On August 2009, Finance Minister Pranab Mukherjee unveiled the Direct Taxes Code Bill, 2009, to be introduced in Parliament later this year.
If enacted, the Bill will not only change the amount of tax you will pay and how but will also transform how you invest, borrow and spend your money. The finance minister successfully managed to make good his promise made during his 6 July Budget speech -- of ushering in a new direct tax code within 45 days.
Unlike his rather insipid Budget proposals, this time Mukherjee has brought in a transformational blueprint of a new tax system, the analysis of whose impact can only make jaws drop.
If one were to describe the system in short, it has tried to simplify the way you will be taxed while taking away most tax-breaks that ultimately complicated yours and the government's life.
Among other things, the Code attempts to provide stability in 'rates of taxes' by bringing them within its own fold.
At present, the tax rates come under the Finance Bill and, thus, are open to change every Budget. Any amendments in the rates of taxes as mentioned in the Code would call for amendments in Parliament, which cannot happen on a regular basis.
The unveiling of the Direct Taxes Code will be followed by public debates before Parliament debates it. It will not be before financial year 2011-12 that this tax code will be put in place, if passed by Parliament.
Even as experts examine the finer details of the revolutionary proposals of the new tax code, we have enough information to make you aware of the impending radical changes in your personal finances.
Income Tax Rate for Individual
for an individual, annual incomes up to Rs 1.60 lakh (Rs 160,000) would be tax-exempt, a 10 per cent tax rate would be applicable for incomes between Rs 1.60 lakh and Rs 10 lakh (Rs 1 million), 20 per cent for income between Rs 10 lakh and Rs 25 lakh (Rs 2.5 million), and 30 per cent for income above Rs 25 lakh.
All this will mean significant tax savings when the Code comes into force.
The present income slabs are much narrower and the tax liability is significantly higher.
Says Vikas Mallan, chief financial officer, Unicon Financial Intermediaries, "Under the proposed Direct Taxes Code, the slabs have been significantly enhanced to take into account realistic income levels."
The hand that taketh away
If generosity marks the changes in income tax slabs, its absence marks other areas. Says Sanjay Grover, tax partner, Ernst & Young, "Currently exempt allowances and benefits such as leave travel assistance and medical reimbursements would be fully taxable under the Code."
There's more grief in store for tax-saving junkies. Prepare to sing a requiem for the existing tax benefit for interest payment on home loans with an annual limit of Rs 1.5 lakh (Rs 150,000) per individual.
This critical driver of the recent real estate boom will be withdrawn if the Direct Tax Code Bill is implemented. But if you have rented out your home that you don't occupy, you will continue to get the existing tax break for unlimited tax deductions for interest payments on loans taken to acquire it.
At the same time, removal of deduction for house rent allowance (HRA) has been proposed.
New Direct Tax Code doesn't distinguish between short- and long-term capital gains.New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
In fact, the new Code proposes to implement a critical recommendation of previous tax reform panels, which suggested that the contribution and return of all investments be made tax exempt with maturity proceeds being taxable -- an exempt-exempt-tax or EET system.
Like other investments, this proposal will impact your stocks and equity mutual fund (MF) investments. At present, in case you sell units of equity-oriented MFs after a year, you do not need to pay any capital gains tax. But if the Direct Tax Code is implemented, you will need to pay tax when you sell your MFs -- be it equity or debt.
The gains get added to your income and taxed as per your income slab. However, in case of gains made after one year, the Code will allow you the indexation benefit before adding the gains to your income. Indexation is a facility offered by the income tax laws to adjust your security's cost price for inflation over the years.
This enables you to inflate your cost price in order to reduce the difference between your selling price and cost prices.
This is done because it is typically presumed that the price you paid for acquiring an asset years back is worth much more today because of inflation. The lower this difference, the lower is your tax liability.
The Code may have done away with the numerous tax breaks, but it still provisions for tax-saving investments and guess what the limit has gone up to? It is Rs 3 lakh (Rs 300,000) per annum.
But the trick is that you will be permitted to invest only in certain options -- Public Provident Fund (PPF), Employees' Provident Fund, life insurance, superannuation funds and National Pension System (NPS), besides claiming for children's tuition fee expenses.
This simply means no more tax breaks for National Savings Certificates, Senior Citizens Savings Scheme, tax-saving bank fixed deposits and equity-linked savings schemes (ELSS) of MFs.
Argues Ajay Seth, senior director (legal & compliance), Max New York Life Insurance, "Adopting the exempt-exempt-tax model that has been proposed will imply that savings above Rs 3 lakh be taxed twice, at the time of making the contribution and again on maturity on the full amount, including the principal."
While Outlook Money's all-time favourite PPF continues to be a permitted tax-saving investment, it loses some sheen as its maturity proceeds will become taxable.
"This will change the way people look at PPF, which has, so far, always enjoyed tax-free returns," says Veer Sardesai, a Punebased financial planner.
The message is clear: You can get tax breaks for retirement savings or educational expenses. The existing tax breaks for health insurance, with the existing annual limits of Rs 15,000 and Rs 20,000 for senior citizens, as well as those for interest repayment for educational loans and notifi ed donations continue in the new regime too.
When considered in the backdrop of growing retirement periods and the high cost of retirement living, educational and healthcare costs, this exception to the general rule of erasing tax exemptions makes a lot of sense.
If enacted, the Bill will not only change the amount of tax you will pay and how but will also transform how you invest, borrow and spend your money. The finance minister successfully managed to make good his promise made during his 6 July Budget speech -- of ushering in a new direct tax code within 45 days.
Unlike his rather insipid Budget proposals, this time Mukherjee has brought in a transformational blueprint of a new tax system, the analysis of whose impact can only make jaws drop.
If one were to describe the system in short, it has tried to simplify the way you will be taxed while taking away most tax-breaks that ultimately complicated yours and the government's life.
Among other things, the Code attempts to provide stability in 'rates of taxes' by bringing them within its own fold.
At present, the tax rates come under the Finance Bill and, thus, are open to change every Budget. Any amendments in the rates of taxes as mentioned in the Code would call for amendments in Parliament, which cannot happen on a regular basis.
The unveiling of the Direct Taxes Code will be followed by public debates before Parliament debates it. It will not be before financial year 2011-12 that this tax code will be put in place, if passed by Parliament.
Even as experts examine the finer details of the revolutionary proposals of the new tax code, we have enough information to make you aware of the impending radical changes in your personal finances.
Income Tax Rate for Individual
for an individual, annual incomes up to Rs 1.60 lakh (Rs 160,000) would be tax-exempt, a 10 per cent tax rate would be applicable for incomes between Rs 1.60 lakh and Rs 10 lakh (Rs 1 million), 20 per cent for income between Rs 10 lakh and Rs 25 lakh (Rs 2.5 million), and 30 per cent for income above Rs 25 lakh.
All this will mean significant tax savings when the Code comes into force.
The present income slabs are much narrower and the tax liability is significantly higher.
Says Vikas Mallan, chief financial officer, Unicon Financial Intermediaries, "Under the proposed Direct Taxes Code, the slabs have been significantly enhanced to take into account realistic income levels."
The hand that taketh away
If generosity marks the changes in income tax slabs, its absence marks other areas. Says Sanjay Grover, tax partner, Ernst & Young, "Currently exempt allowances and benefits such as leave travel assistance and medical reimbursements would be fully taxable under the Code."
There's more grief in store for tax-saving junkies. Prepare to sing a requiem for the existing tax benefit for interest payment on home loans with an annual limit of Rs 1.5 lakh (Rs 150,000) per individual.
This critical driver of the recent real estate boom will be withdrawn if the Direct Tax Code Bill is implemented. But if you have rented out your home that you don't occupy, you will continue to get the existing tax break for unlimited tax deductions for interest payments on loans taken to acquire it.
At the same time, removal of deduction for house rent allowance (HRA) has been proposed.
New Direct Tax Code doesn't distinguish between short- and long-term capital gains.New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
New code: How your investments will be taxed
In fact, the new Code proposes to implement a critical recommendation of previous tax reform panels, which suggested that the contribution and return of all investments be made tax exempt with maturity proceeds being taxable -- an exempt-exempt-tax or EET system.
Like other investments, this proposal will impact your stocks and equity mutual fund (MF) investments. At present, in case you sell units of equity-oriented MFs after a year, you do not need to pay any capital gains tax. But if the Direct Tax Code is implemented, you will need to pay tax when you sell your MFs -- be it equity or debt.
The gains get added to your income and taxed as per your income slab. However, in case of gains made after one year, the Code will allow you the indexation benefit before adding the gains to your income. Indexation is a facility offered by the income tax laws to adjust your security's cost price for inflation over the years.
This enables you to inflate your cost price in order to reduce the difference between your selling price and cost prices.
This is done because it is typically presumed that the price you paid for acquiring an asset years back is worth much more today because of inflation. The lower this difference, the lower is your tax liability.
The Code may have done away with the numerous tax breaks, but it still provisions for tax-saving investments and guess what the limit has gone up to? It is Rs 3 lakh (Rs 300,000) per annum.
But the trick is that you will be permitted to invest only in certain options -- Public Provident Fund (PPF), Employees' Provident Fund, life insurance, superannuation funds and National Pension System (NPS), besides claiming for children's tuition fee expenses.
This simply means no more tax breaks for National Savings Certificates, Senior Citizens Savings Scheme, tax-saving bank fixed deposits and equity-linked savings schemes (ELSS) of MFs.
Argues Ajay Seth, senior director (legal & compliance), Max New York Life Insurance, "Adopting the exempt-exempt-tax model that has been proposed will imply that savings above Rs 3 lakh be taxed twice, at the time of making the contribution and again on maturity on the full amount, including the principal."
While Outlook Money's all-time favourite PPF continues to be a permitted tax-saving investment, it loses some sheen as its maturity proceeds will become taxable.
"This will change the way people look at PPF, which has, so far, always enjoyed tax-free returns," says Veer Sardesai, a Punebased financial planner.
The message is clear: You can get tax breaks for retirement savings or educational expenses. The existing tax breaks for health insurance, with the existing annual limits of Rs 15,000 and Rs 20,000 for senior citizens, as well as those for interest repayment for educational loans and notifi ed donations continue in the new regime too.
When considered in the backdrop of growing retirement periods and the high cost of retirement living, educational and healthcare costs, this exception to the general rule of erasing tax exemptions makes a lot of sense.
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