The revised DTC proposed to continue with the exempt-exempt-exempt (EEE) regime for Government Provident Fund (GPF), Public Provident Fund (PPF) and Recognised Provident Funds (RPFs) and the pension scheme administered by the Pension Fund Regulatory and Development Authority. In addition, approved pure life insurance products and annuity schemes would also get the same tax treatment.
“Universal social security benefits for tax payers may not be feasible in the near future. Also, switching over to a complete EET (Exempt-Exempt-Tax) method of taxation for all savings instruments would entail many administrative, logistical and technological challenges,” said the revised discussion paper on DTC.
Among other changes, the revised version did away with the proposed taxation on money received through voluntary retirement scheme, gratuity, annuity and pension.
“In the earlier proposal, the finance ministry had said that employer’s contribution to provident fund, superannuation and new pension scheme would be considered as income of the employee. The new draft has done away with it,” said Kuldip Kumar, executive director – tax and regulatory services, PricewaterhouseCoopers.
The government had earlier proposed to do away with deduction of interest (up to Rs 150,000) on a housing loan, where the taxpayer resides. The revised draft proposed to restore this deduction.
The earlier draft had also introduced a complex mechanism for taxation of rent income. To compute income from house property, the previous draft had proposed “a notional rent on presumptive basis” (at the rate of six per cent).
The notional rent was considered at six per cent of either the market value of the house or the cost of construction/acquisition. “However, this method discriminates against recent owners as such cost is a function of inflation,” said the new draft. The revised draft scrapped this method of computing notional rent.
Investors in stocks and mutual funds will not be too happy. While bringing back the short- and long-term concept of capital gains taxation, the revised draft proposed to tax capital gains on stocks and mutual funds, even those held for more than a year.
Capital gains could become a part of the total income, after “allowing a deduction at a specific percentage of capital gains without any indexation”. The effective rate of taxation, as a result, would be lower for capital gains after one year.
For example, if the income of a person is Rs 12 lakh (Rs 1.2 million) and capital gains are Rs 500,000, the total income of the person would be Rs 17 lakh (Rs 1.7 million).
However, if the rate of deduction is 50 per cent, then the taxable amount will be Rs 14.5 lakh (Rs 12 lakh plus Rs 2.5 lakh). At present, there is zero tax on long-term capital gains. In the first draft, stocks and mutual funds were proposed to be a part of wealth.
In the short term (less than one year), the entire amount will be added as a part of the income and taxed as per the slab.
“Given that gains will be taxed at rates higher than the present regime, the proposals may impact capital formation and development of capital markets,” said N C Hegde, partner, Deloitte.
In a deviation from the earlier code, the revised proposal retained the existing threshold limit for wealth tax. Earlier, the wealth tax limit was proposed to be hiked to Rs 50 crore (Rs 500 million). The latest draft retained the definition of wealth as ‘unproductive assets’ such as plot of land, jewellery and cash in excess of Rs 50,000.
And the tax rates will be applicable as per current guidelines, subject to revision later, – one per cent tax over Rs 30 lakh. (Rs 3 million).