The new Direct Tax Code snippets

On July 6, 2009, the Finance Minister informed that he would soon present a newly drafted Direct Tax Code (DTC) to replace the existing direct tax laws, particularly the Income Tax Act,1961.True to his word,the draft DTC 2009 has been put up on the official website and official printed versions have also been released. Suggestions from enlightened citizens and professional bodies have been pouring in. The Finance Minister has promised that the government will take into account all the representations before it comes out with the final draft.
DTC 2009 is slated to become law from April 1, 2011.
STT to be abolished. Securities Transaction Tax will be abolished because the exemption for longterm capital gains will be withdrawn altogether. Similarly, the distinction between short-term and long-term capital gains will also be abolished.Mutual fund dividends to be taxed.While dividends paid by companies will continue to be exempt from income tax, dividends paid by mutual funds will be taxable.Hence the tedious tax deducted at source (TDS) on such income will also come back.
EET for all savings products. DTC also proposes to introduce the `Exempt- Exempt-Taxation' (EET) method of taxation of savings.Thus all saving products will be taxed only at the time of on withdrawal.The good news here is that only new contributions made on or after the commencement of this code will be hit. All savings made in EPF, PPF, NSC and other products till March 31, 2011 will be fully protected and will not attract any tax on withdrawal even after April 1, 2011. Similarly, all accretions (capital gains) to that corpus will also be protected from taxation in future.
Capital gains subject to marginal income tax rate. All capital assets will be classified into investment assets and business assets. Any grains made on investment assets will be treated as capital gain. Such capital gain will be taxed as if it is normal income instead of being taxed at a concessional rate, as is the case at present. Indexation benefit. However, if you hold the investment asset for more than one year, you will be entitled to indexation benefit. The index (of market value) will be advanced from April 1, 1981 to April 1, 2001. Appreciation up to April 1, 2001 will be exempt. After adjusting for the rise in the index, the balance amount will be included in thetotal income and will be taxed at the marginal rate of taxation.
Set off your capital losses. If there is any unabsorbed capital loss, it will be deducted from capital gain and only the balance will get taxed. If capital loss exceeds capital gain, the investor will be allowed to carry forward such unabsorbed amount to the next year where it will again be set off against capital gain. No limit will exist on how many years you will be allowed to carry forward your losses.
Deduction for homebuyers. Under DTC investors will be able to lower their tax liability on capital gains by availing of a deduction.The deduction will be available to you if you invest in a residential house,provided you have no otherhouse.New capital gains saving scheme. Alternatively, you can, within 60 days of sale, deposit your capital gains in a capital gains savings scheme (which is yet to be formulated).
By and large, DTC has evoked negative reactions because of the abolition of exemption on longterm capital gains on equities and the possibility of tax on withdrawal on all savings instruments.
Income tax burden to diminish. Finally, here is the good news from DTC. Your personal tax outgo will come down because of the recalibration of tax slabs. Income up to Rs 10 lakh will be taxed at the rate of 10 per cent. On income ranging from Rs10 lakh to Rs25 lakh the rate of tax will be only 20 per cent; and only on income over Rs 25 lakh will the rate of tax be 30 per cent. Effectively, the income tax that a person with an income of Rs 25 lakh will be required to pay will be Rs 3,84,000.
Wealth tax burden to ease up. Similarly, the exemption on wealth tax will be raised to Rs 50 crore and the rate of wealth tax will be 0.25 per cent on excess (above the aforementioned amount). In effect, wealth tax on Rs 51 crore will be Rs 25,000 only!