High inflation has been cutting deep into the pockets of the common man. The next budget is a few months away and the much talked about Direct Taxes Code (DTC) is expected to come into play from 1 April 2012 provided it sails through the current winter session of Parliament. Taxpayers are hoping for some tax relief to help them improve their take-home income and fight inflation. Just to refresh memories, this article discusses the various proposals contained in the DTC and how these may affect individual taxpayers.
The DTC proposes to raise the limit for medical reimbursement from Rs15,000 to Rs50,000. However, exemption in relation to leave travel allowance, children’s education allowance and hostel allowance are missing from the DTC. The rules for the valuation of perquisites are yet to be rolled out and these really hold the key to know what is in store for the working class.
Those with rental income are to pay a little more under the DTC as the standard deduction is proposed to be reduced from 30% to 20%. The concept of taxing the income from house property on a notional basis has been done away with. The deduction of interest on loans in relation to self-occupied house property remains capped at Rs1.5 lakh even under the DTC.
The proposed DTC has eliminated the concepts of long-term capital gains (LTCG) and short-term capital gains (STCG). Capital gains would be taxable as income from ordinary sources at the applicable slab rates. At present, individuals falling under the 30% tax bracket with any taxable LTCG are taxed at 20%. These individuals may end up paying 30% tax on such gains under the DTC regime. The LTCG gain arising from shares or equity-linked saving schemes (ELSS) on which security transaction tax has been paid would continue to be non-taxable as under the DTC a 100% deduction is to be allowed from such gains. However, individuals falling in the 10% or 20% tax brackets and having STCG from shares or ELSS would pay a lower tax of 5% or 10%, respectively, as a 50% deduction has been proposed from such gains under the DTC.
The DTC proposes to provide the benefit of indexation in respect of assets transferred after one year from the end of the fiscal year in which they are purchased. The date of considering the fair market value as on 1 April 1981 is proposed to be changed to 1 April 2000. Under the current provisions, to save taxes on the sale of a residential house, one needs to invest the capital gains in another residential house. But under the DTC regime, one would need to invest the entire sales proceeds to save taxes. It may be worthwhile to review your situation now in relation to your investments before it gets tough under the DTC regime.
DTC proposes to restrict the deduction of Rs1 lakh only to the approved fund(s), namely the approved provident fund, pension fund, superannuation fund and Public Provident Fund. However, an additional deduction of Rs50,000 has been proposed to cover payments such as life insurance premiums (premium not to exceed 5% of the sum assured), health insurance premiums and tuition fees. The principal repayment of housing loans, five-year term deposits with banks or post offices or deposits in senior citizens saving schemes, non-pure life insurance premiums will no longer be eligible for deduction under the DTC.
Currently, Indian citizens qualifying to be ordinarily resident (ROR) are subjected to a wealth tax in India on their wealth situated anywhere in the world. Assets situated outside India are excluded from the taxable wealth in case of non-residents or even for any ROR foreign nationals. Under the DTC, RORs are proposed to be taxed on their wealth situated anywhere in the world irrespective of whether such individuals are citizens of India or not. Although the taxable wealth exemption limit is also proposed to be enhanced from Rs30 lakh to Rs1 crore but the definition of taxable wealth is also proposed to be expanded.
The new income slabs proposed under DTC are: For income up to Rs2 lakh, there is no tax; for income between Rs2,00,001 and Rs5 lakh, the tax rate is 10%; for income between Rs5,00,001 and Rs10 lakh, the tax rate is 20%; for income of Rs10,00,001 and above, the tax rate is 30%. The basic exemption limit for resident senior citizens is Rs2.5 lakh; no separate basic exemption is provided for women tax payers or very senior citizens.
Compared with the existing slabs, these rates hardly offer any significant savings for the taxpayers.
Inflation, the economic situation and growth prospects were much better when the DTC was conceived. But the current situation indeed is compelling the taxpayers to expect that the government may consider some tax reliefs, especially since the coming budget may be the last one to be presented by the government before the next general elections. We will have to wait for the final print to see whether DTC comes into play as it is or whether the government will provide some tax relief to please taxpayers.
Kuldip Kumar is executive director, PwC India. He was assisted in writing this column by Chander Talreja, senior manager (tax & regulatory services), PwC.
Illustration by Shyamal Banerjee/Mint
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