Direct Tax Code : In view of common man

I seen lots of mail chain going here and there since DTC (Direct Tax Code 2010), is passed by parliament that is going to be implemented next year. Someone is happy, some are sad and some are confused. So I tried to see this whole episode of taxations as common man and what it has for me.

Why we got taxed:
The first question that came in my mind why we got taxed, answer was but obvious that to fund Nation and the needs of Nation .Whenever we talk of that we are going to connect all rivers internally to avoid flood and drought or we are going to set up nuclear reactors to feed up energy needs or to complete Golden quadrilateral, the question arises about fund for these schemes. Fund for all these schemes comes from tax levied on individuals, corporate and organization. However in this articles I am just concerned about my own pocket and want to see how its going to effect me.

What income come under tax bracket :
Government of India has the policy of taxing individual based on their investable income and they do not tax your money meant for minimum required savings (we can name 80C here) and household expenses (The exemption of 2 Lakh Rs that government gives us). However the line between saving and investment is very thin and sometime very confusing.

Difference between Investment and Saving:
Saving: Savings are money or other assets kept over a long period of time, usually in a bank Without any risk of loss or making profit.
Investment: Investments are the money or other assets that is purchased with the hope that it will generate income or appreciate in the future.

Now we starts with DTC provisions..


Tax Limits :

FOR INDIVIDUAL (MEN, WOMEN & HUF)
The big change is that the same tax slabs will apply to men and women. Now both are eligible for Rs 2 lakhs tax free exemption, whereas previously it used to be up to Rs 1.6 lakhs for men and Rs 1.9 lakhs for women.
DTC PARLIAMENTARY BILL (AUG 2010)
Up to Rs 2,00,000 - Nil; From Rs 2,00,001 to Rs 5,00,000 - 10%; From Rs 5,00,001 to Rs 10,00,000 - 20%; Above Rs 10,00,000 - 30%
CURRENT SLAB UNDER INCOME TAX ACT
Up to Rs 1,60,000 - Nil; From Rs 1,60,001 to Rs 5,00,000 - 10%; From Rs 5,00,001 to Rs 8,00,000 - 20%; Above Rs 8,00,000 - 30%
FOR SENIOR CITIZENS
For those above 65 years of age, the tax exemption limit has been raised to Rs 2.5 lakhs from Rs 2.4 lakhs, for a net new saving of Rs 1,000 per annum.
DTC PARLIAMENTARY BILL (AUG 2010)
Up to Rs 2,50,000 - Nil; From Rs 2,50,001 to Rs 5,00,000 - 10%; From Rs 5,00,001 to Rs 10,00,000 – 20%; Above Rs 10,00,000 – 30%
CURRENT SLAB UNDER INCOME TAX ACT
Up to Rs 2,40,000 – Nil; From Rs 2,40,001 to Rs 5,00,000 – 10%; From Rs 5,00,001 to Rs 8,00,000 – 20%; Above Rs 8,00,000 – 30%
So as a rough example if someone is earning 7 Lacs/Annum then he will be taxed at 4 lakh Rs at the rate of 10% (He can save 1 Lakh under 80C and there will be no tax on first 2 Lakh Rs.)


1.Here is the heart of Individual Taxation..The 80C:
The government was exempting all our savings (read it as money that can be saved from tax ) from tax till now under EEE umberella (EEE refers to the tax incidence - exempt at time of investment, exempt during accumulation and exempt at withdrawal.)Now take a look at below instruments that was available till now under various tax saving

NPS : Will available in DTC where you can save under 80C (The Maximum available limit for sum of money invested in all sorts of instrument is 1 Lakh). NPS (National Pension Scheme) is the most ambitious scheme of Indian government to bring every Indian under pension umbrella .The thing I hate most in this is EET model means your money will get taxed at withdrawal time and you will not be able to withdraw your money till 20 Years)

NSC: National Saving Certificates issued by post office will not be available in DTC

ELSS : Will not available in DTC.Many people know it as Tax Saving Mutual Funds. This was the smartest instruments under 80C till now where you could get handsome returns (first taste of equity market for a naive user) just in locking period of 3 years.Since it fetches returns from Equity Market Government branded it now as investment .This instrument will not be tax saving instrument under DTC

ULIPS: Will not available in DTC.I never liked this instrument of 80C as it linked money meant for insurance to equity market directly. So your insurance money is always prone to market fluctuations.

Term Insurance: Will be available under 80C. Its different than normal Life insurance schemes. Here you can get higher sum insured for small premium money but the thing is you will not be getting any money back as maturity. Its like Motor Insurance where you pay premium and will be getting money only when motor got an accident.

Bank FDs: Will not available in DTC. Till now Bank FDs with minimum 5 Year lockin period was good tax saving instrument for people in their late 40s or in 50s.

PFs/PPFs :Will be available under 80C(Maximum limit – 1 Lakh).Maximum 70,000 can be saved yearly under this instrument

2. Tax Exemption one additional head (So forget about 80D and 80G) :
Here is the catch that non term life insurance policies has been moved from 80c to under new head. Now an additional deduction of 50,000 (apart from 1 Lakh in 80C) shall be allowed for payments made towards insurance premium, tuition fees and premium paid towards mediclaim.

So if you are paying insurance premium close to 50,000 you are not going to save much here .Frankly speaking it seems government move to push people from Non Term Life Insurance Policies to Term Life Insurance Policies.

Thus, the current deductions under Section 80D with respect to mediclaim premium up to `15,000 for self and an additional `15,000-`20,000 for dependent parents shall stand redundant once the new DTC comes into play with the maximum amount of deduction for mediclaim, insurance premium and tuition fees being restricted to `50,000 only.

3.Other instances and instrument where tax can be saved:
Other instruments on which you get tax rebate

Long Term Equity: The equities that you hold for more than 1 year will not be taxed. However in initial version DTC, government hinted about taxing Long term equities gains too at rate of 15%.The provision of tax exemption for long-term capital gains on listed equity (subject to STT) has been retained in substance, as the proposed DTC provides for a 100% deduction on listed equity shares or units of an equity-oriented fund where the period of holding is more than a year from the date of acquisition and on which STT has been paid.

Government gives tax exemption on this investment instrument because they do not want money of citizens laying idle in their bank account, rather they encourage people to put money in equity market for long term inturn helping economy to grow. I don’t think they will withdraw tax exemption on long term capital gain anytime because withdrawal of tax exemption on long term capital gain will woo away retail investors from equity market.

Dividend on Equities and Mutual Funds: This instrument will be taxed so if any income received as dividends from equity mutual funds and Ulips will be taxed at 5%.The reason for taxing this instrument (from market) could be that regular dividend may be considered as short term capital gain hence taxed.

House Rent: Available for tax exemption only if you do not own a house in same city where you are living. Earlier I have seen many of my colleagues living in their own apartment or house and still claming tax exemption under House Rent. Those days are going away soon 

Interest on Housing Loan: Available for tax deduction. An individual can claim deduction on interest paid up to Rs 1.5 lakh on a loan taken for acquisition , construction, repair or renovation of a house property in the financial year in which such property is acquired or constructed. This deduction would be allowed only if the house property is owned by the person and is not letout in the financial year.
New code has done away with the deduction on repayment of principal on such housing loan, which is currently admissible under Section 80C up to a maximum sum of `1 lakh.

Interest on Education Loan: Available for tax deduction. An individual can claim deduction for interest paid on loan taken for pursuing his higher education or higher education of his spouse, child or a student under his legal guardianship.

LTA : I am not sure about this instrument since DTC has not talked about this instrument at all. However as per Economic Times “A senior finance ministry official, who is involved with the framing of the DTC, clarified that the LTA will enjoy tax exemption and individual taxpayers would continue to enjoy the same benefits that are available at present — actual expenditure on account of the LTA will be exempted for two years in a block of four”

Your feedback and comments are welcome.

Disclaimer: Please consult your financial adviser or other verified sources before taking any financial decision, I have just shared the things that I got from various sites such as EconomicTimes,ValueresearchOnline and in.reuters.com .