The Direct Tax Code (DTC) will finally be replacing the existing Income Tax Act of India. The DTC draft was first introduced by the government in August 2009. On the basis of the feedback from the public, changes were proposed and the second draft was unveiled in June 2010. The proposals have now been approved and could be considered as more or less final, though a few changes could be expected during the parliamentary discussion of the bill. This article brings to you the new tax structure and its various tax saving options, its impact and implications on investors.
New Tax Slabs under DTC
The DTC contains various changes in the income tax slabs and offers the salaried class a little more to take home. This would be effective from 1st April, 2012. So, the first tax returns under DTC will be filed after March 31, 2013.
Current versus new DTC Slabs
a) For men and women below age 65
b) For Senior Citizens above age 65
In comparison to the earlier draft proposals of the DTC and what currently exists, a marginal increase in the tax slabs has been incorporated in the approved DTC bill.
Men and women would follow the same tax slabs.
There would be stability in tax slabs, as the annual budget would no longer revise slabs each year.
Tax Deductions in DTC
Currently, a deduction of up to Rs 1,00,000 is available under section 80C. An additional Rs 20,000 under section 80CCF is available for investments in specified infrastructure bonds.
The DTC brings about certain changes to this structure through the following deductions.
1) Investments in savings schemes
a) Investments in the following saving schemes are eligible for deduction up to a combined limit of Rs 1,00,000.
Employee Provident Fund
Public Provident Fund
National Pension Scheme
All the above would be “EEE”- i.e. exempt at time of investment, exempt during accumulation, and exempt at withdrawal.
b) An additional deduction of Rs 50,000 would be available for investments in:
Life insurance premium paid for self, spouse and child, provided annual premium is not more than 5% of Capital Sum assured.
Mediclaim Insurance Premium.
Tuition Fees (for up to 2 kids)
The total deduction, thus, now stands at Rs 1,50,000.
c) Deductions not available - With the new DTC, the following would no longer be eligible for any deductions under section 80C.
Investments in ULIPs
Equity Linked Saving Scheme
2) Tax benefit on home loans - The tax benefit on the home loan principal repayment has been withdrawn. However the DTC has retained the tax benefit on the interest component at Rs 1,50,000 limit.
3) Tax benefit on LTC - The tax benefit on Leave Travel Concession remains the same as twice in a block of four years. However, it would now be included as part of income and deductions would be available at applicable limits.
4) Tax on medical reimbursements - Currently, medical expenses up to Rs 15,000 are eligible for reimbursements. The new DTC has raised the reimbursement of medical expenses to Rs 50,000. Reimbursements above this amount would be part of the income and taxed at applicable slabs.
5) Tax Deduction for Medical Treatment - Tax deduction of up to Rs 40,000 and Rs 60,000 in case of senior citizens, for medical treatment of self, spouse, dependent children and parents, in specified government hospitals for specific diseases, can be availed. If a reimbursement has already been received for the treatment from an insurer, then the deduction would be reduced by the amount received.
6) Capital Gains Tax - There would be no long term capital gains tax for investments in shares and equity mutual funds. For short term capital gains tax, investors with incomes between Rs 2,00,000 to Rs 5,00,000 to pay 5% tax, between Rs 5,00,000 to Rs 10,00,000 to pay 10%, and over Rs 10,00,000 a tax of 15%, is to be paid. Also, equity-linked mutual funds and ULIPs will attract 5% tax on the dividend declared.
Implications on Investors
Investors with a long term investment horizon stand to gain better, as there is no long term capital gains tax.
Senior citizens get a good relief with the introduction of the EEE regime for retirement schemes.
Investors get dual benefit of child’s education and tax saving with the deduction of tuition fees of children.
Although an amount of Rs 60,000 or Rs 40,000 can be claimed in respect of treatment of specific disease, these diseases are uncommon diseases like HIV, etc.
Investors now have lesser options available for investments in tax saving schemes as ELSS and ULIPs have been done away with.
Great disappointment for risk savvy investors of ELSS who seek to combine, market investments with tax saving.
ULIPs and ELSS are no longer attractive options. Not only have they been removed as deductions but they would also be taxed at the time of withdrawal.
The 5% dividend distribution equity linked schemes could reduce its effective yield.
Despite the current approved proposals, the DTC still requires more clarity on many areas such as 80 CCF and 5 year maturity fixed deposits. The government needs to clarify all asp.
Written for InvestmentYogi by Ramya Ramachandran
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