Change in income tax by wanghonghx


									1. Change the nomenclature
   At present, if a person earns any income during the year beginning on April 1, 2008 and

   ending on March 31, 2009, then 2008-2009 is called the "previous year" and the income is

   assessed to tax in 2009-2010 which is called the "assessment year".

   An unified "financial year" term will replace "assessment year" and "previous year".

   Financial Year is a period of 12 months beginning April 1 and ending on March 31 next year.

   This, in our view, will negate the confusion created by the use of two expressions. It will

   simplify multiple definitions for "year" and the process of filing tax return.

2. Restructure the income-tax slabs
   The tax slabs for individuals will change substantially as depicted in the table below:

               Tax Rate          Existing                Proposed
                            Tax Slabs For Individuals
                   Nil        Upto 160,000             Upto 160,000
                  10%       160,001-300,000 160,001-1,000,000
                  20%       300,001-500,000 1,000,001-2,500,000
                  30%        Above 500,000           Above 2,500,000
                              Tax Slabs For Women
                   Nil        Upto 190,000             Upto 190,000
                  10%       190,001-300,000 190,001-1,000,000
                  20%       300,001-500,000 1,000,001-2,500,000
                  30%        Above 500,000           Above 2,500,000
                          Tax Slabs For Senior Citizens
                   Nil        Upto 240,000             Upto 240,000
                  10%       240,001-300,000 240,001-1,000,000
                  20%       300,001-500,000 1,000,001-2,500,000
                  30%        Above 500,000           Above 2,500,000

3. This we believe is the most vital reform proposed in the new Direct Tax Code. This will
   bring down the tax liability of an individual significantly resulting in more income in

   hand. Also, it will provide everyone an opportunity to save and invest more.
4. Tax the profits in lieu of salary and perks
   The give and take policy always prevails. If the Direct Tax Code Bill proposes to enhance the

   income tax slabs, it also proposes to withdraw the tax deduction available on benefits like

   Leave Travel Allowance (LTA), Medical reimbursement and House Rent Allowance (HRA).

   Hence all these benefits will form a part of your salary and will be taxed as per the

   applicable income tax slab.

   But there is some good news here as well. Food coupons, Employee Provident Fund (EPF),

   Transport Allowance, Gratuity etc will continue to enjoy deductions. It should be noted that

   Gratuity will be tax-exempt on change of jobs only if it is invested in a retirement fund.

   Though this may increase the tax liability of the salaried individuals, but given that the

   increase in tax slabs are substantial, it could still lead to a lower tax liability under the

   new regime.

   Consider the example depicted in the table below. An individual whose CTC is Rs 10 lacs

   p.a., has HRA, LTA and medical reimbursement of Rs 2.7 lacs. In the existing tax system,

   Rs 2.7 lacs would be exempted from tax and the taxable income would be Rs 6.45 lacs (Rs

   10 lacs - Rs 2.7 lacs - Rs 0.85 lacs of Travelling Allowance, EPF and Gratuity), which will

   attract income tax of approximately Rs 97,500. Whereas, under the new tax code, Rs 9.15

   lacs (Rs 10 lacs - Rs 0.85 lacs) will be the taxable income. This will attract income tax of Rs

   75,500. The individual is still able to save Rs 22,000 per year.

                                                      Existing               Proposed
Cost to Company (CTC) 1,000,000 Taxable Income Taxable Income
            Basic                  445,000            445,000                 445,000
 Consolidated Allowance            200,000            200,000                 200,000
   Travelling Allowance             9,600
             EPF                    55,400
          Gratuity                  20,000
             HRA                   170,000                                    170,000
             LTA                    70,000                                     70,000
 Medical Reimbursement              30,000                                     30,000
         Tax (Rs)                                      97,500                 75,500
5. Increase the Deduction Limit
     The aggregate amount of deductions in savings schemes is proposed to be raised from Rs 1

     lac (currently under Section 80C) to Rs 3 lacs.

  Gross   Existing Tax Proposed Tax Savings Savings
 Income after Rs 1 lac after Rs 3 lacs (Rs)   (%)
   (Rs)    Deduction     Deduction
              (Rs)           (Rs)
 400,000     14,000            -       14,000 100
 600,000     54,000         14,000     40,000  74
1,000,000   174,000         54,000    120,000  69
1,500,000   324,000        124,000    200,000  62
2,500,000   624,000        324,000    300,000  48
5,000,000  1,374,000      1,044,000   330,000  24

      6.   (Cess not taken into account while calculating the tax
7.    For example, an individual with an income of Rs 10 lacs will be able to save tax on Rs 3

     lacs straight away by investing in prescribed saving instruments. The remaining income of

     Rs 7 lacs will attract tax of Rs 54,000 as compared to Rs 174,000 under the existing tax

     regime. This will result in savings of Rs 120,000 per year (an increase of 69%).

     As is evident from the table above, the increase in tax slabs combined with the increase in

     the deduction limit will substantially boost the savings of individuals.

     However, it should be noted that investments in equity-link savings scheme

     (popularly known as tax-saving mutual funds) and 5-year fixed deposit will not

     be exempt anymore.

8. Introduce the Exempt-Exempt-Tax (EET) structure
     Investments in small savings like provident fund, life insurance etc will be brought at par
   with National Pension Scheme (NPS) i.e. they will be EET (Exempt-Exempt-Tax). This

   means the withdrawal amount will be taxed from April 1, 2011. The withdrawal amount will

   be clubbed with the individual's income and taxed as per the new slab mentioned above.

   Grandfathering Clause: Withdrawal of any amount invested in retirement and

   superannuation schemes as on March 31, 2011 will not be taxed.

   Relief on rollover: The rollover of money withdrawn from one account of the permitted

   saving to another will not be treated as withdrawal.

   Small saving scheme such as Public Provident Fund (which offers an assured return of 8%

   p.a.) currently enjoys Exempt-Exempt-Exempt (EEE) status. Like this there are other

   schemes as well which are used by many individuals to achieve their long-term financial

   goals like retirement, children's marriage and education. Individuals investing in them

   will have to set aside more funds every year to build the targeted corpus. For example, an

   individual who wants a retirement fund of Rs 20 lacs after 15 years will now have to set

   aside Rs 1.66 lacs per year instead of Rs 1.38 lacs assuming he has to pay a tax of 20% on

   the withdrawal amount.

9. Scrap the benefits on home loans
   This could come as a blow to many existing and prospective home buyers. The new Direct

   Tax Code proposes to scrap the tax benefit currently available on home loans.

   The tax benefit on home loans is used to bring down the tax liability of an individual (who

   has bought a home on loan) to a great extent (i.e. upto Rs 1.5 lacs on home loan interest and

   Rs 1 lac on repayment of home loan). But the scrapping of the same would increase the tax

   liability of individuals.

   If this happens as has been proposed, we recommend that individuals should consider

   making higher down payment and taking lesser loan.

10. Enhance the exemption limit for Wealth Tax
   The limit for wealth tax will be increased substantially from Rs 30 lacs to Rs 5000 lacs (or

   Rs 50 cr). The rate of taxation will be reduced from 1% to 0.25%. The scope of wealth has

   been expanded to include more instruments like shares, mutual fund units and fixed deposit
   investments and house property including self-occupied house.

   Inspite of these inclusions, very few individuals will have a net wealth of more than Rs 50

   cr. Furthermore, many individuals who are currently paying wealth tax will move out

   from this ambit.

11. Simplify the Capital Gains taxation
   Distinction Scrapped: The distinction between short-term and long-term capital gains

   tax will be scrapped. This means capital gains will be taxed irrespective of the investment


   Indexation benefit: One year cap remains in order to avail indexation benefits. The same

   will be applied to houses sold after one year. The indexation base has also been proposed to

   be shifted from April 1, 1981 to April 1, 2000.

   Rate of Capital Gains: The capital gains will be taxed as per the tax slab applicable to the


   Some exceptions: Capital gains will not apply to transfer of assets on partition of Hindu

   undivided family, gifts, transfer under an irrevocable trust, of any investment asset, other

   than sweat equity share

   Here the crux is that investors will no more enjoy zero tax benefit on equities held for over

   one year.

12. Abolish the Securities Transaction Tax (STT)
   Since the time STT was introduced, it has been an eyesore for many traders and investors

   investing in the stock markets. There has been a long standing demand to abolish the same,

   which in all probability may happen on April 1, 2011.

   This would result in bringing down the transaction cost for investors and traders. Besides

   bringing smiles on the faces of traders, in our view it will also help in increasing retail

   participation in the stock markets.

To top