Impact on Direct Tax Code on various products

Direct Tax Code is the new proposed bill for changing the tax rules in India. If it comes into
effect from April 1, 2011, it will change the whole taxation system and will change the way our
taxes are calculated from years . The new tax code will have impact on Insurance Policies, Home
Loans, PPF, Ulip, Mutual Funds, Shares and Taxation slab. A common man has to understand
whats there in future for him so that he can plan accordingly. However the Direct Code tax is
still in draft and might come into effect, but there is no guarantee. Experts feel that it can not
come in its original form. Lets see what are the impacts on different investment products if DTC
comes into effect .

Effect on Endowment/Moneyback insurance policies

As per Direct tax code, any amount you receive at maturity from an insurance policy (including
bonus) will be taxed. However this rule will not apply for policies where;

1. In any given year , premium paid in a year is less than 5% of Sum Assured , and
2. The policy runs till maturity.

So if you have any Endowment Policy or Moneyback Policy and in any year if you paid or will
pay more than 5% of Sum assured as premium or make your policy as paid up in between, all the
money you receive in the end will be taxed at the time of maturity. For policies where premium
paying term is lesser than the total tenure, still all these rules will apply. For example , if you
have a policy where sum assured is Rs 5,00,00;  then there can be two cases where you will be
taxed at the end.

 First : If you pay more than 25,000 as premiums .

 Second :  Even if you pass this 5% rule , but you do not run your policy till maturity.

Effect on ULIP’s

The same rule applies to ULIP also. The first point is exiting before 10 yrs will badly hurt you
from cost point, as all the Ulip’s are heavily front loaded and exiting before 10 yrs means the
total cost is (commissions) turns out to be too much for you. Only if your total premium per year
is less than 5% of the Sum assured, you can save yourself from getting taxed. But most of the
Ulip plans in the country will not meet that criteria as majority of the policyholder’s pay much
more than 5% of sum assured as premiums. A big number of policies have sum assured as 5
times of the premium, as it’s the minimum requirement of a Ulip policy . Read about recent war
between SEBI and IRDA over ULIP control

Effect on PPF

For PPF account any amount you have accumulated till 31 Mar 2011, will be tax free in any year
of withdrawal. However any new contribution made after 31 mar 2011 will be taxed in any year
when its withdrawn . All these rules will apply to existing as well as new accounts. One
important point you should consider here is that PPF will still remain one of the best debt
product, because this “tax on maturity” rule will be applicable on all the products, so from that
point , PPF will still have one of the best returns in debt segment. This whole rule applies to your
EPF as well . (Tip : Read Why you should open a PPF account even if you dont need it right
now)

Strategies

• Deposit more this year (2010-2011, so that amount becomes tax-free at the end .

• Invest in your child who is below 3 yrs, so that you get benefit of tax on amount
contributed for next 15 yrs, and after 15 yrs , when your child is age 18 , he/she will get that
amount and it will be considered as his/her income , but at that time the tax outgo will be lesser
as they will not have any other source of income , so the tax outgo will be less .

• Dont withdraw big partial chunks in between. Better withdraw smaller amounts so that in
any particular year your taxable incomes remains low

Effect on Home Loans

Self occupied house

The tax benefits on self occupied home loans will be withdrawn once DTC comes into effect . At
present Rs 1 lac is exempted for principle repayment and Rs 1.5 lacs for the interest repayment.
After DTC comes, you will have not get tax benefits (Report on Returns from Real Estate in
India)

House given on Rent

1.5 lacs interest deduction will be applicable for the home loans where the house is the second
one and is given on rent. You might want to reconsider taking home loans if tax break was one of
the major deciding factor .

In true sense tax break on home loans should always be secondary factor while deciding the
purchase of house, because if you look back in your home loan documents, it’s clearly written
that tax benefits are always as per the applicable rules of the year. So dont feel cheated and yell
on govt for this.

Effect on Mutual Funds & Stocks

DTC does not differentiate between short-term and long-term capital gains, which means that
any withdrawal after 31st Mar 2011 will be taxed in the year of withdrawal. Currently any profit
earned after 1 yrs of investment is tax-free in Equity mutual funds and Stocks , this will not
remain so . So if you have any Equity mutual funds or stocks with you, better sell them just
before 31st Mar 2011 , so that current tax rules apply to that part of your investments .
Effect on Kisan Vikas Patra(KVP)/NSC/Tax Saving FD

All of these will loose the tax benefits

Effect on 80C

Sec 80C will be replaced by Sec 66 and limit will be raised from 1.2 Lac (20k for Infa bonds) to
3 lacs . Have a look at following classification of profucts from taxation point .

 New Direct Tax Code 2011: Major relief for salaried class
 Corporate tax has been kept at 30%.
 The limit for exemptions for salaried people is Rs. 2 lakh, while that for senior citizens is
Rs. 2.5 lakh.
 The new Direct Tax Code comes into effect from April, 2011.

“As of now, it is proposed to provide the EEE (Exempt-Exempt-Exempt) method of taxation for
Government Provident Fund (GPF), Public Provident Fund (PPF) and Recognised Provident
Funds (RPF) …”, the revised DTC released by the Finance Ministry said.

NEW DELHI: The Cabinet on Thursday approved the draft of the Direct Tax Code (DTC) Bill,
but the changes in tax slabs proposed in the latest version are a pale shadow of the sweeping
changes promised in the original proposal unveiled in August last year by finance minister
Pranab Mukherjee.

The version approved by the Cabinet exempts incomes up to Rs 2 lakh per annum (against the
current Rs 1.6 lakh) from tax, proposes to tax incomes between Rs 2 lakh and Rs 5 lakh at 10%,
between Rs 5 lakh and Rs 10 lakh at 20% and beyond Rs 10 lakh at 30%.

For women and senior citizens, the exemption limit would be Rs 2.5 lakh per annum. At present,
women have to pay tax on incomes of Rs 1.9 lakh per annum or more and senior citizens on
incomes of Rs 2.4 lakh or more.

The maximum that anyone can gain from this proposal in terms of savings on the tax burden
compared to the present levels is Rs 26,000 per annum. Even that is only possible if you are a
woman and have an annual income of Rs 10 lakh or more. That's a far cry from the Rs 2.2 lakh
that the same person would have saved if the original DTC proposal had been accepted by the
Cabinet.

For corporates, too, the DTC appears to have flattered only to deceive. The code passed by the
Cabinet has maintained the rate of tax on corporate incomes at the current 30%, against the 25%
proposed originally, and the minimum alternate tax (MAT) for corporates at 20% of book profits.

The original draft had promised a whole new paradigm in direct taxation, drastically lowering
the tax burden while also doing away with most exemptions. A revised draft released in June this
year brought back some of the exemptions like the one available for interest on housing loans
that the first draft had proposed to get rid of.

The speculation that this might force the finance ministry to make the revision of tax slabs also
less ambitious to avoid giving away too much revenue has now proved well-founded. Under the
original proposal, the 10% slab would have extended up to Rs 10 lakh and the 20% slab up to Rs
25 lakh, meaning that the 30% rate would have applied only to incomes of over Rs 25 lakh per
annum.

What has finally emerged unless the rates or slabs are changed once again in the process of being
discussed in the Parliamentary standing committee or in Parliament hardly justifies the hype that
greeted the DTC when it was announced last year. It is the sort of tinkering at the margins that
routinely happens in the annual Budget, instead of being the biggest tax revolution since
Independence.

On the plus side for individual taxpayers, withdrawal from provident funds will not be taxed as
the original DTC had proposed to do. Also deductions from taxable income will be available for
interest on housing loans up to Rs 1.5 lakh per annum and on payments into PF and similar
superannuation schemes up to Rs 1 lakh. Also available will be a deduction of up to Rs 50,000
for life insurance and health insurance premiums or tuition fees.

Read more: Direct Taxes Code Bill: You'll save tax, but not much - The Times of India
http://timesofindia.indiatimes.com/business/india-business/Direct-Taxes-Code-Bill-Youll-save-
tax-but-not-much/articleshow/6442402.cms#ixzz1B27f0bX1

The New Direct Tax Code (DTC) is said to replace the existing Income Tax Act of 1961 in
India. It is expected to be passed in the monsoon session of 2010 and is expected to be enforced
from 2011 2012. During the budget 2010 presentation, the finance minister Mr. Pranab
Mukherjee reiterated his commitment to bringing into fore the new direct tax code (DTC) into
force from 1st of April, 2011, but same could not be fulfilled and now it will be applicable from
1st April, 2012.

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.
You can download the bill tabled in parliament from below link:
Direct Tax code bill (1.1 MiB, 760 hits)
Here are some of the salient features and highlights of the DTC:

 DTC removes most of the categories of exempted income. Unit Linked Insurance Plans
(ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings
certificates), Long term infrastructures bonds, house loan principal repayment, 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 atleast 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.

 The tax rates and slabs have been modified. The proposed rates and slabs are as follows:

Annual Income Tax Slab

Up-to INR 200,000 (for senior citizens 250,000) Nil
Between INR 200,000 to 500,000 10%
Between INR 500,000 to 1,000,000 20%
Above INR 1,000,000 30%

 Men and women are treated same now

 Exemption will remain same as 1.5 lakhs per year for interest on housing loan for self-
occupied 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 withdrawals—to 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.

 Surcharge and education cess are abolished.

 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.

 Bad news for NRIs : As per the current laws, a NRI is liable to pay tax on global income
if he is in India for a period more than 182 days in a financial year. But in new bill, this
duration has been changed to just 60 days.This is very unfair to Seafarers. To avoid any
income tax, an Indian sailor employed with a foreign ship will have to stay maximum for
60 days in India.