The Direct Tax Code (Code) recognises the importance of broadening of tax base to improve its horizontal equity, i.e., equity across different classes of taxpayers. The Code reflects this strategy by substantially liberalising tax rate slabs while, reducing tax deductions and incentives to a large extent. However, as the threshold has not been raised, which remains at Rs 1,60,000, the tax benefit resulting from widening of the slabs is skewed in favor of the higher income groups.
The tax base will likely increase across a wide spectrum of employees on account of withdrawal of exemption to certain components of salary like leave encashment, house rent allowance, special allowances, leave travel concession and medical facilities including reimbursements. At the same time, the Code proposes to bring in parity between the Government and private sector employees in the tax treatment of commuted pension, gratuity, entertainment allowance, valuation of residential accommodation, etc. Ushering of the Exempt-Exempt-Tax (EET) system of taxation is a major change which is likely to impact cash flows at the time of actual receipt of pension, gratuity, voluntary retirement compensation, provident fund balance, etc. Individuals would have to suitably adjust their current contribution and savings to allow for a tax payout at a later date. The Code requires more clarity on the tax treatment of employer's contribution to recognised provident fund and interest in such account, employer's contribution to superannuation fund and to the new pension scheme, so as to conform to the EET principle.
For employees, a potential minefield could be the valuation of perquisites, the authority for which has been delegated to the CBDT. Valuation of housing, car and so on is a key component of tax effectiveness of the present taxation structure. Any severity in these provisions will have a corresponding negative impact on the employees, especially at the lower income levels.
House property owners are likely to be adversely affected by the proposals on account of fixation of a higher basis for taxation based on a presumptive value, reduction of standard deduction by 10%, disallowance of any interest on capital borrowed in case of self-occupied property and interest for the pre-construction/acquisition period. Denial of interest deduction on self-occupied property may be a breeding ground for sham transactions which would be an undesirable consequence.
A paradigm shift is proposed in the taxation of capital gain under which all capital gains will now be taxed at the normal rates. Widening of the scope of indexation and shifting of the base date for indexation to 1 April 2000 will be beneficial to the taxpayers, especially those holding assets acquired prior to this date. There is some ambiguity on taxation of listed shares on which STT has been paid and it is hoped that clarity will emerge over time.
The avenues for deduction on account of investments, currently available under section 80C, have been restricted to a small group of four, along with tuition fees, the thrust being on long-term investments. However, the limit for deduction has been enhanced from Rs. 1 lakh to Rs. 3 lakh which is more likely to benefit higher income groups.
RATES OF TAX
Though the threshold and rates will be retained, the slabs will be substantially liberalised, which would result in tax savings and increase in disposable income.
| Income slab | Existing rate | Proposed rate |
| Upto Rs. 1,60,000 | Nil | Nil |
| 1,60,000 to 3,00,000 | 10% | 10% |
| 3,00,000 to 5,00,000 | 20% | 10% |
| 5,00,000 to 10,00,000 | 30% | 10% |
| 10,00,000 to 25,00,000 | 30% | 20% |
| Above 25,00,000 | 30% | 30% |
For resident women (not being senior citizen) and senior citizen, the threshold of Rs. 1,90,000 and Rs. 2,40,000, respectively, will be retained.
| Surcharge & Cess | Existing | Proposed |
| Surcharge | Nil | Nil |
| Cess | 3% | Nil |
Tax savings at a glance
| Income | Current tax* | Proposed tax | Savings (Rs.) | Savings (%) |
| 1,50,000 | Nil | Nil | - | - |
| 3,00,000 | 14,420 | 14,000 | 420 | 3 |
| 5,00,000 | 55,620 | 34,000 | 21,620 | 39 |
| 7,50,000 | 1,32,870 | 59,000 | 73,870 | 56 |
| 10,00,000 | 2,10,120 | 84,000 | 1,26,120 | 60 |
| 20,00,000 | 5,19,120 | 1,04,000 | 4,15,120 | 80 |
*Inclusive of 3% cess
FINANCIAL YEAR TO BE THE BASIS
As a simplification measure, the concept of previous year and assessment year will be replaced by financial year which would be the year to which the income relates.
RESIDENTIAL STATUS
* There will be no change in the test for being a resident or non-resident.
* The concept of 'not ordinary resident' will be done away with. Instead, exemption from taxing global income will be provided to an individual who was a non-resident in 9 immediately preceding years. Exemption will be provided for the year in which he becomes a resident and the succeeding year. The test of 730 days will be done away with. This will restrict the benefit of exemption from taxation of global income to two years.
| Example | Existing | Proposed |
| Z is in India for 200 days each during 2011-12, 2012-13, 2013-14 and 2014-15 | Z will not be taxed on global income for all these years as he is in India for less than 730 days in the preceding 7 years. | Z will be taxed on global income from 2013-14 onwards. |
INCOME FROM EMPLOYMENT
| Salary payments | Existing | Proposed | Impact |
| Basic salary | Taxable | Taxable | No impact |
| Wages | Taxable | Taxable | No impact |
| Annuity | Taxable | Taxable | No impact |
| Bonus | Taxable | Taxable | No impact |
| Commission | Taxable | Taxable | No impact |
| Leave encashment | Exempt | Taxable | Will increase taxable salary |
| Commuted pension and gratuity | Fully exempt for Government employees. Partially exempt for other employees. | Partially exempt for all employees provided amount is deposited in a 'Retirement Benefit Account' (RBA). Withdrawals from RBA will be taxed. | Will provide parity of treatment between Government and non-Government employees |
| Voluntary Retirement Compensation | Exempt upto Rs. 5 lakh, subject to specified conditions. | Exempt (subject to conditions to be specified) provided amount is deposited in RBA. Withdrawals from RBA will be taxed. | Conforms to EET principle |
| Recognised PF | Existing | Proposed | Impact |
| Employer contribution | Exempt upto 12% of salary | Likely to be exempt under EET principal. | Requires more clarity in the Code. |
| Employee contribution | Deductible from income (max Rs. 1 lakh) | Deductible from income (max Rs. 3 lakh) | Increase in deductible limit. |
| Interest | Exempt upto 9.5% | Likely to be exempt under EET principal. | Requires more clarity in the Code. |
| Withdrawals | Generally exempt, except in certain situations. | Withdrawals taxable under EET principal except balance as on 31.3.2011 and interest thereon. | Conformity to EET principle. Relief will be available, as prescribed. |
| Allowances | Existing | Proposed | Impact |
| DA | Taxable | Taxable | No impact |
| HRA | Exempt | Taxable | Will increase taxable salary |
| Entertainment allowance | Exempt for Government employees upto specified limit. Taxable for others. | Taxable for all | Will provide parity of treatment between Government and non-Government employees |
| Transport allowance for commuting between office and residence | Exempt upto 800 p.m. | Exempt upto limit to be prescribed. |
|
| Special allowances granted to meet personal expenses at place of work or to compensate for increased cost of living (e.g. compensatory allowances, etc.) | Exempt as prescribed | Taxable | Will increase taxable salary |
| Perquisites | Existing | Proposed | Impact |
| Accommodation | Valued as per Rules. Preferential treatment for Government employees. | Value will be determined similarly for private and Government employees. | Will provide parity of treatment between Government and non-Government employees |
| Motor car; domestic servant, gas/electricity/water; educational facilities; transport facility | Valued as per Rules. | Valuation will be prescribed. |
|
| Other benefits and amenities, e.g., subsidized loan, holiday expenses, free meals, credit card/club expenses, etc. | Valued as per Rules. | Valuation will be prescribed. |
|
| Stock options/sweat equity | Taxable on allotment or transfer of shares as per prescribed valuation rules. | Taxable on allotment or transfer of shares as per valuation rules to be prescribed. | No change |
| Employer contribution to approved superannuation fund | Taxable to the extent it exceeds Rs. 1 lakh. Withdrawals are exempt in certain situations. | Likely to be exempt under EET principal. | Requires more clarity in the Code. |
| LTC | Exempt | Taxable | Will increase taxable salary |
| Medical facilities and reimbursements | Exempt upto specified limits. | Prima facie taxable unless beneficial valuation rules are prescribed. |
|
| New pension scheme | Existing | Proposed | Impact |
| Employer contribution | Deductible from income upto 10% of salary. | Likely to be exempt under EET principal. | Requires more clarity in the Code. |
| Employee contribution | Deductible upto 10% of salary. | Deductible from income | No limit specified. |
| Withdrawals | Taxable | Taxable. However, withdrawal used to purchase annuity will not be taxed. Also, rollover to a different account will neither be deductible nor taxable. | Rollover will promote portability. Uncommuted pension will be taxed. |
INCOME FROM HOUSE PROPERTY
| General | Existing | Proposed | Impact |
| Basis of computation | Annual value as computed under the Act. | Gross rent, i.e., higher of rent receivable or 6% of value of property. | Tax base may get enhanced. |
| One self occupied property | Value is Nil. | Value will be Nil. | No impact |
| Deductions | Existing | Proposed | Impact |
| Municipal taxes and service taxes | Deductible | Deductible | No impact |
| Standard deduction | 30% | 20% | Will increase taxable income |
| Interest on capital borrowed - on rented property - on self occupied property |
- Allowed without limit - Allowed upto Rs. 30,000 or Rs. 1.5 lakh |
- Allowed without limit - Not allowed. | Discriminatory in favor of taxpayers having houses let out. |
| Pre acquisition or construction period interest | Allowable in 5 instalments | Not allowed | Such interest will be sunk cost |
CAPITAL GAINS
| General | Existing | Proposed | Impact |
| Distinction between short-term and long-term capital asset | Distinct tax treatment and rate | No distinction | All capital gains will be taxed at normal rates |
| Base date for indexation and substitution of FMV to determine cost | 1 April 1981 | 1 April 2000 | Appreciation upto 1 April 2000 will not get taxed. |
| Capital assets eligible for indexation | Long-term capital asset | Any capital asset held for more than 12 months. | Scope of indexation widened. |
| Deductions | Existing | Proposed | Impact |
| On transfer of residential house | Available on purchase of residential house u/s 54 | Not available | Residual deduction can, instead, be claimed on making deposit. |
| On transfer of agricultural land | Available on purchase of agricultural land u/s 54B | Available on purchase of agricultural land | Proposed exemption applies with certain modifications. |
| On transfer of any long-term asset not being residential house | Available on purchase of residential house u/s 54F | Available on purchase of residential house | Proposed exemption applies with certain modifications. |
| On transfer of any long-term asset (residual provision) | Available on purchase of NHAI or RECL bonds u/s 54EC | Available on deposit in Capital Gains Savings Scheme A/c. Withdrawals will be taxed. | Taxation will be deferred. |
| Rate of tax | Existing | Proposed | Impact |
| On transfer of shares or units of Equity Oriented Fund where STT has been paid. | Long-term gain is exempt. Short-term gain is taxable at 10%. | All gains will be taxable at normal rates. STT will be abolished. | Tax impact may go up. |
LOSSES
| Provision | Existing | Proposed | Impact |
| Short-term v. Long-term capital gain/loss | Long-term loss cannot be set-off against short-term gain. | No restriction for set-off. | Restriction not required in view of same rate across all capital gains. |
| Carry-forward and set-off | Specific provisions for losses under each head of income | Loss from all heads of income will be aggregated and carried forward. However, capital loss will be treated separately. | Loss from lottery, puzzles, races and games shall also be treated separately. |
| Carry-forward time limit | As specified for different types of losses. | No time limit. | Losses will not lapse. |
DEDUCTIONS
| Deduction | Existing | Proposed | Impact |
| Savings, pension fund, pension scheme | Multiple avenues for savings u/s 80C. Deduction limited to Rs. 1 lakh. | Only payment to the following will qualify: • Approved provident fund; • Approved superannuation fund; • Life insurer; • Pension System Trust; • Tuition fees Limit will be enhanced to Rs. 3 lakh.
Roll over to another account will neither be entitled to deduction nor be taxed. | Deduction for NSC, ELSS, repayment of home loan, units of mutual fund, bank FD's, etc., will be eliminated. EET principal will be applied. |
| Health insurance premia | Available upto Rs. 15,000 (Rs. 20,000 for senior citizen) | Will be available upto the existing limits. | No impact |
| Medical treatment of self or dependant | Available upto Rs. 40,000 (Rs. 60,000 for senior citizen) | Will be available upto the existing limits. Non-resident will also be eligible. Independent spouse will be covered but brother and sister will be excluded. |
|
| Medical treatment of disabled | Available upto Rs. 50,000 (Rs. 75,000 for person with severe disability) | Limit of Rs. 75,000 will be increased to Rs. 1 lakh, while limit of Rs. 50,000 will be retained. Non-resident will also be eligible. Brother and sister will be excluded. Dependant should have annual income of less than Rs. 24,000. | Will benefit taxpayers providing medical treatment of person with severe disability |
| Higher education | Available | Available | No impact |
| Donations | Deduction allowed of 100% or 50% of donation depending on nature of donee. | Deduction will be allowed of 125%, 100% or 50% of the donation depending on nature of donee. | Another slab of 125% for specified donees have been added. |
| Disabled person | Available upto Rs. 50,000 (Rs. 75,000 for person with severe disability) | Limit for severe disability will be enhanced to Rs. 1 lakh, while limit of Rs. 50,000 will be retained. | Will benefit taxpayers with severe disability |
CERTAIN EXEMPT INCOMES
| Income | Existing | Proposed | Impact |
| Life insurance policy receipt | Exempt provided annual premium does not exceed 20% of sum assured. Exempt without condition, on death. | Exempt provided annual premium does not exceed 5% of sum assured and sum is received on completion of contract or on death. | Objective appears to limit benefit to pure life insurance policies. |
| Dividend | Exempt | Exempt | No impact |
| Income from units | Exempt | Exempt | No impact |
WEALTH TAX
| Provision | Existing | Proposed | Impact |
| Wealth | Includes non-productive assets | Will include all assets, including financial assets. Financial assets will be valued at lower of cost or market price. | Pre-1993 position reverted to. |
| Exemption of house or plot | One house or part of house or plot of land | One house or part of house or plot land acquired or constructed before 1.4.2000. | New acquisitions or constructions will be taxable. |
| Rate | 1% of net wealth exceeding Rs. 30 lakh | 0.25% of net wealth exceeding Rs. 50 crore. | Will mitigate the hardship on account of increase in scope of wealth. |
PROCEDURAL CHANGES
| Return | Existing | Proposed | Impact |
| Due date for filing return | 31 July | 30 June |
|
| TDS from salary | Existing | Proposed | Impact |
| Salary from other employers can be considered | Yes | No | Each employer will have to deduct taxes separately. |
| Loss from house property can be adjusted | Yes | No | May increase TDS outgo resulting in refund claim |
ILLUSTRATION
Medium range income - Approx. Rs 3 lakh
| Income | Amount | Taxable |
|
| Current | Proposed |
| Basic salary | 1,20,000 | 1,20,000 | 1,20,000 |
| Dearness allowance | 12,000 | 12,000 | 12,000 |
| HRA | 12,000 | 1 4,000 | 12,000 |
| LTC | 5,000 | 1 1,000 | 5,000 |
| Bonus | 20,000 | 20,000 | 20,000 |
| Transport allowance | 9,600 | Nil | 2 Nil |
| Employer contribution to PF @12% | 15,840 | Nil | Nil |
| Interest on PF @9.5% | 12,000 | Nil | Nil |
| Concessional loan provided by employer | 3 10,000 | 3 10,000 | 2 10,000 |
|
|
|
|
| Interest on home loan for self-occupied property | 60,000 | (-) 60,000 | Nil |
| Gain from sale of shares liable to STT and held for more than a year. | 20,000 | Nil | 20,000 |
| Interest on bank deposits | 14,000 | 14,000 | 14,000 |
| Dividend on mutual fund units | 4,000 | Nil | Nil |
| Gross income | 3,14,440 | 1,21,000 | 2,13,000 |
| Tax incentives |
|
|
|
| • Life insurance premium | 10,000 | (-) 10,000 | (-) 10,000 |
| • Self contribution to PF | 15,840 | (-) 15,840 | (-) 15,840 |
| • Repayment of home loan | 10,000 | (-) 10,000 | (-) Nil |
| Taxable income |
| 85,160 | 1,87,160 |
| Tax on income |
| Nil | 2,716 |
All figures in Rs
1Assumed figure after providing for exemption. 2Exempt amount/valuation rules will be prescribed. Assumed to the same as currently applicable. 3Value as per perquisite rules.
Impact
Taxpayers having taxable base upto Rs. 3 lakh may face higher tax outgo on account of reduce tax concessions and no change in tax rate slab.
Higher range income - Approx. Rs 18 lakh
| Income | Amount | Taxable |
|
| Current | Proposed |
| Basic salary | 7,20,000 | 7,20,000 | 7,20,000 |
| Dearness allowance | 2,40,000 | 2,40,000 | 2,40,000 |
| HRA | 1,20,000 | 1 60,000 | 1,20,000 |
| LTC | 30,000 | 1 10,000 | 30,000 |
| Bonus | 1,00,000 | 1,00,000 | 1,00,000 |
| Transport allowance | 60,000 | 1 50,400 | 2 50,400 |
| Employer contribution to PF @12% | 80,000 | Nil | Nil |
| Interest on PF @9.5% | 30,000 | Nil | Nil |
| Stock options | 3 60,000 | 3 60,000 | 2 60,000 |
|
|
|
|
| Interest on home loan for self-occupied property | 2,40,000 | (-) 1,50,000 | Nil |
| Gain from sale of shares liable to STT and held for more than a year. | 1,00,000 | Nil | 1,00,000 |
| Dividend on shares | 20,000 | Nil | Nil |
| Dividend from mutual fund units | 60,000 | Nil | Nil |
| Gross income | 18,60,000 | 10,90,400 | 14,20,400 |
| Tax incentives |
|
|
|
| • Life insurance premium | 1,00,000 | (-) 1,00,000 | (-) 1,00,000 |
| • Repayment of home loan | 20,000 | 4 Nil | Nil |
| • Self contribution to PF | 80,000 | 4 Nil | (-) 80,000 |
| Taxable income |
| 9,90,400 | 12,40,400 |
| Tax on income |
| 5 2,07,154 | 1,32,080 |
All figures in Rs.
1Assumed figure after providing for exemption. 2Exempt amount/valuation rules will be prescribed. Assumed to the same as currently applicable. 3Value as per perquisite rules. 4Tax incentives, though available, are limited to Rs. 1 lakh. 5Inclusive of 3% cess.
Impact
Taxpayers having taxable base exceeding Rs. 3 lakh may benefit from lower tax outgo on.
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