1. Impact on Leave encashment

Draft Provisions of DTC: DTC proposed to do away with the exemption available in respect of Leave encashment received at the time of retirement (presently Rs 3 lakh in specified cases and fully exempt in case of government employees).

Revised Discussion Paper (RDP): Amount received in lieu of accrued leave at time of superannuation would be exempt, subject to monetary limits.

Beneficial: This is a beneficial move, even if the current exemption limit of Rs 3 lakh remains unchanged.

2. Impact on House rent allowance (HRA)

Draft Provisions of DTC: DTC has proposed to tax the HRA component, which would increase taxable salary. Presently exemption is available to the extent of lower of the following-

a) Actual HRA received;
b) 40% of Basic salary (plus Dearness allowance) — 50% in case of specified metro cities; or
c) Rent paid in excess of 10% of Basic salary and Dearness allowance

Revised Discussion Paper (RDP): The revised discussion paper has not introduced any change. Thus, no exemption is proposed to be provided in respect of HRA

Not beneficial: While employees who own a house can avail of interest deduction for housing loans, those renting a house can no longer avail of HRA exemption.

3. Impact on Medical facilities/ reimbursement

Draft Provisions of DTC: Currently medical treatment in specified hospitals is not taxable, nor is payment of medical insurance premium. More so, reimbursement of medical bills is exempt up to Rs 15,000. The DTC seeks to tax all of the above.

Revised Discussion Paper (RDP): It is proposed that perquisites regarding the medical facilities/ reimbursements would be valued as per current law with enhancement of monetary limits for medical expense reimbursement exemption.

Beneficial: An encouraging move, which would relieve the unnecessary tax burden which would have been imposed on the employees. Further it is likely that the exemption limits will be enhanced.

4. Impact on Leave travel concession (LTC)

Draft Provisions of DTC: DTC has proposed to remove the exemption available. Presently, an employee can claim LTC in respect of travel expenses for self/ family, subject to certain limits. 2 such trips can be availed in a block of 4 calendar years.

Revised Discussion Paper (RDP): The revised discussion paper has not introduced any change. Thus, no exemption proposed to be provided in respect of LTC.

Not beneficial: The exemption appears withdrawn. However, the monetary impact may not be significant as an exemption was restricted to travel expenses only and that too for 2 trips in 4 years.

5. Impact on Accommodation perquisite valuation

Draft Provisions of DTC: DTC has proposed to tax perquisite in respect of accommodation provided in hands of all employees (including government) — valuation rules were to be prescribed.

Revised Discussion Paper (RDP): Clarified that the perquisite value would not be based on market value of accommodation.

Beneficial: The apprehension of a very high tax burden has been put to rest as the perquisite value will not be based on market value of accommodation. Presently, this perquisite is valued at lower of a specified percentage of salary and actual rent paid.

6. Impact on Allowances for meeting personal expenses

Draft Provisions of DTC: DTC has proposed to remove exemptions available in respect of these allowances.

Revised Discussion Paper (RDP): The revised discussion paper has not introduced any change. Thus, such allowances may no longer be tax exempt.

Not beneficial: However the monetary impact of the withdrawal of this exemption may not be significant.

7. Impact of new Direct Tax Code on EEE regime transition

Shift from EEE regime to EET regime for retirement benefits

Draft Provisions of DTC: DTC’s proposal to shift towards the EET mechanism in respect of all retirement investment schemes came in for much criticism.

This meant while deposits and accretions to the retirement benefit accounts, wherever applicable, would remain un-taxed, any withdrawal made would be taxed in that year at the applicable rate.

Grandfathering provisions, which stated that accumulated savings, including those in PF up to March 2011 would not be taxed, were the only saving grace. Revised Discussion Paper (RDP): The RDP has sought to continue with the EEE mechanism in certain instances. However in a few cases, there is a move towards EET.

The focus is to ensure long term savings and uniform rules for contribution and withdrawal would be introduced. Beneficial: Continuance of the EEE regime in case of various investments will ensure that the investors do not suffer any hardship. Further investments made before the date of the commencement of DTC which enjoy EEE method of taxation, would continue to be eligible for the EEE treatment for the full duration of the financial instrument.

The implications are analysed scheme wise below (It remains to be seen whether the limits for the schemes will be part of the proposed overall Rs 3 lakh eligibility cap for each fiscal).

8. Impact on Govt PF/ Recognized PF/ Public PF

Draft Provisions of DTC: DTC proposed to tax the employer’s contributions to PF at contribution stage (presently exempt). In line with EET principle, DTC proposed to tax any amount withdrawn, which is not grand-fathered.

Revised Discussion Paper (RDP): Employer contribution to these schemes within limits (to be prescribed) would not be taxed. Employee contributions would continue to be allowed as a deduction within the overall savings/ investment cap. Withdrawals would be exempt, if they conform to the rules/ restrictions to be prescribed.

Beneficial: EEE continued in these schemes, i.e. it is proposed that withdrawals continue to be exempt.

9. Impact on Superannuation fund

Draft Provisions of DTC: DTC proposed to tax employer’s contribution as salary (currently exempt up to Rs 1 lakh). In line with EET principle, DTC proposed to tax any amount withdrawn, including from RBA (which is not grand-fathered.

Revised Discussion Paper (RDP): Employer contribution would not be taxed (limits to be prescribed) and employee contribution (within prescribed investment limit) would continue to be permitted as a deduction. Further, withdrawals would not be taxed.

Beneficial: Continuance of EEE is beneficial. However, withdrawals may be subject to certain restrictions such as end use or lock in period.

10. Impact on Life insurance policies

Draft Provisions of DTC: DTC increased the eligible deduction limit for life insurance premium paid to Rs 3 lakhs (presently Rs 1 lakh). However, the maturity proceeds were taxed in case where the premium paid in any year is more than 5% of the sum assured (presently 20%) or the sum is received before the death/completion of insurance term.

Revised Discussion Paper (RDP): EEE continued for all presently issued policies. For new policies issued after DTC implementation, only ‘pure life insurance’ products would be eligible for EEE.

Beneficial: Continuation of EEE for present life insurance policies would ensure consistency & clear tax treatment. Therefore, terminal proceeds from these policies would not be taxed on maturity/death.

If the government prescribes the ‘pure life insurance’ criteria to restrict EEE benefit to plain vanilla life insurance products without any survival benefits, then it could have a large impact on other policies, which have a provision of some maturity benefit even if the insured person survives the term.

11. Impact on Superannuation fund

Draft Provisions of DTC: DTC proposed to tax employer’s contribution as salary (currently exempt up to Rs 1 lakh). In line with EET principle, DTC proposed to tax any amount withdrawn, including from RBA (which is not grand-fathered.

Revised Discussion Paper (RDP): Employer contribution would not be taxed (limits to be prescribed) and employee contribution (within prescribed investment limit) would continue to be permitted as a deduction. Further, withdrawals would not be taxed.

Beneficial: Continuance of EEE is beneficial. However, withdrawals may be subject to certain restrictions such as end use or lock in period.

12. Impact on Life insurance policies

Draft Provisions of DTC: DTC increased the eligible deduction limit for life insurance premium paid to Rs 3 lakhs (presently Rs 1 lakh). However, the maturity proceeds were taxed in case where the premium paid in any year is more than 5% of the sum assured (presently 20%) or the sum is received before the death/completion of insurance term.

Revised Discussion Paper (RDP): EEE continued for all presently issued policies. For new policies issued after DTC implementation, only ‘pure life insurance’ products would be eligible for EEE.

Beneficial: Continuation of EEE for present life insurance policies would ensure consistency & clear tax treatment. Therefore, terminal proceeds from these policies would not be taxed on maturity/death.

If the government prescribes the ‘pure life insurance’ criteria to restrict EEE benefit to plain vanilla life insurance products without any survival benefits, then it could have a large impact on other policies, which have a provision of some maturity benefit even if the insured person survives the term.

13. Impact of revised direct tax code on Gratuity

Draft Provisions of DTC: DTC has proposed to do away with the exemption available in respect of gratuity (exempt up to Rs 10 lakh in specified cases, fully exempt for government employees).

Any amount withdrawn, including from RBA (which is not grand-fathered) would be taxed. Revised Discussion Paper (‘RDP’): It is proposed to provide exemption in respect of gratuity received, subject to monetary limits.

Beneficial: The recipient will be able to utilise the gratuity amount immediately and the tax burden (if any) would also reduce substantially. The government is expected to continue the current exemption limit of Rs 10 lakh.

14. Impact of revised direct tax code on VRS compensation

Draft Provisions of DTC: DTC has proposed to do away with the present exemption available in respect of VRS compensation (exempt up to Rs 5 lakh in specified cases).

Any amount withdrawn, including from RBA (which is not grand-fathered) would be taxed.

Revised Discussion Paper (‘RDP’): It is proposed to provide exemption in respect of VRS compensation received, subject to monetary limits.

Beneficial: The recipient will be able to utilize the VRS compensation amount immediately and the tax burden (if any) would also reduce substantially.The government is expected to continue the current exemption limit of Rs 5 lakh.

15. Impact of revised direct tax code on rent and notional deduction

Provisions of DTC: DTC proposed to tax income from House property by reference to the gross rent, which is determined at higher of contractual rent or presumptive rent.

Revised Discussion Paper (‘RDP’): Concept of presumptive rent has been done away with.

If property is let out, gross rent would be the amount of rent received/receivable.

If property is not let out, the gross rent would be NIL.

Beneficial: This move to do away with any notional valuation would simplify and provide clarity in the taxing mechanism of rental income to a great extent. Further, no tax is proposed to be levied in case of multiple house properties, which are lying vacant/used for self-occupation. Presently, excepting one property, tax is required to be paid in respect of all other properties on deemed rent basis.

15. Impact of revised direct tax code on interest on housing loan for SOP

Draft Provisions of DTC: DTC proposed to eliminate the current available deduction of Rs 1.5 lakh in a year available against interest on housing loans, which would have caused hardship to the individual tax payers buying property for own accommodation.

Revised Discussion Paper (‘RDP’): Interest deduction up to Rs 1.5 lakh is proposed to be allowed in respect of one house property which is not let out by an individual/HUF.

Beneficial: This is a beneficial move, and will enable the existing and future borrowers to continue availing the deduction of Rs 1.5 lakh per annum. This would also go to partly reduce the overall impact of interest burden on the borrower.

16. Impact of revised direct tax code on interest on loan for pre construction period

Draft Provisions of DTC: DTC proposed to remove the exemption for interest on borrowed capital during the pre construction period which can be written off currently over 5 years.

Revised Discussion Paper (‘RDP’): No change proposed

Not beneficial: In absence of a specific provision allowing interest deduction for pre-construction period, it would not be allowable. Given that the construction period for properties may extend over a year for sure, there is a need to reconsider granting this benefit, may be over a period of time.

17. Impact of revised direct tax code on transfer of assets held for less than a year

Draft Provisions of DTC: DTC proposed to abolish Securities Transaction Tax (STT) and capital gains arising on transfer of such assets are proposed to be taxed at normal rates.

Revised Discussion Paper (‘RDP’): Although taxation continues at normal rates, STT would not be abolished, though the rates may be calibrated.

Not Beneficial: Imposition of STT and taxing capital gains at normal rates would result in a ‘double whammy’. There may be a need here to reconsider this proposal, especially to introduce STT.

18. Impact of revised direct tax code on transfer of assets held for more than a year

Draft Provisions of DTC: DTC proposed to abolish STT and capital gains arising on transfer of such assets are proposed to be taxed at normal rates. Therefore, certain capital gains earlier exempted completely (sale of listed equity shares and equity oriented mutual fund units) and beneficial tax rate of 20% on other long termcapital gains would no longer be applicable. Indexation benefit was proposed to be made available to compute capital gains, effective 1 April 2000, unrealized gains till this date would not be taxed.

Revised Discussion Paper (‘RDP’):

a) STT would not be abolished

b) Instead of allowing indexation benefit to compute capital gains on sale of listed shares or mutual fund units, it is proposed to allow a deduction at rates (to be specified), which would result in lowering the effective tax rate

c) Indexation benefit would continue to be made available for all other assets, as proposed earlier.

Mixed impact: Imposition of STT and taxing capital gains at normal rates would result in ‘double whammy’.

Although the overall impact may get partially offset by the specified deduction (currently indicated at 50% to 70%), still there would be a need to reconsider the imposition of STT, albeit at calibrated (lower) rates.

19. Impact of revised direct tax code on taxation of capital gains for non-residents

Draft Provisions of DTC: DTC has proposed to introduce a special tax rate of 30% on capital gains for non-residents, whereas the capital gains arising to residents would be taxed at the normal rates.

Revised Discussion Paper (‘RDP’): The special rate of 30% is proposed to be done away with, and taxability would remain same for all persons

Beneficial: Welcome move and would simplify the capital gains taxation for non-residents.

20. Impact of revised direct tax code on Wealth-tax

Draft Provisions of DTC: DTC proposed to impose wealth-tax @ 0.25% on all assets (except exempted assets), total value exceeding Rs 50 crores.

Revised Discussion Paper (‘RDP’): Proposed to be imposed on ‘unproductive assets’ only, in line with the present law.

Limit of Rs 50 crores will be calibrated suitably.

Mixed Impact: This would simplify the levy of wealth-tax and lend equity, as the productive assets would be out of wealth-tax levy. However, it remains to be seen whether equities etc. would be treated as productive or not for a lay investor. Further the revised limit (presently Rs 30 lakh) should be sufficiently high to ensure that the tax incidence is minimal.

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Category : Income Tax (24905)
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Tags : Capital Gain (328) Direct Tax Code (292) dtc (262)

0 responses to “Impact of revised Direct Tax Code on your salary, budget, retirement benefits, property income, capital Gain and wealth tax”

  1. Mahesh Desai says:

    Govt should tax only the basic salary and not DA or other allowances. These are not the income of Employees. DA is based on the Govt.Index which is the indicator of cost of living. DA & other allowances should not be considered as income.

  2. VISWANATHAN P says:

    Respected Sir,

    SAVINGS mean individuals

    SACRIFICING
    ASSETS
    VENTURE in the
    INTEREST of
    NATION’S
    GROWTH and its
    SELF-RELIANCE.

    THIS SECTION OF THE PEOPLE SHOULD GET:
    THE HIGHEST INTEREST AND THE MAXIMUM TAX EXEMPTION
    AT THE TIME OF INVESTMENT AND ALSO AT THE TIME OF WITHDRAWAL.
    Salaried section is saving their salaried income sacrificing their immediate needs with the only one good intention to secure their future, despite the high inflation that is prevailing at the time of saving the amount.

    The concern is only old age. Now a days more and more old age homes are coming up. Sons and daughters feel their old age parents are burden. Every Senior Citizen of this country should feel secured for which the Government should exempt the savings from their salaried income during their heydays and also exempt the withdrawal of their savings from INCOME TAX.

    1. THE ENTIRE AMOUNT SAVED FROM THE INCOME FOR A PERIOD OF 5 YEARS AND ABOVE SHOULD BE EXEMPTED FROM INCOME TAX AT THE TIME OF SAVINGS AND ALSO AT THE TIME OF WITHDRAWAL OF THE SAVINGS.

    2. THE ENTIRE AMOUNT PAID BY THE EMPLOYER TOWARDS THE SUPERANNUATION PENSION FUND SHOULD NOT BE TREATED AS PERKS AND THE EMPLOYEES SHOULD NOT BE TAXED.

    3. All RETIREMENT BENEFITS SHOULD BE EXEMPTED FROM TAX.

    4. INTEREST ON BANK DEPOSITS SHOULD BE EXEMPTED FROM INCOME-TAX FOR SENIOR CITIZENS.

    5. THE GOVERNMENT SHOULD EVOLVE AN HEALTH INSURANCE SCHEME TO THE SENIOR CITIZENS. A MINIMUM ANNUAL PREMIUM DURING THE DAYS OF THEIR EMPLOYMENT SHOULD BE COLLECTED AND TAX EXEMPTION SHOULD BE GIVEN TO THIS PREMIUM PAID. SENIOR CITIZENS SHOULD BE PROVIDED THE BEST MEDICAL FACILITIES. MANY INSURANCE COMPANIES FIND SOME REASONS OR OTHER TO NOT ISSUE MEDICLAIM POLICY TO SENIOR CITIZENS.

    6. INFLATION IS A GREAT CONCERN TO ALL. ANNUAL INCOME TAX EXEMPTION SHOULD HAVE RELEVANCE TO INFLATION.

    I HOPE THE ABOVE SUGGESTIONS MAY BE FAVOURABLY CONSIDERED DURING THE FINALISATION OF THE DIRECT TAX CODE.
    THANKING YOU,
    Yours Sincerely

    P VISWANATHAN
    email:viswa1959@gmail.com

  3. k.srinivasan says:

    sir much discussion have taken place about the new dtc. i wish to emphasize that income is the actual salary received from the employee that is the amount taken for employer and employees contribution
    towards provident fund that is our basic pay and other allowances dearness allowance and hra ,cca are given as allowances to meet the expenses according to the cost of living index. it is only an expense re imbursment for the working class to live in diginity.

  4. Nand Sharma says:

    The deposits made by general public and senior citizens in particular in Small Saving Schemes contribute a lot as the money is used for development purposes. Taxing these schemes would in other words would be to compel people to invest their savings anywhere other than small savings. Ultimately, it would affect the development schemes. People would have to think of other investments. So Govt must keep it mind.

  5. Sarvesh says:

    This amendment of taxing the HRA is harsh on the employees..Govt. should make endeavour to tax the amount paid by the employees to the land owners. Instead of taxing this amount Govt is trying to hide his inefficiency to track the land owners taxing such income of land owners in the hands of employees indirectly.I think it is shameful and very harsh on the genuine tax payers who can not hide their income and liable for TDS.

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