slab. Base date for cost of acquisition has been changed to 1st April, 2000 instead of earlier 1st April, 1981. Medical reimbursement : Max limit for medical reimbursements has been increased to 50,000 per year from current 15,000 limit. Tax on dividends: Dividends will attract 5% tax.

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Income and Wealth Tax Rates

Increase in tax exemption on income from Rs 1.6 lakh to Rs 2 lakh, with no separate benefit for women. Income from Rs 2-5 lakh to be taxed at 10 percent; Rs 5-10 lakh at 20 percent and 30 percent thereafter. Currently, income from Rs 1.6-5 lakh attracts 10 percent tax; from Rs 5-8 lakh, 20 percent and beyond Rs 8 lakh, 30 percent. Tax exemption limit for senior citizens above 65 years to be marginally raised to 2.5 lakh per annum from Rs 2.4 lakh at present. Corporate tax to be a flat 30 %. MAT has been increased from 18 percent to 20 percent of book profit of a company. Dividend Distribution Tax will be at 15 percent. Exemption limit for imposing Wealth Tax raised to Rs 1 crore from current Rs 15 lakh. Wealth tax to be imposed at the rate of 1 percent, except on non-profit organisations which are exempt.

Tax Audit Limits

Tax Audit Limits raised from existing Rs 15 lakh for professionals to Rs 25 lakh, and from Rs 60 lakh for income from business to Rs 1 crore. Exemptions Exemption of interest up to Rs 1.5 lakh on housing loan retained. Deduction to be considered only on the interest component and not the principal amount. EEE (exempt-exempt-exempt) mode of taxation for insurance and pension funds also maintained. Exemption on pension, Provident Fund and Gratuity Funds to be at Rs 1 lakh, while Rs 50,000 exemption provided on pure insurance, including health cover, and tuition fee payment. LTA Tax incentives on leave travel allowance to be scrapped.

For Investors
Existing provision of zero tax on long term capital gains to continue. Short-term capital gains tax for annual income up to Rs 10 lakh rationalized to benefit investors in the lower income bracket. Small investors with incomes between Rs 2 lakh and and 5 lakh to pay only 5 percent capital gains tax, less than one-third of the current 17 percent (15 percent + cess). Investors in income bracket of Rs 5 lakh and 10 lakh will pay 10 percent capital gains tax. Big investors having income over Rs 10 lakh to pay shortterm capital gains tax at 15 percent.
Investment in equity-linked Mutual Fund schemes and ULIPs to attract 5 percent tax on the dividend paid by these entities. At present, there is no DDT applicable to equity fund schemes or insurers on income distribution to unit or policy holders.

Implication of DTC
While senior citizens benefit marginally, women would no longer be given a special status by the government for a higher exemption. Middle Class will continue to find purchasing a house a lucrative option, as exemptions on interests on home loans will continue. It will also give realtors some relief who are just emerging from a depressed patch. As for the outcome of personal exemptions, there will be a marginal rise in savings as exemptions have been increased for investment in approved funds and insurance schemes to Rs 1.5 lakh in a year from Rs 1.2 lakh currently. Raising the limit for imposition for Wealth Tax to Rs 1 crore is likely to improve compliance, which is currently very low. But the Rs 1 crore limit is markedly low compared to the proposed limit of Rs 50 crore, which was originally proposed. The adverse impact of the new provision comes from the fact that Wealth Tax would now include companies in its ambit. So far, they were out of the net. Small and medium investors will gain substantially by way of saving on taxes on short term gains. DTC is also expected to boost investment flow into capital markets, as the government proposes to retain a zero long-term capital gain tax.

While corporates will get slight reprieve via reduction in Corporate Tax from current 33.22 percent (for incomes more than Rs 1 crore), increased MAT will counter the gain for industry. Moreover, Special Economic Zones (SEZs), which are notified on or before March 31, 2012, will get income tax benefits, as per the proposed Direct Taxes Code (DTC) bill. As for the government, DTC will result in an estimated revenue loss of Rs 53,172 crore in 2012-13 as gross tax collection from direct taxes will come down from an estimated Rs 5.80 lakh crore to Rs 5.27 lakh crore.

Why DTC
As part of its financial reforms process, the government wanted to modernize and upgrade its direct tax laws i.e. the Income Tax Act and the Wealth Tax and bring them more in line with current times. DTC is expected to widen tax base, give moderate relief to tax payers, reduce unnecessary exemptions, and improve compliance thus improving collections. It also seeks to address new realities like operations of foreign companies in Indian markets, foreign institutional investors and cross-border M&As.

For example, capital gains tax would be imposed on acquisitions made overseas if the acquired company holds over 50 percent assets in Indian company. This would affect companies like Vodafone Group for its acquisition of a 67 percent stake in Hutchison Essar from Hong Kong`s Hutchison Telecommunications International Ltd.
The government has also clarified that foreign companies, which were regarded as resident of India if their control and management were wholly situated in India, will now be considered resident if the place of effective management is in India.

Non-clarified Things
There are some questions that have been left unanswered in the bill. They would be clarified in due course by the government. Here's a list of such areas: 1. 2. 3. 5. 6. 7. The DTC doesn't talk about the amount up to which the interest paid on education loan would be exempt from income tax. Does it mean any amount of interest is exempt? The DTC doesn't talk about deduction of up to Rs. 20,000 under section 80CCF available on investment in infrastructure bonds. Does it mean it won't be available under DTC? Bank fixed deposits (FDs) of 5 years duration enjoy deduction under section 80C. Would this be allowed under the Direct Tax Code (DTC)? The DTC doesn't talk about the limits up to which retirement benefits like gratuity, leave salary, etc. will be exempt from income tax. The DTC doesn't talk about the treatment of perquisites (perks) like company car, employer provided housing accommodation, etc. The DTC is not clear about continuing exemption to investments in Senior Citizens Savings Scheme (SCSS), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS) MFs, life insurance premiums other than term insurance, etc.