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Highlights of the draft “New Direct Tax Code”

The draft “New Direct Tax Code” has been unveiled. And there are lots of proposals that should make you happy if implemented.

Here are the salient features of the draft New Direct Tax Code.

People had very high expectations from Budget 2009. However, it was a dampener, with very little change in direct taxes – including personal income tax.

(Check out “Budget 2009-2010: Personal income tax (IT) related changes and impact on you” for more)

Although there weren’t many changes in the budget, the finance minister, Mr. Pranab Mukherjee, promised to release a draft of a new direct tax code within 45 days of the budget.

This draft has been released now.

What is the “New Direct Tax Code”?

Income tax in India is governed by the age-old Income Tax Act, drafted in 1961.

A lot of things have changed since then.

No doubt, many things have been implemented by modifying the IT Act from time to time. But this has been a patch-work.

And like any patch work, it has made the IT Act very complicated. Thus, the IT Act today is very difficult to interpret, and has resulted in many disputes and court cases.

The “New Direct Tax Code” is something that would ultimately replace the Income Tax Act, 1961. It would contain provisions of income tax as well as some other direct taxes, like the wealth tax.

So, here are the changes proposed in the “New Direct Tax Code”.

Change in Income Tax Slabs

This is the highlight of the draft of the New Direct Tax Code. It proposes to change the income tax slabs dramatically.

(Check out “Income Tax (IT) Slabs / Brackets and rates” for the current tax slabs)

The draft proposes the following slabs:

From Rs. 0 to Rs. 1.6 Lakhs0%
From Rs. 1.6 Lakhs to Rs. 10 Lakhs10%
From Rs. 10 Lakhs to Rs. 25 Lakhs20%
Over Rs. 25 Lakhs30%

Sounds great, doesn’t it?

Inclusion of perquisites (or perks) in salary

The draft recommends that the perks given out to employees by their employers should be included in their salaries.

This would increase taxable income of many people.

Abolishment of Securities Transaction Tax (STT)

The draft proposes removal of the Securities Transaction Tax (STT) that is currently levied on transactions in equities. Instead of the STT, the long term capital gain tax would be reinstated.

This is great for traders, but not so good for long term investors.

(Here is a thorough analysis of this: “Securities Transaction Tax (STT) not removed in budget 2009 – Good or bad for you?”)

Increase in exemption limit for investments

Currently, investments upto Rs. 1 Lakh per year in certain instruments are exempt from income tax under section 80C.

(Check out “Saving Income Tax – Understanding Section 80C Deductions” for all the details about section 80C)

The draft proposes to increase this limit to Rs. 3 Lakhs per year.

Move to Exempt – Exempt – Taxed (EET) regime

The draft proposes a move to the EET regime of taxation.

(Please read “Taxation Regimes – EEE EET ETE TEE – What do these mean” to understand the different taxation regimes)

This would impact popular investment avenues like PPF, EFP and GPF. However, please do not panic – even if this proposal is accepted, your investments upto the time this change happens would remain tax free at the time of withdrawal.

(Please read “Public Provident Fund (PPF) – Plan Your Retirement and Save Tax” and “Provident Fund (PF) and Voluntary Provident Fund (VPF)” for more about these investment avenues)

If this proposal is adopted, it would also bring the New Pension System (NPS) on par with other long term investments meant for retirement.

(Check out “Highlights of the New Pension System / Scheme (NPS)” for comprehensive details on the NPS)

Manifold increase in the threshold for Wealth Tax

The draft recommends that the threshold for levying the wealth tax be increased from Rs. 30 Lakhs to Rs. 50 Crores.

Change in the rate of Wealth Tax

Currently, wealth tax is levied at the rate of 1% of the wealth. The draft proposes to change this to 0.25%.

Benefits of the New Direct Tax Code

Well, from the above, you can see that there can be tremendous savings for you in terms of a reduced income tax liability if this new code is made into a law.

You would also benefit from the changes related to the wealth tax.

But apart from monitory benefits, this code also aims at simplifying the laws, smoothening the entire process of tax collection, and better overall compliance. In short, it aims at making the tax system more efficient.

When is this expected to be implemented?

Well, this is difficult, and depends largely on the debate that happen inside the parliament (by lawmakers) and outside it (by tax experts and income tax department).

However, realistically speaking, the New Direct Tax Code can be expected to be adopted into a law and implemented sometime in the year 2011.

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