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Direct Tax Code (DTC) – A Complete Guide

This article explains the Direct Tax Code (DTC) in detail, and analyses its implications for you. Basically, its a comprehensive guide to the Direct Tax Code (DTC) – read on!

The cabinet recently approved the Direct Tax Code (DTC) bill that is going to replace the Income Tax Act, 1961 and the Wealth Tax Act, 1957. Now, it would soon be presented to the parliament for discussion and approval.

The Direct Tax Code will come into effect from FY 2012-13 starting from 1st April, 2012. You would file your first income tax return under the DTC after 31st March, 2013.

(To understand terms like FY and AY, please read “Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)”)

Some Background for the Direct Tax Code (DTC)

The first draft of the Direct Tax Code was unveiled to the public for discussion in Aug 2009.

It proposed a lot of radical things like removal of most exemptions, and a drastic widening in the income tax slabs applicable to individuals.

As expected, the positive change in the income tax slabs / brackets was welcomed by all, but the negative changes were opposed.

Based on the feedback received from the public, the government presented the second draft of the Direct Tax Code in June 2010. This draft diluted many negative proposals, but was mum on the changes in the income tax slabs. However, it was widely expected that the slabs would not change dramatically from the current ones.

The Direct Tax Code (DTC) bill

Now, the final Direct Tax Code (DTC) bill has been approved by the cabinet – which means that the proposals contained in this bill are more or less final, unless changes are made in the parliament during discussions on the bill.

So, how does it impact the retail investor? How does it impact the salaried class? Let’s see what are the implications of this (almost final) Direct Tax Code for you.

Income Tax (IT) Slabs / Brackets

This is the topic that is of most interest to everyone!

Here are the proposed income tax slabs for individuals:

Men and women under 65 years of age

IncomeIncome Tax (IT) Rate
Up to Rs 2,00,0000%
Rs 2,00,001 to Rs. 5,00,00010%
Rs. 5,00,001 to Rs. 10,00,00020%
Above Rs. 10,00,00130%

Men and women over 65 years of age

IncomeIncome Tax (IT) Rate
Up to Rs 2,50,0000%
Rs 2,50,001 to Rs. 5,00,00010%
Rs. 5,00,001 to Rs. 10,00,00020%
Above Rs. 10,00,00130%

(Please see “Income Tax (IT) Slabs / Brackets and rates” for the currently applicable income tax slabs)

Other salient features:

  • Slabs would be the same for men and women – No distinction would be made between them. Slabs would be different only for senior citizens.
  • There will be stability in the tax slabs and rates – they would no more be a part of the annual budget, and therefore, would not be subject to change every year.

Exemptions (Currently available under Section 80C)

The income tax exemptions would be available upto Rs. 1,50,000 (up from the current Rs. 1,00,000 for investments under section 80C + Rs. 20,000 for investment in infrastructure bonds u/s 80CCF)

However, the limit of Rs. 1,50,000 would have 2 sub-limits:

(To know more about the current popular exemptions, please read “Saving Income Tax – Understanding Section 80C Deductions”)

EEE Taxation Regime

To a great relief of all investors, the Exempt-Exempt-Exempt (EEE) regime of taxation has been retained on retirement savings (Provident Fund – PF, Public Provident Fund – PPF, etc).

(To know more about various taxation regimes, please read “Taxation Regimes – EEE EET ETE TEE – What do these mean”)

Income Tax Benefit of a Home Loan

The income tax benefit for the interest component of a home loan has been retained, and the limit for it remains Rs. 1,50,000.

However, no income tax benefit would be available for the principal component of the home loan – principal repayment would not result in any tax saving.

(For more on tax benefits of a home loan, please read “Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage”)

Leave Travel Concession / Allowance (LTC / LTA)

Leave travel allowance (LTA) will continue to enjoy the same tax benefit as is available today. Thus, you would be able to claim tax benefit twice in a block of four years.

(For more on LTC / LTA, please read “Income tax treatment of leave travel allowance / concession (LTA / LTC)”)

However, the nature of LTA would change a little. Now, LTA would be a part of your income, and would appear on your Form 16 – and would be eligible for deduction as per the permissible limit (details have been described in the above article).

Reimbursement of Medical Expenses

Reimbursement of medical expenses upto Rs 50,000 would be exempt from income tax (up from Rs. 15,000). Any reimbursement of medical expenses over this limit would be added to your income and would be taxed as per the slab applicable to you.

Interest Paid on Education / Study Loan

Any interest paid on education loan would be exempt from income tax. However, the DTC doesn’t talk about the amount upto which this exemption would be available.

(For more on education loan and income tax, please read “Income Tax (IT) benefit of an education / study loan – Section 80E”)

Long Term and Short Term Capital Gains

In a very welcome relief to real investors (read: long term investors), the long term capital gains from shares and equity mutual funds (MFs) would remain to be completely tax free – there would be no tax on long term capital gains (LTCG).

For short term capital gains (STCG), taxation would follow a slab structure:

IncomeShort Term Capital Gains Tax (IT) Rate
Up to Rs 2,00,0000%
Rs 2,00,001 to Rs. 5,00,0005%
Rs. 5,00,001 to Rs. 10,00,00010%
Above Rs. 10,00,00115%

(To know more about the capital gains, please read “Long Term and Short Term Capital Gain – Income Tax Calculation”)

Further, the benefit of indexation of cost has been extended to works of art and jewellery.

Wealth Tax

A wealth tax would be levied at a rate of 1% on net wealth of a person over Rs. 1,00,00,000 (Rs. 1 Crore). Net wealth is defined as all assets less any debt.

(Currently, wealth tax is levied on assets over Rs. 15,00,000 or Rs. 15 Lakhs)

“Assets” for the purpose of calculating wealth tax would include jewellery, urban land, buildings, automobiles, bank deposits outside India, share in foreign trusts, shares held in foreign companies, watches over Rs. 50,000 in value, works of art and cash-in-hand over Rs. 2,00,000.

Some gray areas

There are some questions that have been left unanswered in the bill. They would be clarified in due course by the government. Here’s a list of such areas:

  • The DTC doesn’t talk about the amount upto which the interest paid on education loan would be exempt from income tax. Does it mean any amount of interest is exempt?
  • The DTC doesn’t talk about deduction of up to Rs. 20,000 under section 80CCF available on investment in infrastructure bonds. Does it mean it won’t be available under DTC?
  • Bank fixed deposits (FDs) of 5 years duration enjoy deduction under section 80C. Would this be allowed under the Direct Tax Code (DTC)?
  • The DTC doesn’t talk about the limits up to which retirement benefits like gratuity, leave salary, etc. will be exempt from income tax.
  • The DTC doesn’t talk about the treatment of perquisites (perks) like company car, employer provided housing accommodation, etc.
  • The DTC is not clear about continuing exemption to investments in Senior Citizens Savings Scheme (SCSS), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS) MFs, life insurance premiums other than term insurance, etc.
  • The Direct Tax Code (DTC) is not clear about taxation of returns from insurance products other than term insurance (For example, Unit Linked Insurance Products – ULIPs)

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