Direct Tax Code, 2012

Unplugged…from the personal finance viewpoint

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HIGHLIGHTS

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• Applicable from April 1, 2012.• Slight upward tweaking of tax brackets• Lot of current rules are carried forward • Much-watered down version compared to the

proposed drastic overhaul• Changes in products in Section 80C• Fewer tax savings options

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• Changes in Sec 80C will increase your tax payout

• Products which will no longer give tax benefit:– 5 year FDs– NSC– SCSS– ELSS

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EXEMPTION LIMIT

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Provision• Only two slabs

– Senior citizens (up to ` 2.5 lakh) and

– Other individuals (up to ` 2 lakh)

• Change in tax slabs:– up to ` 2 lakh @ NIL– ` 2 – 5 lakh @ 10%– ` 5 – 10 lakh @ 20%– ` 10 lakh and above @ 30%

Impact• No separate slab for women

• Additional savings due to upward revision of slabs

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SEC. 80

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Provision• Investments up to ` 1 lakh

Impact• No change in limit, but

change in products– PPF – Recognised PF – New Pension Scheme (NPS)– Pension fund– Anything else specifically

approved

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Provision• Additional limit of ` 50,000

Impact• Additional cumulative limit:

– Pure life Insurance – 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)– Sec 80D will cease to exist

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Provision• Premia paid for self /

spouse / children / dependent parents eligible for overall additional deduction limit of Rs 50,000

Impact• Increased limits

(individually), but since it is cumulative with life insurance and tuition fees, it is not sufficient

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INCOME FROM HOUSE PROPERTY

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Provision• No deduction on principal

repayment• Interest on housing loan for

self-occupied property – exemption @ Rs 1.5 lakh

• Interest is only deductible if the house is completed within three years of the loan commencement

Impact

• No change from current status

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Provision• House property income

taxable only where rent is actually received/receivable

• Deduction for repairs @ 20% of gross rent allowable

Impact• No tax on notional rent on

residential properties that are not self-occupied

• Cannot avail benefit of interest (earlier full amount allowed)

• Down from 30% allowed earlier

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CAPITAL GAINS

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Short Term Capital Gain

Provision• Effective tax rate – 5%, 10%

or 15% depending on the tax bracket you fall in

• In case of STCL - only 50% of the STCL can be set off against STCG

Impact• Lower STCG tax to be paid,

especially for those in the lower tax brackets

• Earlier it could be completely set-off

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Long Term Capital Gain

Provision• Definition of ‘Long Term’ -

all investment assets held for more than 1 year from the end of the financial year in which the asset is acquired.

Impact• If the investment asset was

purchased any time between 1st April 2010 to 31st March 2011, then to consider it to be Long Term, it has to be held up to 31st March 2012.

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Long Term Capital Gain

Provision• Change in definition for

assets other than equity shares and equity mutual funds:– 1 year from the end of the

financial year in which the asset was purchased

Impact• Many capital gains which

were considered short-term (so far) will now become long-term– Holding period for

indexation/exemption benefit is reduced to 12-24 months maximum

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Long Term Capital Gain

Provision• Change in base year

Impact• At present, base index is

taken as 1980-81. The base date would now be shifted from 1.4.1981 to 1.4.2000

• Hence, capital gains between 1.4.1981 and 31.3.2000 will not be liable to tax

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Long Term Capital Gain

Provision• Indexation and rollover

benefit (subject to conditions) available with reference to purchase price, or optionally, fair value as on 1 April 2000, if asset acquired before that date

• LTCG can be set off against STCG

Impact• Unrealised gains up to April

1, 2000 would go untaxed completely

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MUTUAL FUNDS

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Provision• 5% dividend distribution tax

on equity funds

Impact• Currently this is nil• Better to choose Growth

option, if your investment is with a long term horizon

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INSURANCE

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Provision• Maturity proceeds exempt,

if the premium paid in any year < 5% of sum assured & received on completion of original insurance period

• Equity-linked life insurance schemes subject to 5% tax on distribution

Impact• Policies with sum assured > 20

times premium will only be tax-exempt on maturity.

• Most endowment / money-back / ULIPs will be taxable on maturity

• ULIPs where you have chosen equity-based option (65% or more of equity exposure) will be liable to deduct this tax

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PENSION PLANS

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Provision• Fall under EEE category

Impact• Probably ULIPs will take this

back-entry and launch ‘Unit Linked Pension Plans’ so that the investor can get the benefit of tax-exempt returns on maturity

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INCOME FROM EMPLOYMENT

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Provision• LTC• HRA – Fully exempt to the

extent of rent actually paid• Medical facilities /

reimbursement - Medical facilities not taxable (as currently applicable) and medical expense reimbursements up to Rs 50,000 exempt

Impact• Both will be fully taxable

• Increase in reimbursement limit from Rs 15,000 to Rs 50,000

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Provision• Exemption of employers

contribution to an approved pension fund – up to10% of Basic+DA

• Employer’s contribution to an approved superannuation fund – fully exempt

Impact• Companies might use this to

reduce tax burden of employees

• Likely to benefit senior employees

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Provisions Under Current Laws Under DTC

Gratuity Full exempt for Govt. employees Others – up to ` 10 lakh

Exempt for both categories to prescribed limit

Voluntary retirement compensation

Exempt to ` 5 lakh, subject to conditions

Exempt subject to conditions

HRA Exempt subject to conditions Exempt subject to conditions

Entertainment Allowance Govt. employees – ExemptOther – Taxable

Taxable for all

Accommodation Preferential treatment to Govt. employees for arriving at value

No difference between Govt. and other employees

Employer contribution to approved superannuation fund

Exempt up to ` 1 lakh Fully exempt

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Provisions Under Current Laws Under DTC

LTC Exempt Taxable

Medical reimbursement Exempt up to ` 15,000 Exempt up to ` 50,000

Employer’s contribution to NPS

Not taxed up to 10% of salary

Same

Employee’s contribution to NPS

Not taxed up to 10% of salary

Exempt up to ` 1 lakh

Withdrawal from NPS Taxable Exempt

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WEALTH TAX

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Provision• Net assets above Rs 1 crore

@ taxed 1%

Impact• Gross assets minus loans on the

assets = net assets• Does not include the house you

live in• Includes:

– archaeological collections – drawings– paintings – sculptures – wristwatches worth over Rs 50,000– cash in hand above Rs 2 lakh– deposits with foreign banks

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Provision• If you have worked abroad,

created some assets there and moving back to India, you will have to pay wealth tax on your foreign assets if you have taken Indian resident status

• No education cess or surcharge

Impact• In such a situation, you will

have to pay 1% tax on your deposits in foreign banks and on the value of other assets in foreign countries