DIRECT TAX CODE

:- Chandresh

 The new Direct taxes code has been published by Finance ministry, which would replace current Income Tax structure from 2011-12.

General Aspects
Earlier Income Tax Act and Wealth tax Act (Covering Income Tax, TDS, DDT, FBT and Wealth taxes) are abolished and single code of Tax, DTC in place. Concept of Assessment year and previous year is abolished. Only the Financial Year terminology exists.

 Only status of Non Resident and Resident of India exits. The other status of resident but not ordinarily resident goes away. Earlier the terminology of assessed was meant for the person who is paying tax and/or, who is liable for proceeding under the Act. Now it has been added with 2 more definitions namely a person, whom the amount is refundable, and/or, who voluntarily files tax return irrespective of tax liability.

 No changes in the system of Advance Tax, Self Assessment Tax and also TDS. Amendment of TDS goes in line with earlier Notification 31/2009 which speaks of Form 17/UTN/etc. Government assessed is covered in Direct Tax Code. Even though they are not liable for Income Tax / Wealth Tax, Government Assesses are required to comply with provision of TDS and TCS. (Current act was not covered with Government Assesses)

New Tax rates: (For Ordinary source of income)

Slab 1 2 3 4 Income Between Tax rate

0 - 1.60 Lakhs 1.60 Lakhs to 10 Lakhs 10 Lakhs to 25 Lakhs Above 25 Lakhs

0% 10% 20% 30%

 For Female, second slab begins from 1.90 Lakhs and for Senior citizen it begins from 2.40 Lakhs Companies tax rate changed from 30% to 25%.

New due dates for Tax Returns:

Sl No 1 Type Date First filing (under DTC) 30/06/2012

Non-Business 30th June / NonCorporate Others 31st August

31/08/2012

Tax incentives:
Earlier terms Deductions under Chapter VI A will be treated as Tax incentives. 80C gets a major hit by introduction of EET methodology (Exempt - Exempt - Tax). The investment is Exempted when invested. The investment is Exempted till it is remained invested. The investment is Taxed when it is withdrawn.

Also, investments are considered only of those invested through savings intermediaries approved by PFRDA (Pension Fund Regulatory and Development Authority)!!

Such savings intermediaries may in turn invest in ELSS mutual funds, government securities, Public sector securities, etc. Such investments are also exempted to the maximum of Rs. 3 Lakhs.

 All such savings will be governed directly by government by an appointed depository (an independent agency).
Other than this, Tuition fees for children will be allowed as deductions. No maximum limit for this, as savings are charged once they are withdrawn.

 Medical treatment, higher education loan interest, donation and rent paid by selfemployed individual are deductible. New provision comes for Handicapped individuals to get deductions upto 75,000.

Major Deductions applicable under Tax Incentives for an individual:

Investments through PFRDA approved agencies (Max of 3 Lakhs) Payment of tuition fees Medical treatment Health insurance Donations Interest on loan taken for higher education Maintenance of a disabled dependant Interest income on Govt bonds

Deductions from Salaries:

Allowed are only, PT, Transport Allowance (limit prescribed) and special allowances given exclusively to meet duties (to the extent actually incurred). Also deduction is allowed for PF as tax incentives. And last, deductions are allowed for Voluntary retirement, Gratuity on retirement and pension received.

 No deductions on HRA, Medical reimbursements, etc, etc. Employer part of PF paid will be exempt from tax as Tax Incentives under EET methodology (to employees).

House Property:
No deduction for Housing loan repayment of Self-Occupying property. This includes interest as well as part of principal. Only Let out properties are considered and the Gross rent and specified deductions are taken with simple calculations.

Residuary Sources (Other Sources)

Earlier things follow almost. Any amount exceeding 20,000 taken / accepted / repaid as loan or deposit, otherwise by an account payee cheque/draft shall be added to the income.

Computation of total Income

Incomes are broadly divided into 2 sources, namely Special Sources and Ordinary Sources. Special sources are given no deduction and what is earned is taxed directly (generally at a lower rate). Ordinary sources are divided into further categories, namely:
Income from employment. Income from House Property Income from Business Capital gains Income from Residuary Sources (Similar to other sources, with some minuses)

Ordinary Sources:
The 5 categories of Ordinary sources can have multiple sources under each head (Eg: Multiple employer, Multiple Business, Multiple Properties, etc). The income will be computed in 2 step procedure for each head:
Calculate for each source under each head of Income. Aggregate the total under each head and arrive a total profit or loss under such head.

Then aggregate all the 5 heads and arrive the figure of Current Income from Ordinary Sources .

 Then this value has to be aggregated with unabsorbed losses as of immediate preceding financial year . Such aggregated income will be treated as Gross Total income from Ordinary Sources .
If such result is negative, then Gross Total Income will be NIL and value will be treated as Unabsorbed current loss from ordinary sources .

 Such Gross Total Income will be further reduced by incentives similar to earlier Chapter VI A deductions. The resultant amount will be 'Total income from ordinary sources'.

Some cases for Ordinary Sources GTI deriving:

Description Current income from ordinary sources Unabsorbed preceding year loss from ordinary sources Gross total income from ordinary sources, of the financial year Unabsorbed current loss from ordinary sources of the financial year Case Case - II I 1000 Nil 1000 (-)500 Case - III 1000 (-)1500 Case - IV (-)1000 Nil Case - V (-)1000 (-)1500

1000

500

Nil

Nil

Nil

Nil

Nil

(-)500

(-)1000

(-)2500

Special Sources:
This includes incomes like:
Any assessee
On income by way of winnings from
any lottery or crossword puzzle race, including horse race (not being the income from the activity of owning and maintaining race horses) Card game or any other game or gambling or betting.

 Non-resident
On investment income by way of Interest, dividends on which distribution tax has not been paid, capital gains, any other investment income On income by way of royalty or fees for technical services

Non-resident sportsman who is not a citizen of India

On income by way of participation in India in any games, advertisement or contribution of articles relating to any game or sport in newspapers, magazines or journals in India

 Non-resident sports association or institution

On income by way of guarantee money in relation to any games or sports played in India.

The income on such way will be aggregated Current Income from Ordinary Sources . Then this value has to be aggregated with unabsorbed losses as of immediate preceding financial year . Such aggregated income will be treated as Gross Total income from Special Sources .
If such result is negative, then Gross Total Income will be NIL and value will be treated as Unabsorbed current loss from Special sources .

 Such Gross Total Income will be calculated separately and adjusted will losses. Then the resulting values will be aggregated and the resultant amount will be 'Total income from Special sources'.

Total Income:
'Total income from ordinary sources' PLUS 'Total income from Special sources' = Total Income. The losses can be carried forward for any number of financial years, with year on year adjustment system. Loss under Capital Gains and Loss under Speculative business are ring-fenced and can be adjusted only against respective heads.

Facts about DTC

The exemption limit for senior citizen and women is proposed to be raised to 2.5 lac. MAT is also proposed to be increased from 18 per cent to 20 per cent of the book profits of the company. Exemption limit of 1.5 lac on interest on Housing loan will continue. Tax on Foreign & Domestic company will be 30 per cent.

 Surcharge & cess on companies will be removed. It seeks to levy dividend distribution tax at 15 per cent. Income on non-profit organisations, exceeding Rs 100,000, is proposed to be taxed at 15 per cent. HRA exemption restored. Employer s contributions to NPS (not exceeding 10% of salary), to approved superannuation fund (no limit limit of 1,00,000 done away with), to approved PF (not exceeding 12% of salary), interest credited to approved fund not to be included in salary.

 Only actual rent from house property to be taxed. Present system of taxing notional value called annual value proposed to be done away with. Rent received in arrears to be included in the year of receipt, whether person in owner of property or not, after allowing 20% deduction towards repairs & maintenance. Consideration received from transfer of carbon credits to be taxed as business income. Remission or cessation of any liability by way of loan/deposit/advance/credit to be taxed as business income.

 Scientific Research and Development in house facility expenses weighted deduction proposed to be increased from 150% to 200%. Transfer of land of a sick industrial company made under a scheme sanctioned under section 18 of SICA where such company is being managed by worker s cooperative not to attract capital gains tax. Reverse mortgage under notified scheme to continue to be exempt from capital gains tax. Exemption for long-term capital gains from equity shares/units of equity oriented mutual funds retained. STT to be retained.

 Short-term capital gains (where equity shares/units are held for 1 year or less) deduction of 50% to be are allowed and balance 50% taxed. Likewise short-term capital loss to be scaled down by 50%. Deduction for interest on housing loan/loan taken for repair or renovation of house property upto limit of Rs. 1,50,000 in respect of one house pro-perty not let out. No deduction for re-payment of principal under the Code. Limit for tax audits for professionals increased from Rs. 15 lakhs to Rs. 25 lakhs. Limit for tax audit for business increased from Rs. 60 lakhs to Rs. 1 crore.

 TDS of 10% on payments in respect of life policies which are not exempt from tax from code. Amount received by employee from NPS trust is tax-free. Thus, NPS which is taxed on EET basis is proposed to be made EEE (Exempt-ExemptExempt) for employees. MAT rate Increased from 15% of book profits to 20%. MAT Credit carry forward period increased from 10 years to 15 years.

 DDT on dividend of domestic company 15%. DDT on income distributed by mutual fund/life insurance to unitholder/policy holder 5% Wealth tax threshold increased from Rs. 30,00,000 to Rs. 1 crore. Tax rate will be 1% of net wealth in excess of Rs. 1 crore.

How insurance gets impacted:

Under DTC, to be eligible for tax deduction, a policy should give life cover of at least 20 times the annual premium. If this condition is not met, you will not get any tax deduction on the premium and even the income from the policy will be taxable. Right now income received from insurance policies is free.

 Deduction limit for life insurance will get reduced from present Rs 1 lakh a year to Rs 50,000 an year. This annual limit of 50,000 will include the amount paid for tuition fees of children as well as medical insurance for self and parents So an insurance policy with a large premium, around 80,000 1 lakh will fetch maximum tax deduction of only Rs 50,000

 The DTC will also nudge policyholders to take long term view on investments. Premature withdrawals from ULIPs will be taxed, so think twice before deciding on an insurance policy. Agent telling you that surrender charges have been waived off and you can withdraw money after 5 years without paying anything won t hold true anymore.

How equities investment will be effected:

Exemption on long term capital gains continuing is definitely positive news here. Investors can continue with their investments as planned without any need to rejig them due to DTC. However ELSS Mutual Fund scheme s tax exemption will go and they will be treated at par with other schemes in market with no tax exemption. Investors who are looking for Mutual Funds for tax exemption should consider this factor while investing.