Investment may be grouped under realty (house property), investment in bank deposits, Post office Small Saving Schemes, investment in Mutual Funds, investment in direct equity and debt securities, gold or bullion. The incomes from speculative nature of business are not included here as they are not investment.

Income from House Property:

As per new code income from a house property, which is not used for the purpose of any business or profession by its owner will be taxed under the head “Income from house property”. The code suggests a new scheme for computation of income from house property. Accordingly,

(a)     Income from house property will be gross rent less specified deductions,

(b)     Gross rent will be higher of (i) actual contracted rent for the year and (ii) presumptive rent calculated @ 6% per annum of the ratable value fixed by the local authority. However where no ratable value has been fixed, 6% of the actual cost of investment in such property will be taken as rental value. Here lies the catch. It is but common experience till now that no house property gives a return of more than 3-4% in the immediate future of the investment in house property. Every one can calculate this with their own experience. However for example to day flat price per Sq.ft. is Rs.3000/- in suburbs of Chennai and a two bed room flat of 800sq.ft will cost Rs.25,00,000/-. If this flat is to be let out it may fetch a rent of Rs6,000/- per month or Rs72,000/- p.a. which works out to only 2.88%. May be at present the rent quoted here are more than actual.  May be Government might have kept in mind the suburbs of NewDelhi like Noida or Gurguan and Navi Mumbai for rental rates but the sq.ft. rate of flat in those centres will be more than Rs.8000-10,000 and rental value there also will not be higher than 3-4%. Hence the presumptive calculation 6% on investment for rental value is nearly 100% higher than the actual realisable rent. Hence wherever the actual rent shown is less than 6% of investment cost, there is scope for department to claim that there is suppression of income. Hence the presumptive rent should be reduced to 2.5% from the code prescription of 6%.

(c)     The advance rent will be taxed only in the financial year to which it relates.

(d)     The gross rent of one self occupied property will be deemed to be nil, as at present.

(e)     The following deductions will be allowed from gross rental income calculated as above: (a) Municipal property and services taxes paid, (b) 20% of gross rent towards repair and maintenance (presently30%) (c) interest on housing loan

(f)       In the case of self occupied property where the gross rent is NIL, NO DEDUCTION for taxes and interest will be allowed.

(g)     The income from property shall include income from the letting of any building along with any machinery, plant or furniture etc. if the letting of building is in separable from others.


Income from all transactions in all investment assets will be computed under the head “Capital gains”. Investment asset is defined as any capital asset other than business capital asset. The present distinction of short term and long term investment assets based on the length of holding of an asset will be eliminated. The capital gains arising out of transfer of personal effects and agricultural land beyond specified urban limits will continue to be exempted from tax under this head. If the capital asset is transferred after one year from the end of financial year in which it is acquired, it will be eligible for deduction of indexed cost to reduce inflationary gains. The cost of acquisition of assets for indexation has been shifted from 01/04/1981 to 01/04/200. The carry forward loss under this head will be allowed as deduction from gains before it is subjected to tax in the current year. If there is still an unabsorbed loss the same may be carried forward to next year. If the capital gain is available then it has to be added to the other heads of income and taxed at the appropriate marginal tax rate applicable to person’s total income. The transfer of capital asset under gift or will be exempted from capital gains. In respect of securities transactions, Securities Transaction Tax will be abolished.

IN RESPECT OF SECURITIES: As there will be no security transaction tax all capital gains arising from transactions involving market transactions also be subject to capital gains tax. Hence all capital gains arising out of equity transactions will be subject to tax at normal rates applicable to investor. So also in case of redemption of equity mutual funds the capital gains will be taxed.  Earlier the Courts have held that if the cost of acquisition is indeterminable then the gain from that transfer is exempted from capital gains tax. But New code has amended this provision by treating the cost of the asset as “nil” so that entire net sale proceeds will be taxed as capital gain. A similar provision has been made in respect of cost of improvement also.


As per New Code, the deduction for new investment of sale proceeds of the transferred asset is available only in case o the following: (a) From one agricultural land to one or more agricultural lands; (b) From any investment asset transferred any time after one year from the end of the financial year in which the asset is acquired to a residential house, if the assessee does not own any residential house, other than the new house on the date of transfer of the original asset. (c) from any investment asset transferred any time after one year from the end of the financial year in which the asset is acquired, to deposit in an account maintained under the “Capital Gains Saving Scheme”. All withdrawals under whatever circumstances , from the Capital Gains Saving Scheme will be included to the income of the assessee under the head “Income from residuary sources” and accordingly taxed in the year of withdrawal.


The loss under the head “Capital Gains” will not be allowed to be adjusted against any other head of income. The losses under this head will be allowed to be carried forward for any number of years for set off against the income under this head only

The New Code do away with the difference between short term and long term capital gains and different structure of taxation of these gains. After the implementation of the New Code both short term and long term capital gains will be added to the other ordinary sources of income and taxed at the marginal rate applicable to the assessee. The only difference will be that if the asset was sold after holding it for ONE FULL FINANCIAL YEAR the assessee can claim deduction for the amount invested from such sale proceeds in ONE residential house provided that he does not own any other house on the date of transfer of the original asset. This deduction will be available irrespective of the fact that the asset sold is Fixed Asset or any Financial Asset. From this it is clear that when any asset is held for more than one full financial year, deduction can be claimed by investing the full or the part of the sale proceeds in a residential house if the assessee does not own any other house. Similarly if the transferred asset is held for more than one full financial year, he can defer payment of capital gains tax by saving the sale proceeds in “capital gains saving scheme. As and when withdrawals are made from this account , the withdrawals will be taxed in the year of withdrawal. Thus the new code also distinguishes between short term and long term capital gain but the only difference from the existing provisions is that for all assets uniform holding period of ONE FULL FINANCIAL YEAR is prescribed for special treatment

From the above it is clear that for security transactions, nil tax for long term capital gain (held beyond 12months from the date of purchase) and special rate of 15% for short term capital gain will be dropped. But still the treatment of sale proceeds for tax purposes will differ if the asset is held for one full financial year. By using this avenue one can only defer the tax impact and plan it in such a way its impact is least. From this it is clear that the Government want to tax the sale proceeds of assets if it is immediately used for any other purpose but to permit to defer the tax impact if it is saved in special scheme. But this saving scheme may or may not offer return, even if it offers return it may be very low and even if it is low it will be taxed without any exemption at the time of withdrawal. Under such a situation how an investor can build his portfolio of securities and plan his future funding of major expenditures at an average compounding rate when his intermediary sales are to be either taxed or invested in a much lower return is a million dollar question? The whole world of long term financial planning is likely to go awry as the sale proceeds are to be taxed at each stage of rollover or churning. It may create a sense of insecurity in financial planning and people may give up planning. Or one has to plan taking into account the outflow on account of capital gains taxes at each stage of transaction also. To avoid such stringent provisions, we suggest a modified provision in which the sale proceeds may be permitted to be invested in special saving scheme and any withdrawal from it for the purpose of investment in the security may be exempted from tax. If this is not permitted every time when an investor re arrange his portfolio he has to pay tax on capital gain.

Already the speculative instinct in the capital market has reduced the enthusiasm of investors for long term investment. Investors are losing patience and losing faith in long term investment. With the provisions of the new code adding further disincentives for long term investment, it will be difficult to gauge how the capital formation in the country will improve? If the capital formation in our country is affected, our economic growth will be affected. If the entire capital market functions only with speculative instinct it may tend to be a gambling den than contribute to the capital formation.


The income under this head will comprise of any income which is not included in any other head of income discussed above. The scope of this head has been broadened by including the following incomes also:

(a)     Interest other than interest accruing to or received by permitted financial institutions

(b)     Amount received or retained on account of breach of contract unless included under business income;

(c)     The redemption or withdrawal of the principal amount from any investment that is eligible for deduction in computing the total income. However withdrawals or redemptions from pf or pure life insurance policies.

(d)     Any amount exceedin Rs.20,000/- taken as loan or deposit otherwise than by way of cheque or draft will be deemed to be income under this head,

(e)     Any sum received under a life insurance policy, including bonus if any, shall be exempted from tax provided it is a pure life insurance policy. The term pure life insurance means that premium payable for any of the years during the term of the policy does not exceed 5% of the sum assured. Consequently proceeds of all other policies including bonus will be included in the income under this head.

While serial No11 of the Sixth Schedule of the New Code which deals with “income not to be included in the total income” give specific reference to accumulated balance outstanding as on 31-03-2011 in Employees Approved Provident Fund and any accretion there to, it is silent with respect to PPF and other insurance or superannuation schemes. Why this discrimination among existing Provident funds and other long term saving schemes? While the Government’s discussion paper on the new code [paragraph 12-7] state this exemption will be available to GPF, PPF,RPF and EPF the same is not to be found in the sixth schedule of the new code and it state only about EPF.

The new code states under sec99 dealing with “Dividend Distribution Tax” states that every domestic company shall be liable for dividend distribution tax at the rate of15% from distributed profits. The question that arises is that all those small and medium investors who receive dividend may not have total income exceeding Rs.10Lacs including those dividends and hence they are liable to pay only 10% tax but their TDS from dividends will be at 15% and this dtds they can not claim also by filing the return as there will be no Form 16A. WHY SMALL INVESTORS SHOULD TAKE THE BURDEN OF ADDITIOANAL 50% TAX THAN THE LAW PRESCRIBES FOR THEIR INCOME LEVELS JUST BECAUSE THE GOVERNMENT FIND IT EASY TO COLLECT? WILL THIS ARGUMENT STAND IN COURT IF THE INVESTORS TAKE IT TO  THEM? WHY SHOULD SMALL INVESTORS PAY EXTRA TAX TO SUBSIDISE TAX BURDEN OF SUPER RICH, PROMOTERSAND FIIs? IS IT THE PENALTY FOR SMALL INVESTORS TO INVEST IN EQUITIES? IS IT THAT ALL PUBLIC SHAREHOLDERS SHOULD NOT ENJOY THE BENEFIT OF DIVIDENDS AS REGULAR INCOME AND TAKE ADDITIONAL BURDEN OF DIVIDEND TAX BECAUSE THE PROMOTERS OF THE COMPANIES HAVE GIVEN THEM THE OPPORTUNITY TO INVEST IN THEIR COMPANIES? SHOULD THE SMALL AND MEDIUM INVESTORS ONLY LOOK FOR SHORT TERM CAPITAL GAIN AND PAY ONLY 10% TAX INSTEAD OF 15% DIVIDEND PAY OUT TAX? WILL SUCH A SITUATION CONTRIBUTE TO THE CAPITAL GROWTH IN THE ECONOMY? My humble answer to all these questions is to reduce the dividend pay out tax to 10% or better than that, exempt dividend up to Rs.1,00,000 per shareholder per company as exempt and tax the rest of the dividend as income under “Residual Sources” in the hands of all other individual and corporate shareholders other than banks, mutual funds, investment companies. Perhaps Government will get thousands of crores of rupees as tax on dividends which will reduce the gap between the rich and the poor and contribute to the wealth distribution rather than accumulation in few hands. This will add to the additional participation of the public investors in equity investment.


The new code argues that incentives for savings have been rationalized to encourage net savings. Hence it has increased the limit of savings exempted from tax to Rs.3lacs as against the present limit of Rs.1lac. At the same time it has reduced the avenues for saving by excluding ELSS OF MFs, 5 year Term deposits of banks, NSCs, POTDs, Principal repaid on housing loans, etc. The eligible schemes under New Code for this purpose are Approved Provident funds, Approved superannuation funds, Insurance and New Pension System Trust. The accretions to the deposits made in these accounts by way of principal as well as interest will be exempted from tax as long as they are not withdrawn and any withdrawals will be taxed at marginal rate applicable in the year of withdrawal. The question that arises is that when investments are made in these accounts the assessee may enjoy a tax exemption at lesser rate{ NIL UP TO RS.1,60,000; 10% FROM 1,60,000 TO 10,00,000 AND 20% FROM 10,00,000 TO 25,00,000 income levels in the respective years] but may have to pay tax at higher rate when he withdraws in lump sum. Why government want to penalise its public for saving from their income. Or is the Government think that public should only save and never withdraw to enjoy their savings? By restricting the schemes to only four and that too where these institutions have to invest more than 80% in Government Securities does the Government wants to corner a major portion of savings and leave the private sector to cry for funds? Under such situation how private capital will be formed and how the economic growth can be achieved? If the principal amount that has been saved is to be taxed at the time of withdrawal why it should be called “incentive for savings”? What is the incentive for saving here except that you only defer your tax impact but at the same time increase the tax impact on a future date? Is it that the Government expect that all the tax savers should use their savings only after their retirement when their income is likely to come down? To day a person contributes to GPF or EPF or PPF from his monthly income and use those savings on a later day for the purpose of house building or children higher education, medical treatment or dependents marriage etc. In future how these bulk expenses are to be funded by individuals if a substantial portion of their periodical savings is to be spent on taxes? What ever deductions and exemptions already in the INCOME TAX ACT are included after certain careful study about the living conditions of the people and all these things should not be brushed aside in one sweep using EET. If the Government is so particular that it has to collect more revenue than it has to go by the established canons of taxation namely tax where the traffic can bear? Leaving that way and allowing the rich to get more concession and making the others to bear that additional burden also is not conducive to social justice.

I hope someone will answer my above queries and answer how the new code will improve the delivery of social justice.


The discussion paper has put one important point for discussion that as per Government’s view profit linked incentives are inherently inefficient and hence the Code substitutes the existing system of taxing the profits to a new system wherein a business entity will be allowed to recover all capital and revenue expenditure(except expenditure on land, goodwill and financial instrument )and it would be made liable to pay tax on profits made there after. The period consumed in in recovering all capital and revenue expenditure will be the tax holiday period. This new scheme will apply to the nine selective industries only which are all capital intensive. One of the important aspects that we may discuss here is Minimum Alternative Tax [MAT].

According to the discussion paper the Code provides for MAT calculated with reference to the “value of gross assets” instead of present system of tax on book profits. The MAT will be calculated at2% of all the assets at cost less accumulated depreciation. (in case of banking companies0.25%) the question that is silent here is the cost is net cost of excluding all the borrowings for funding those assets or without the deduction o borrowing. If it is without the deduction of borrowing then MAT will be an additional burden in addition to interest cost as interest cost is allowable deduction for calculating MAT on existing profit method. Since under the code MAT will be a final tax and not to be adjusted against future actual tax liability no credit will be allowed for MAT paid in future. Hence it is an additional burden and not like advance payment of tax as in the present situation. Will it not add to the tax burden of the companies?

Authored by: CA. N. VENKATESWARAN,  B.Sc.,FCA.,ACS.,CAIIB.,AMIMA , Email: [email protected]

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September 2021