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Economy

India Direct Tax Code Bill Tabled in Lok Sabha

The Government introduced the Direct Tax Code Bill today. After some serious amount of searching, I found the bill online, after struggling with pages timing out, debugging communication messages and guessing IP addresses. (Read: It was darn easy in the end, but I had spent so much time I needed to make it look like it was a bloody difficult job).

What matters is not that I found it. What matters is what is in it.

First, this bill of the DTC applies from 1 April 2012, so heave a sigh of relief.

For salaried income: Deductions are Employment Tax, Travel allowance (currently Rs. 800 a month), actual reimbursements, employer’s contribution to pension [upto 10% of salary], retirement or provident fund [upto 12%].

Housing rent allowance is fully exempt, without the complex formula – now it is limited to the rent actually paid. Nice.

Property income: Only rent actually received is taxable. You get to deduct local taxed and 20% of the gross rent, plus all interest paid on a loan for that property. If you take on a loan before the property is ready, you get to amortize the interest paid before possession over the subsequent five years, equally.

Securities Transaction Tax stays. We will now pause for a minute to pray for the arbitrageurs that died after that sentence.

Capital Gains: First calculate the gain as selling price minus cost price minus all intermediate costs. For shares and equity mutual funds on which STT is paid and held over a year, ZERO. Rejoice.

Shares and MFs with less than one year of holding – 50% of the gain (or loss) is “ditched” and the rest added to income.

For debt MFs or shares transferred off-market or Gold ETFs or things like that: To qualify for LTCG (Long Term Capital Gains) you have to hold the asset for “one year from the end of the financial year in which the asset is acquired”. If you buy on April 1, 2012, you have to hold it till after March 31, 2013 – that’s two years at the extreme. Then, you get to index the costs to inflation. If you’ve bought the asset before 2000, then you must assume indexation from 2000, but you get the option – and I mean it’s your choice to do this if it works in your favour – of using the price on April 1, 2000. This is incredible, for me, because my family owns shares held for over 20 years.

Any other short term capital gains are simply added to income.

There will be a Capital Gains Deposit Scheme where you can dump the proceeds (not just the gains, the entire proceeds) of capital asset sales (long or short term) and not pay tax. You can buy a house or agricultural land to offset cap gains taxes, within a year after the sale or use the Cap Gains Deposit Scheme, to park money upto three years to invest in such a tax-offsetting asset. You get to do this for max two residential properties for a person.

Deductions: Everyone gets a Rs. 100,000 deduction for money put into “approved funds”. What we don’t know – are ELSS mutual funds “approved”? Are "ULIPs” approved? Most likely no to both. They do mention that approved funds are –

  • PF, retirement or gratuity funds
  • Pension funds
  • Any thing else specifically approved

An additional Rs. 50,000 is deductible under 3 heads – 50K is the limit for all of them added up.

  • Pure life Insurance – defined as any policy where the premium is less than 5% of the sum assured for ALL years of the policy,
  • Health insurance
  • Two children’s tuition fees (including pre-school fees). But no donations or “development fees”.

Housing: This gets interesting. First, no principal deduction. Second, interest is only deductible if the house is completed within three years of the loan commencement. (And the pre-completion interest is amortized forward over five equal yearly installments. You don’t get the deduction during the pre-completion phase) The interest deduction limit is Rs. 150,000.

Higher Education loan interest is deductible for seven years, but it’s gotta be from a bank or FI (not relatives) and for a course the govt. recognizes. (Sorry, IIPM. Perhaps even ISB will not qualify!)

Medical expenses get a 40K deduction if you actually spend the money on medical treatment. 60K for treatment of senior citizens. Oh, and if you get insurance, that much is not counted.

Tax slabs: Upto 200,000 a year, no tax.
Rs. 200,000 to 500,000: 10%
Rs. 500,000 to 10 lakhs: 20%
> 10 lakhs: 30%.

It’s progressive, and slabbed. For senior citizens (65+), the first slab is 250,000. For companies, the rate is 30%, and Minimum Alternate Tax is 20% (but you can claim it back within 15 years)

Dividends and Insurance income distribution from “Equity Oriented Insurance Schemes” (ULIPs) get taxed – at 5%. The 15% dividend distribution tax stays. That means to go through equity mutual funds you actually pay a lot – first companies pay 15% tax on dividends, then the mutual funds get a tax hit of another 5%.

Wealth tax: 1% of whatever’s above 1 crore rupees, every year. But not including the house you live in. This is just horrible, but amounts to just 1% more income tax, if you look at it. But if someone has money in illiquid assets like multiple houses, or equity, they’ll find the going tough. Think of the promoters of Indian companies!

With about 35 lakh crores under private sector ownership, that alone will give the government more than 30,000 cr. of wealth tax revenue.

But the section actually doesn’t count assets like shares and bonds! This needs lawyer input but it seems like for wealth, they consider land, farm houses, cars/yacht/aircraft, jewellery and bullion, antiques and paintings, expensive watches, cash, and shares held in foreign companies. Nothing about Indian company shares, or bonds, or mutual funds.

EEE or EET: NPS goes Exempt on withdrawal – commutation of pension (lumpsums) upto 1/3rd or 50% of the amount in different cases.

Life insurance paid on death is exempt. This is still a great way to transfer assets without a will.

All exemptions for donations to non-profits, political parties etc. stay.

Nothing much changes, really, other than a few exemptions gone, and wider tax slabs. Retaining LTCG at zero for equity markets is good, of course, but it won’t last that long. Wealth tax can be a huge issue or a non-issue, if there is clarity on whether it applies on share/bond holding.

To me this is no big deal – just business as usual. But the equity markets have reason to rejoice.

  • Anonymous says:

    >Thanks a lot for the excellent summary by you.

    I got worried by Wealth Tax resurfacing after black era of the 70's (Wealth Tax 5%). It seems Indian Stocks and Bonds and MFs are out of the Wealth as it is today.

    Other items can be tax planned – not a big problem.

    MK

  • Srikanth says:

    >Deepak,

    Great analysis, well laid-out – muchos gracias!

    Last line is the stinger… 🙁

    Regards,

    Srikanth

  • hisanjay says:

    >Thanks a lot for the detailed information. I am sure it will be useful to a lot of them.

  • Ninad says:

    >Great analysis there
    But DTC feels like old wine in a new bottle a watered DTC from the original

    One question though HRA is tax free means no rent receipts submission in office business right?
    that would be a great relief

    Ninad

  • Anonymous says:

    >Any clarity on education cess – I tried searching the pdf but didnt get anything for above string.

    -Ayush

  • Anonymous says:

    >Thanks a lot for the PDF! I was looking for it.

  • Anonymous says:

    >Deepak: Great analysis. But, I would still wait till the bill becomes an act. The current bill is so different from the original DTC that one can never be sure what will happen when it actually gets implemented from Apr 1, 2012. Long way till then. Too much lobbying and interest groups.

  • Sunitha says:

    >Deepak, Is there a different interest deduction limit based on whether house is self occupied or rented out? OR is it 1,50,000 limit irrespective of whether you stay in or let out?

  • Deepak Shenoy says:

    >Supposedly no ed. cess or surcharges.

    Also, if you rent out the apt, all the interest is deductible, but if you stay in it the deduction is 1.5 l per year. AFAIK.

  • Sandeep says:

    >Hello Deepak – First off, excellent analysis. Kudos. Just one point I would like to make.

    HRA is not actually tax-free to the extent of the rent. The complex formula that exists today could be carried fwd in the DTC too. Note the section again – "(h) any allowance provided by an employer to meet the expenditure actually
    incurred on payment of rent in respect of residential accommodation occupied by the
    employee, to such extent as may be prescribed."

    To the extent prescribed = expect formula

  • Deepak Shenoy says:

    >Sandeep: True – there may be a formula later. Let's wait and see. In the current draft there is no prescription for limits so I guess we'll only know when the final draft goes through as on April 1, 2012 (and they can still change it after that!)

  • Px says:

    >Hey deepak
    can u do a writeup on NPS especially when people might consider investing in it a lot more seriously…

  • Anonymous says:

    >Hello Deepak
    So clear and simple for all to understand.. Great work!
    What will happen to maturity amount of my existing Insurance policy(where the prem paid is more than 5%of sum assured)? Will it remain tax free as before under 10-10-d

  • Karan Batra - Tax Advisor says:

    >Its a huge relief that the New Direct Tax Code would not be applicable wef 1st April 2011 thereby giving assessee time to think and plan their taxes before hand…

  • Anonymous says:

    >Thanks for doing all the spade work..really appreciated! And now please… some constructive suggestions to reduce the tax burden esp on long term capital gains.

  • Wryter says:

    >Thanks for the roundup. Researching a bit more on Capital Gains. Will get back to you.

  • Wryter says:

    >Yup 2012 sounds good to me. Let me start all over again. Lots more to add.

  • Shubhanand says:

    Deepak,
    May i request some clarity on yr comments regarding short term capital gains on Shares and MF’s ?
    You said 50% of the gain (or loss) is “ditched” and the rest added to income – what do you mean by “Ditched”?
    I read in the issue of Economic times “Wealth” from May 30-Jun 5th (Pg 26), that only 50% of the gains are taxed at tax rate as per applicable slabs. No mention there about how remaining 50% will be treated.
    Thanks in advance
    Regards