An apt statement for the DTC is “Better late than never”. DTC which is supposed to replace the old Income Tax Act 1961 is delayed by one year. The discussion on easing the tax filing process and forms has been going on for quite some time and finally income tax department has got its act together. This means that now it will be applicable from 1^st April 2012. The not so good delayed feeling is accompanied with deletion of some beneficial regulation from the original proposal too.

So what this new DTC is going to offer? This proposal will not bring revolutionary changes but it promises to make the tax regime transparent and simpler to abide by. Although there are a lot of confusions and questions in mind of tax payers regarding DTC, which will hopefully get cleared once the bill is discussed, let’s figure out some direct implications of DTC on individual tax payers:

Income Slab

DTC has redefined the Tax Slabs which will bring smile on the face of salaried class as Income tax exemption limit is now proposed at Rs2 lakh per annum, up from Rs1.6 lakh.

Following tax slab has been proposed under the new direct tax regime.

According to new proposal Tax burden at highest level will come down by Rs 41,040 annually. This will generate some more disposable income for people falling under different tax slab. For senior citizens (65+), there will be no tax on income up to 2,50,000. Earlier exemption limit was 2,40,000.

Exemptions

Exemption for investment in approved funds and insurance schemes is now proposed at Rs 1.5 lakh annually. Earlier it was Rs 1.2 lakh annually.

Deduction of 1 lakh under 80C

The DTC will maintain the existing deduction of Rs1 lakh under 80C but DTC removes most of the categories of exempted income like ULIPs, ELSS funds, NSC, Infrastructure bonds, and term deposits. Additionally Tax deduction in principal part of the housing loan under 80C is also removed.

The instruments available for tax saving purpose will be

· New pension system (NPS)

· Provident fund (EPF and PPF)

· Superannuation fund

· Any other scheme proposed by Government as per the framework.

Deduction of 50,000

There will be another 50,000 deduction which will be allowed for the following:

· Pure Life Insurance where the sum assured is 20 times the annual premium.

· Health insurance, Mediclaim Policies

· Tuition fee (up to 2 child’s)

Capital Gains

DTC proposal will change the perspective of short and long term capital gains. Only half of Short-term capital gains will be taxed. According to DTC proposal income from capital gains will be categorized as income from normal sources for all tax payers and hence will be taxed as per the individual’s tax slab. DTC also proposes indexation base year change from 1-Apr-81 to 1-Apr-2000.

Short term capital gain on stocks: As per DTC only half of short term gain will be added to your taxable income and taxed as per the category you fall into.

Long term capital gain on stocks: Holdings sold after a year will come under long term capital gains and not taxed.

Short term capital gain on property sale: The gain will be added to the taxable salary and taxed as per your category/slab.

Long term capital gain on property sale: The gain, after indexation, will be added to your salary and taxed as per your tax slab. Earlier, the tax on long term capital gain on property sale was flat 20%.

Others

Max limit for medical reimbursements has been increased to 50,000 per year from current limit of Rs 15,000.

No exemption for holidays as per DTC. Work more so that you generate more tax is the new ruling. The tax exemption on LTA is gone.

DTC proposals regarding NRI’s taxation seems to be slightly harsh. For NRI’s, if you stay in India for at least 60 days and earn money, you will be taxed. The limit earlier was 182 days.

DTC doesn’t provide any extra benefit to women. Women giving men tough fight seems to be a reality as per DTC.

DTC proposes to levy dividend distribution tax at 15%.

Finally…

DTC aims to replace the archaic Income Tax Act and simplify the whole direct tax regime in the country. The Code aims to reduce tax rate which seems to be a very positive and progressive initiative from the government side.

The author Pankaj Priyadarshi is a financial consultant and can be reached at pankaj@verticalgrass.com. He is B.Tech from IIT, Kharagpur and MBA from ISB, Hyderabad.

Income Tax calculator