Decoding the New Tax Code 2009

On 12th August, 2009 the Finance Minister unveiled the new tax code - Direct Taxes Code, 2009, which will we revamping the existing Income Tax Act, 1961. He said it is a process and not an event. So it will take time to put things in place and get feedback. So, if this new Tax Code is put to use, it would be from 1st of April 2011. let us see how an individual is affected/benefited by the new code. I am not discussing anything from an business angle or corporate angle.

(a) Individual tax rates

The good news is that we have now broader blocks and it will reduce your tax liability considerably. But hang on, till you read this full blog.

Existing Income .........................................New Income ...........................Tax Rate

Upt0 1,60,000.....................................................Upto 1,60,000..............................Nil
[for women - 1,90,000
for Senior Citizen - 2,40,000]
1,60,001 to 3,00,000..........................................1,60,001 to 10,00,000.................10%
3,00,001 to 5,00,000........................................10,00,001 to 25,00,000................20%
5,00,001 & above................................................25,00,001 & above........................30%

For information - the tax rate for Corporate (both Indian & Foreign) reduced to 25%

(b) Salary elements.

Only the following are allowed as deduction. Medical reimbursement, perquisites like LTA, Leave encashment will no longer be deductible, but included in the salary component, as the slab is increased.

• Profession tax - tax on employment within the meaning of clause (2) of Article 276 of the Constitution;
• amount received from his employer for journey by the person between his residence and office or any other place of work, to the extent prescribed - Currently Rs.800 per month
• any such special allowance or benefit specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the dutiesof an office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose;
• the amount of any pension received by an individual who has been in the service of the Central Government or State Government and has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other gallantry award as the Central Government may, by notification in the Official Gazette, specify in this behalf.
• The following shall be allowed if the amounts referred to therein is paid to, or deposited in, a Retirement Benefits Account maintained with any permitted savings intermediary in accordance with the scheme framed and prescribed by the Central Government in this behalf:
  

• 
  
• the amount due or received, directly or indirectly, from his employer, in connection with his voluntary retirement or termination of service or voluntary separation under any scheme framed for this purpose in accordance with such guidelines as may be prescribed;
• the amount of any gratuity received from one or more of his employers, subject to limits as may be prescribed, if the amount is received -(i) on his retirement, or on his becoming incapacitated prior to such retirement, or on termination of his employment; or (ii) by the spouse, children or dependants on the death of the person.
• the amount of any death-cum-retirement gratuity received under the Payment of Gratuity Act, 1972 or from the Central Government, State Government,local authority or any public sector company;
• the amount received in commutation of pension under a scheme of his employer, framed in accordance with the prescribed rules, to the extent of -
  (i) one-third of the pension, in a case where he receives any gratuity; and
  (ii) one-half of such pension, in any other case;
  

(c) Exempt - Exempt - Tax (EET)

That means, your contribution to PPF, etc are exempted from tax comutation and when you withdraw them, it is taxable. Of course, it is believed that whatever is accruing after 1st April 2011 will only come under this. That means current contribution, when you withdraw will not be taxable and any contribution after 1st Apr 2009 when withdrawn will be taxable.

(d) Dividends

Dividends are not taxable in the hands of the recipients. Dividend distributio tax remains at 15% in the hands of the company.

(e) Income from House Property

• House propoerty income would now be Gross Rent minus allowable deductions and Gross Rent is the higher of Contractual Rent or the Presumptive Rent (i.e. 6% of value fixed by local authority or in case there is no such valuation, cost of construction or acquisition)
  
• Deduction for repairs & maintenance is allowed at 20% (now 30% of annual value) of the Gross Rent
• Advance rent would be taxed in the year it relates to.
  
• No deduction for self occupied property towards Interest on loan borrowed for consturction, purchase, repairs or reconstructing

(f) Capital Gains

No more distinction between Long Term and Short Term Capital Gains. All are taxable. So investment in Stocks and holding for a year or more will not benefit more, as it would be taxed, if it is a gain. Hope the set-off provision will remain the same, so that we can adjust if there is a loss and carry forward any unabsorbed loss.
Another important change is that the Indexation for ascertaining the cost of acquisition. Hitherto it was 1-Apr-1981 now the indexation starts from 1-Apr-2000.
Good news - Securities Transaction Tax removed.

(g) Deductions from Taxable Income (sec 80C)

The current limit of Rs.1,00,000 has been increased to Rs.3,00,000. (Will discuss about the changes in detail in the next post)

(h) Wealth Tax
Wealth tax limit raised to Rs 50 crore. Tax of 0.25 per cent above this limit. Equity Shares etc., are now considered as wealth.

Cheers,
Gopal