Impact of Direct tax code on individual taxpayer

A good article from Indian express on effect of direct tax code

The Direct Tax Code (DTC) is expected to be rolled out from April 1, 2012 and the proposed bill is likely to be tabled soon before the Parliament. In this article, we discuss how the proposed changes can impact your taxation under the DTC regime.

Salary Income

The limit for medical reimbursement is proposed to be enhanced from Rs 15,000 to Rs 50,000. But the exemptions in relation to Leave Travel Assistance, children education allowance and hostel allowance are missing in the DTC. Salaried class, in fact, would need to wait to know the real impact as rules for valuation of perquisites have still not been rolled out.

Rental Income

Those having rental income will have to pay little more under DTC as the standard deduction is proposed to be reduced from 30 per cent to 20 per cent. The concept of taxing income from house property on notional basis has been done away and it is the income from actual letting which would be taxed.

Capital Gains

The concept of long term capital gains (LTCG) and short term capital gains (STCG) has been done away with, in the DTC. Capital gains would be taxable as income from ordinary sources at applicable slab rates. Individuals falling under 30per cent tax bracket having any taxable LTCG are presently taxed at 20 per cent. Such individuals may end up paying 30 per cent tax on such gains under the DTC regime. The LTCG gain arising from shares or equity linked mutual funds (assets) on which STT has been paid would continue to be not taxable as under the DTC 100 per cent deduction is to be allowed from such gains. However, individuals falling in the tax bracket of 10 per cent or 20 per cent and having STCG would pay lower tax at 5 per cent or 10 per cent respectively as 50 per cent deduction has been proposed from such gains under the DTC. STCG from such assets presently suffer tax at 15 per cent.

The benefit of indexation is proposed to be provided in respect of assets transferred after one year from the end of the fiscal year in which it is purchased. The date of considering the fair market value as on April 1, 1981 is also proposed to be advanced to April 1, 2000.

Deductions

DTC proposes to restrict the deduction of Rs 1,00,000 only to the approved funds, namely, approved provident fund, pension fund, superannuation fund, PPF etc. However, an additional deduction of Rs 50,000 has been proposed to cover payments such as life insurance premiums (where premium not to exceed 5 per cent of sum insured), health insurance premiums and the tuition fee. The principal repayment of housing loan, 5 year term deposits with banks or post offices or deposits in senior citizens saving schemes, non pure life insurance premiums etc will no longer be eligible for deduction under the DTC.

Others

Currently, Indian citizens qualifying to be ordinarily resident are subjected to wealth tax in India on their wealth situated anywhere in the world. Assets situated outside India are excluded from the taxable wealth in case of non-residents or even for any ordinarily resident foreign nationals. Under the DTC, ordinary residents be taxed on their wealth situated anywhere in the world irrespective of whether such individuals are citizens of India or not. Although the taxable wealth exemption limit is proposed to be enhanced from Rs 30 lakh to Rs 1 crore, but the definition of taxable wealth is also proposed to be expanded.

Also, Indians settled abroad who come to India on visit may trigger global taxation in India sooner due to certain changes in the tax residency provisions under DTC.

Although the prime objective of DTC is to simplify the provisions, but taxpayers do expect to see simplifications on ground, that is, timely receiving of refunds, less hassles at tax offices etc. One will have to wait for the final print to see what the DTC actually brings.