Changes in New Direct Tax Code (DTC)

The Government has come out with new revised Direct Tax Code and there are many
changes which might look good to investors finally. Most of the people were not happy
with the old tax code as it made some products taxable like PPF, Endowment Plans etc,
which investors were totally worried about. Now Govt has made some changes earlier
which looked extreme to investors and they were not happy about it, however still there
are some things which will pinch investors. Old Direct Code tax was challenged and the
govt reconsidered the Old Direct Tax Code and has finally come up with this new revised
set of rules which I will list down here.

Pure Life Insurance Products/Pension Products/PPF/EPF/NPS

Finally, under New Tax Code:  PPF, EPF, NPS, Pure Insurance products and Pension
Products have come under EEE regime, which means that the amount you contribute, &
any return or interest generated and the final maturity is exempt from tax. The major
change in the revised Direct Tax code is that at the time of maturity of these products,
you don’t have to pay tax on the amount you get. In the old Code the maturity was
taxable.

Endowment/Money back and ULIP’s

These products are under EET regime, so the money you get at the end will be
TAXABLE.  (More)

Real Estate

Existing and prospective real estate buyers have some thing to cheer about. In the
Revised Tax code, Interest will still be exempted upto 1.5 lacs, but principal would not be
getting any place in sec 80C , which is again not a big problem as generally 80C gets
filled up with EPF, Insurance, children’s tuition and other products for most people. 
(Returns from Real Estate)

Another big change which is there is that now on a rented flat, the gross rent for taxation
would be actual rent received. Earlier, if you had not let out your flat and it was vacant,
you still had to pay tax on the notional rent (the old draft it was said that it can be upto
6% of the value of the property.) But now, with revised tax code you don’t have to pay
any tax if you don’t get any rent from your rented (and second house) house

Existing Investments

Incase you have any existing Investments, which enjoyed EEE method of taxation, they
would be treated the same way for their full tenure.

Capital Gains on Equity

There are some big changes here. For sure your equity investments in shares and Equity
mutual funds are going to be taxed now, but in a different way. The old tax code
suggested that short-term capital gains on Equity should be added to the income and
taxed at applicable tax rates and long-term gains (above 1 yrs) should get Indexation
benefits and then they should be added to your income for taxation purpose.
However the new revised tax code has changed this and a new concept of “Deductions”
is in . As per this rule , for any long-term capital gains, you will get certain specified
deductions which will be some percentage of your profits, and then after deducting
these, the rest will be added to your income and then taxed at applicable rates. The
indexation concept is now gone . The short-term capital gains still gets added to income
and then taxed . The short-term capital gains will actually be now beneficial to people
who earn 10 lacs of less , as earlier they had to pay 15% tax , but now as they have to
pay 10% tax as per the new slab , the tax on short-term capital gain part will be 10%
only .There is no enough clarity on the deductions percentage as of now. (Using looses to
reduce your tax)

One another major change is the definition of the holding period. As of now, it will be 1
yr from the end of the financial year when you bought your shares which means that if
you bought your shares or mutual funds on 5th of Apr 2010 , then the end of that
financial year would be 31st Mar 2011 and then 1 yr from that 31st Mar 2011 would be
31st Mar 2012 , so effectively your Holding period can range from 1 yrs to 2 yrs
depending on when you buy the shares, so the short-term capital gain would be if you
sell it before your holding period and long-term capital gains would be if you sell it after
your holding period .

Capital Gains on Gold , Debt Funds , Real Estate

The long-term gains on these assets would now be after 1 yrs. Earlier it was 3 yrs. The
long-term capital gains would qualify for Indexation as it was applicable earlier and gains
will directly be added to income and taxed . Earlier the base date for indexation values
 was taken from 1 Apr 1981, however now the base date shifts to Apr 1, 2000. This will
now reflect the inflationary changes in these asset classes in a better way.
What happens to the properties very old like 30-40 yrs ? Some thing new has come up !!
, your original indexed cost price wont be considered , but the price on Apr 1 , 2000
would be Applicable, as per my understanding .

Interesting: So what about those who have invested in Equity after Mar 31 , 2010 ? If
they sell it before 31st Mar 2011 , they will pay short term capital gains of as high as
30% or 20% (depending on which slab you come in this year) , OR the other option is to
hold it and sell it later so that New Direct Code applies to you and you pay just 10% on
the profits considering you taxable income is less than 10 lacs . Watch the video below
on this issue .
Still, there are some areas where there is no clarity on what will happen , Please share your
views on how this new tax code impacts you ? what are your views on this ?