DIRECT TAX CODE- A NEW INCOME TAX RULE

Highlights 

• Common threshold income tax exemption limit for men and women proposed at Rs. 2 lakh per annum (proposed), up from Rs. 1.6 lakh
• 10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on between Rs. 5-10 lakh, 30 per cent for above Rs. 10 lakh
• Tax burden at highest level will come down by Rs. 41,040 annually
• Proposal to raise tax exemption for senior citizens to Rs. 2.5 lakh from Rs. 2.4 lakh currently.(NOTE:-union budget 2011-12 already has proposed it)
• Corporate tax to remain at 30 per cent but without surcharge and cess
• MAT to be 20 per cent of book profit, up from 18.5 per cent
• Proposal to levy dividend distribution tax at 15 per cent
• Exemption for investment in approved funds and insurance schemes proposed at Rs. 1.5 lakh annually, against Rs. 1.2 lakh currently
• Proposed bill has 319 sections and 22 schedules against 298 sections and 14 schedules in existing IT Act
• Once enacted, DTC will replace archaic Income Tax Act.
• However, many provisions in Income Tax Act will be a part of DTC as well.
• FBT will be charged to the employee rather than the employer.

Salient features

• DTC removes most of the categories of exempted income. Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Unit Linked Insurance Plans (ULIPs), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will lose tax benefits.
• Only half of Short-term capital gains will be taxed
• Surcharge and education cess are abolished.
• For incomes arising of House Property: Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent.
• Tax exemption on Education loan to continue.
• Tax exemption on LTA (leave travel allowance) is abolished.
• Taxation of Capital gains from property sale : For sale within one year, gain is to be added to taxable salary .
• Tax on dividends: Dividends will attract 5% tax.
• Medical reimbursement : Max limit for medical reimbursements has been increased to rupees 50,000 per year from current rupees 15,000 limit.
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Common features and impacts

Sr. No.	Particulars	Provsions of Direct Tax Code Bill	Existing Tax Provisions	Impacts
1	Tax Rates (i) Exemption Limit	Basic Exemption limit is proposed at Rs. 200000 ( Rs. 250000 for Senior Citizens)	Basic Exemption limit is Rs. 160000/- ( Rs. 190000/- for women and Rs. 240000/- for Senior Citizens)	Good Increase in basic exemption limit is a welcome Preferential exemption for women removed
	(ii) Slab rates	Up to Rs. 5 lakh - 10% Rs. 5 to 10 lakh - 20% Over Rs. 10 Lakh - 30%	Up to Rs. 5 lakh - 10% Rs. 5 to 8 lakh - 20% Over Rs. 8 Lakh - 30%	Good Increase in slab will result in saving of Rs. 24000 Education cess removal will be welcomed
2	DTC continues EEE (i) Govt. PF / recognized PF / Public PF	Employer's contribution to PF up to 12% of salary exempt Employee's contribution eligible for overall investment deduction limit of RS 100,000. Amount received on maturity not taxable, subject to conditions	Employer's contribution to provident fund exempt up to 12% salary Employee's contribution eligible for deduction up to Rs 100,000 Accretions and withdrawals exempt based on prescribed guidelines.	Good EEE continued in these popular schemes. Overall investment deduction limit of Rs 100,000 applies for contributions to approved funds, viz PF, superannuation fund, gratuity, pension and other notified funds.
	(ii)Superannuation fund	Employer's contribution to approved superannuation funds exempt Employee's contribution eligible for overall investment deduction up to Rs 100,000 Maturity payments on retirement/achieving certain age/incapacitation not taxable	Employer's contribution up to Rs 100,000 per annum is exempt. Withdrawal is exempt based on prescribed guidelines.	Good Continuance of EEE would mean no tax liability on end-payments. Removal of present anomaly of part double taxation of employer's contribution will help.
	(iii) Life insurance policies	Premia eligible for overall additional deduction limit of Rs 50,000 Premia paid on policies with premium >5% of sum assured not deductible. Maturity proceeds exempt, if the premium paid in any year less than 5% of sum assured & received on completion of original insurance period. Proceeds received on death are completely exempt. Equity linked life insurance schemes subject to 5% tax on distribution.	Premia deductible up to Rs 100,000 . Sum received on life insurance policy exempt if premium in any year is <20% of sum assured.	Adverse Overall additional deduction limit not only lowered to Rs 50,000 but is also merged with mediclaim insurance and tuition fees Amounts received during the term of the insurance contract under cash back insurance policies would become taxable Threshold of 5% of sum assured seems to be too low-may affect even genuine policies. No grandfathering provisions for presently issued policies. 5% distribution tax on equity linked insurance schemes would lower the effective yield of such instruments.
	(iv) Mediclaim insurance premium	Premia paid for self/spouse/dependent parents eligible for overall additional deduction limit of Rs 50,000.	Premia paid for self/spouse/children are entitled for deduction of Rs 15,000, and additional deduction of Rs 15,000 Rs. 20000 in case of Senior Citizens) for parents.	Mixed Impact Overall additional deduction limit although increased, is merged with life insurance and tuition fees Parents need to be dependent, if premium is to qualify as a deduction
	(v) Investment avenues reduced substantially	No deduction for avenues such as mutual fund investments, housing loan repayment, etc.	Such payments were eligible for Rs 100,000 deduction limit	Adverse These avenues will no longer be eligible for deduction
3	Salary components (i) House rent allowance	HR exemption continued	Exemption is available	Good This will ensure some parity between employees staying in own house vis-�-vis those staying in rental house.
	(ii) Leave encashment	Exemption for leave encashment on retirement up to limit to be specified allowed.	Exemption is available up to Rs 3 lakh n specified cases and fully exempt in case of Govt. employees	Good Employees would continue to avail of exemption.
	(iii) Medical facilities / reimbursement	Medical facilities not taxable and medical expense reimbursements up to Rs 50,000 exempt	Medical treatment in specified hospitals not taxable, nor is payment of medical insurance premium. More so, reimbursement of medical bills is exempt up to Rs 15,000.	Good Continuation of exclusion of medical facilities out of perquisite net is a very welcome move. Increase of medical expenses reimbursement limit up to Rs 50,000 is also commensurate to the increased medical costs.
	(iv) Leave travel concession	LTC exemption removed when the bill placed, but amendement anounced that it will not be taxed	LTC exempt in respect of travel expenses for self/family, subject to certain conditions.	Not Good LTC benefit shall be taxable
4	Retirement Benefits (i) Gratuity, VRS, commutation of pension	Terminal benefit such as gratuity, VRS, commuted pension are exempt, subject to conditions	Exemption is available in specified cases subject to conditions.	Good Continuance of exemption will mitigate hardship of tax burden on such payments.
5	House Property Income (i) Notional rent taxation stopped	House property income taxable only where rent is actually received/receivable.	House property income taxed on deemed rent basis, even if not actually let out.	Good Removes anomaly of tax levied on non-existing income.
	(ii) Deduction for repairs	20% on gross rent allowable towards repairs, etc.	Deduction of 30% of gross rent is allowed.	Adverse Given increasing costs of maintenance of properties, this may be viewed favorably.
	(iii) Interest on housing loan for self-occupied property	Deduction of Rs 1.5 lakh allowed.	Interest deduction up to Rs 1.5 lakh in case of one house property which is not led out by an individual.	Good The move to allow deduction of interest on housing loan is welcome.
	Capital gains (i) Securities Transaction Text (STT)	DTC has proposed to continue levy of STT in same way as present.	STT is leviable on sale/ purchase transactions undertaken on recognized stock exchanges and on redemption of equity oriented mutual funds.
	(ii) Equity shares /equity oriented mutual fund units (STT paid)	If held >12months, 100% gains are allowed as deduction, ie entire gains not taxed If held <12 months, deduction of 50% of gains will be allowed.	If held >12months, entire gains are not taxable. If held <12months, tax payable on gains @ 15%.	Good Continuance of NIL, tax on gains from sale of shares/equity oriented units held for more than a year is a welcome move. 50% deduction mechanism would result in lower tax impact (5%, 10%,or 15%)
	(iii) All other investment assets	Holding period of indexation/exemption benefit is one year from end of financial year post acquisition. Indexation and rollover benefit available with reference to purchase price, or optionally, fair value as on ! April 2000, if asset acquired before that date.	Holding period for classification as long term/indexation/exemption benefits is 36 months. If long term, gains taxable @20%, subject to indexation benefit. If short term, gains taxable at applicable slab rates.	Good Holding period for indexation/exemption benefit is reduced to 12-24 months maximum. Unrealised gains up to 1 April 2000 would go untaxed completely. sourceTOI - for details & authentication of the bill and any amendments in the bill please refer to Direct Tax Code Bill