Direct Tax Code Bill – Changes in personal taxation
It’s here. With the amount of anticipation that normally accompanies a hotly publicised Bollywood movie, the Direct Tax Code (DTC) bill is finally here.
The DTC will replace the Income Tax Act and rings in many changes in personal and corporate taxation. It will come into effect starting April 1, 2012. Here we demystify what the impact of the DTC will be towards personal taxation for salaried individuals.
Following on from its original proposal last year, the government had issued a revised discussion paper in June 2010. In its original form, the DTC was expected to bring about far-reaching changes in the personal taxation slabs and available exemptions. Fast forward to today and what has been tabled in parliament appears to be a watered down version of the DTC.
The following are the newly announced tax slabs for individuals:
FOR INDIVIDUAL (MEN, WOMEN & HUF)
The big change is that the same tax slabs will apply to men and women. Now both are eligible for Rs 2 lakhs tax free exemption, whereas previously it used to be up to Rs 1.6 lakhs for men and Rs 1.9 lakhs for women.
DTC PARLIAMENTARY BILL (AUG 2010)
Up to Rs 2,00,000 - Nil; From Rs 2,00,001 to Rs 5,00,000 - 10%; From Rs 5,00,001 to Rs 10,00,000 - 20%; Above Rs 10,00,000 - 30%
CURRENT SLAB UNDER INCOME TAX ACT
Up to Rs 1,60,000 - Nil; From Rs 1,60,001 to Rs 5,00,000 - 10%; From Rs 5,00,001 to Rs 8,00,000 - 20%; Above Rs 8,00,000 - 30%
Up to Rs. 1,60,000 - Nil; From Rs 1,60,001 to Rs 10,00,000 – 10%; From Rs 10,00,001 to Rs 25,00,000 - 20%; Above Rs 25,00,000 – 30%
** For men or women earning up to Rs 8 lakhs the net annual tax saving under the new DTC bill is going to be a maximum of Rs 4,000.
** For men or women earning between Rs 8 lakhs to Rs 10 lakhs the net annual tax saving is going to be a maximum of Rs 24,000.
** For men or women earning above Rs 10 lakhs, there is no additional net annual saving available under the direct tax code other than the Rs 24,000 as mentioned in the above example as well.
FOR SENIOR CITIZENS
For those above 65 years of age, the tax exemption limit has been raised to Rs 2.5 lakhs from Rs 2.4 lakhs, for a net new saving of Rs 1,000 per annum.
DTC PARLIAMENTARY BILL (AUG 2010)
Up to Rs 2,50,000 - Nil; From Rs 2,50,001 to Rs 5,00,000 - 10%; From Rs 5,00,001 to Rs 10,00,000 – 20%; Above Rs 10,00,000 – 30%
CURRENT SLAB UNDER INCOME TAX ACT
Up to Rs 2,40,000 – Nil; From Rs 2,40,001 to Rs 5,00,000 – 10%; From Rs 5,00,001 to Rs 8,00,000 – 20%; Above Rs 8,00,000 – 30%
Up to Rs. 2,40,000 – Nil; From Rs 2,40,001 to Rs 10,00,000 – 10%; From Rs 10,00,001 to Rs 25,00,000 – 20%; Above Rs 25,00,000 – 30%
Currently, the Income Tax Act offers individuals an annual deduction of Rs 1 lakh under 80C that can be used for instruments such as PPF (up to a cap of Rs 70,000), PF, NPS scheme, ELSS, premium for pure life insurance or ULIP, principal repayment of home loan, NSC, fixed deposits with a maturity of five years, payment of tuition fees for full-time education for up to two children.
In the current financial year (April 2010 through March 2011), one can get an additional deduction of Rs 20,000 for investing in certain notified infrastructure bonds under 80CCF. Additionally, 80D gives a deduction of Rs 15,000 towards medical insurance.
Under the DTC Bill, some of the above deductions have changed. What was previously available as the 80C deduction of Rs 1 lakh is now available as a deduction towards investments only in retiral accounts such as PPF, PF, NPS and in savings schemes as notified by the government. These are all eligible for taxation under EEE treatment.
EEE refers to the tax incidence - exempt at time of investment, exempt during accumulation and exempt at withdrawal. These will be available for the tax year starting April 1, 2012.
Additionally, an aggregate deduction of Rs 50,000 is available for premium for pure life insurance, health insurance and tuition fees for two children.
As a result, the total deduction available is Rs 1.5 lakhs.
Please note that under the previous 80C deduction investments in ELSS and ULIPs were eligible for the Rs 1 lakh deduction, as was a deduction towards repayment of principal for an outstanding home loan. Under the DTC Bill all these three options are no longer eligible for a deduction.
To show you an actual example of the scope of savings, let us look at the hypothetical case of Mr Prakash, an individual tax payer aged 40. His salary is Rs 18 lakhs and he takes advantage of investing in certain instruments that offer him a tax deduction. The illustration link below compares Mr Prakash’s tax liability under three scenarios.
(To view and download this sample illustration, click here)
(Are you happy with the new tax slabs? Share your views, click here)
As you will see in the above table, the tax liability under the DTC Bill is lower by approximately Rs 40,000 compared to the current rules. However, these savings could have been far more if the DTC in its original form had been implemented, as can be seen if one compares the total tax liability in the columns marked DTC Parliamentary Bill vs. Original DTC. For this reason we believe that the Bill has watered down some of the exemptions and the deductions.
Nevertheless, the following are the sources of the total Rs 40,000 of savings for Mr Prakash under the DTC Bill:
** Source - Additional Rs 50,000 deduction - Amount of Saving compared to Existing Income Tax Act - Rs 15,000 (Rs 50,000 x 30% marginal tax rate = Rs 50,000, Mr Prakash is in the highest tax bracket, and this is the additional saving that he can get by the additional Rs 50,000 deduction now available for tuition fees, pure life insurance and medical allowance)
** Source - Tax saving up to Rs 2 lakhs - Amount of Saving compared to Existing Income Tax Act - Rs 4,000
** Source - Tax saving between Rs 8 lakhs to Rs 10 lakhs - Amount of Saving compared to Existing Income Tax Act - Rs 20,000
** Source - Education Cess - Amount of Saving compared to Existing Income Tax Act - Rs 1,170
Copyright 2010 iTrust Financial Advisors Private Limited. All rights reserved.
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