A.

Direct Tax Code The New Direct Tax Code (DTC) is said to replace the existing Income Tax Act of 1961 in India. DTC bill was tabled in parliament on 3oth August, 2010. There are big changes now in monsoon session and There are now much less benefits as compared to what were in the original proposal. Highlights of the Direct Taxes Code bill

Common threshold Income Tax exemption limit for men and women proposed at Rs. 2 lakh per annum (proposed), up from Rs. 1.8 lakh 10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on between Rs. 5-10 lakh, 30 per cent for above Rs. 10 lakh Tax burden at highest level will come down by Rs. 41,040 annually Proposal to raise tax exemption for senior citizens to Rs. 2.5 lakh from Rs. 2.4 lakh currently. Corporate Tax to remain at 30 per cent but without surcharge and cess. MAT to be 20 per cent of book profit, up from 18.5 per cent. Proposal to levy dividend distribution tax at 15 per cent. Exemption for investment in approved funds and insurance schemes proposed at Rs. 1.5 lakh annually, against Rs. 1.2 lakh currently Proposed bill has 319 sections and 22 schedules against 298 sections and 14 schedules in existing IT Act. Once enacted, DTC will replace archaic Income Tax Act. However, many provisions in Income Tax Act will be a part of DTC as well. Fringe benefits tax will be charged to the employee rather than the employer.

Salient features

DTC removes most of the categories of exempted income. Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Unit Linked Insurance Plans (ULIPs), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will lose tax benefits. Only half of Short-term capital gains will be taxed Surcharge and education cess are abolished. For incomes arising of House Property: Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent. Tax exemption on Education loan to continue. Tax exemption on LTA (leave travel allowance) is abolished. Taxation of Capital gains from property sale : For sale within one year, gain is to be added to taxable salary .

Tax on dividends: Dividends will attract 5% tax. Medical reimbursement : Max limit for medical reimbursements has been increased to rupees 50,000 per year from current rupees 15,000 limit.

B.Direct Tax Proposals & Actual amendments: 1.Personal Tax rates

Basic exemption limit for individual taxpayers (not being senior citizens) has been marginally raised. As provided under the DTC, a general category of individual taxpayers has been introduced and the concept of different slab rates for males and females has been done away with. The revised slab rates for individual taxpayers (not being senior citizens) are as under:

Income Rate of tax (percent) Up to INR 200,000 NIL INR 200,001 to INR 10 500,000 INR 500,001 INR 20 10,00,000 INR 10,00,001 and above 30

Tax exempted up to INR 250,000 in case of resident taxpayers who are senior citizens above the age of 60 years but below the age of 80 years Also Exempted upto INR 500,000 in case of resident taxpayers who are senior citizens of the age 80 years and above While there is no surcharge applicable on personal tax rates, education and secondary and higher education cess ("education cess") has been retained at 3 percent.

2.Corporate Tax rates

No change has been proposed in the tax rates for corporate, partnership firms, local authorities and co-operative societies. The basic tax rates have been retained at the rate of 30 percent (effective tax rate being 32.445 percent) in case of domestic companies and 40 percent (effective tax rate being 42.02 percent) in case of foreign companies with no change in the surcharge and education cess.

3.Dividend Distribution Tax

Provisions relating to dividend distribution tax ("DDT") have been amended to eliminate the cascading effect of taxes in multi tier corporate structures. Dividends received by any company from its subsidiary company, shall not be subject to DDT provided that the subsidiary company has discharged DDT on such dividend distribution.

4.Minimum Alternate Tax There is no change in the current minimum alternate tax (MAT) rate (ie 18.50 percent). The effective MAT rate for domestic companies will be similar to the last financial year ie 20 percent. MAT provisions have been amended to provide that in case of companies which are not required to prepare profit and loss account in accordance with the Companies Act, 1956, the book profit for the purposes of MAT shall be as per the profit and loss account drawn up in accordance with respective acts or regulations applicable to them. Amendments in MAT- Section 115JB- Book profit will be increased by revaluation reserve relating to revalued assets disposed or retired, if the same not credit to P&L.

5. Capital gains The Securities Transaction Tax has been reduced by 20 percent from0.125 percent to 0.1 percent on delivery based purchase /sale of equity shares in a company /units of an equity oriented fund entered into through a recognized stock exchange in India with effect from July 1, 2012. In the case of conversion of sole proprietary concern or a firm into a company which is not regarded as transfer for the purposes of computation of capital gains, the cost of acquisition of the asset in the hands of the company would be the same as that in the hands of the sole proprietary concern or the firm. The fair market value of the asset as on the date of transfer of a capital asset is proposed to be considered as the full value of consideration in cases where the sale consideration for such transfer is not determinable. Budget 2012 proposes to insert a new provision which would exempt either fully /proportionately, the capital gains arising out of the sale of residential property on fulfilment of certain conditions, inter-alia, if the sale consideration is invested for subscription to the equity

shares of a small and medium enterprise engaged in manufacturing and the company utilizes the said subscribed amount for the purchase of a new plant and machinery. The exem ption from capital gains on account of sale of agricultural land is proposed to be extended to HUF. It has been clarified that in a situation where a subsidiary company amalgamates into the holding company, the requirement for issue of shares to the shareholder ie the holding company for the purpose of exemption from capital gains tax is not applicable. A similar amendment has been proposed in the case of demerger where an undertaking is demerged into the company which is a holding company. 6. TDS and TCS: Section 194LAA: TDS @ 1% on payment on transfer of certain immovable properties (other than agricultural land) if consideration paid / payable is equal to or exceeds 50 Lakhs (property situated in specified urban area) and 20Lakhs in other areas (w. e. f. 1st October, 2012). Amendment to section 194J:10% TDS on any fee/commission/remuneration by whatever named called, payable to director other than salary income. Section 206C: TCS of 1% to be collected by every person receiving any amount in cash as consideration for sale of bullion or Jewellery where the sale proceeds exceeds 2Lakhs. Time limit for TDS assessment extended to 6 years from 4 years. Delay in furnishing of TDS statement- FEE of Rs.200 per day and penalty from Rs.10,000/to 1 Lakh in case return not filed within 1 year from due date. Such penalty is also for furnishing of inaccurate information in the TDS statement.

7.Other proposals & amendments: . Proposal to allow individual tax payers, a deduction of up to Rs 10,000 for interest from savings bank accounts and it is implemented. Proposal to allow deduction of upto Rs 5,000 for preventive health check up. Also it is implemented in Budget. To provide low cost funds to stressed infrastructure sectors, rate of withholding tax on interest payment on ECBs proposed to be reduced from 20 per cent to 5 per cent for 3 years for certain sectors. Turnover limit for compulsory tax audit of account and presumptive taxation of SMEs to be raised from Rs 60 lakhs to `1 crore.

Wealth tax- Exemption of residential house allotted to employees of a company having remuneration limit up to Rs5 Lakhs increased to Rs10 Lakhs. Exemption for resident senior citizens who does not have any income chargeable under the headprofits and gains of business or profession is not required to pay advance tax. New Tax saving scheme: Relief for new Retail Investor having annual income below 10Lakhs Deduction of 50%: investment up to Rs.50,000/-: in a Rajiv Gandhi Equity scheme. Share premium received in excess of the fair market value to be treated as income from other sources new clause inserted in section 56(2). Section 44AB: Turnover or gross receipts for audit of accounts limit for professional income increased from Rs15 Lakhs to 25 Lakhs and for persons carrying on business limit increased from SRS 60 lakhs to 1 crore.

Highlights of Direct Tax code

1. Removal of most of the tax saving schemes: DTC removes most of the categories of exempted income. Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will loose tax benefits. 2. New tax saving schemes: Tax saving based investment limit remains 100,000 but another 50,000 has been added just for pure life insurance (Sum insured is atleast 20 times the premium paid) , health insurance, mediclaims policies and tuition fees of children. But the one lakh investment can now only be done in provident fund, superannuation fund, gratuity fund and new pension scheme (NPS).

Tax slabs: The income tax rates and slabs have been modified. The proposed rates and slabs are as follows:
Annual Income Up-to INR 200,000 (for senior citizens 250,000) Between INR 200,000 to 500,000 Between INR 500,000 to 1,000,000 Above INR 1,000,000 Tax Slab Nil 10% 20% 30%

Men and women are treated same now 4. Home loan interest: Exemption will remain same as 1.5 lakhs per year for interest on housing loan for self-occupied property. 5. Short and long term gains: Only half of Short-term capital gains will be taxed. e.g. if you gains 50,000, add 25,000 to your taxable income. Long term capital gains (From equities and equity mutual funds, on which STT has been paid) are still exempted from income tax. 6. EEE and EET: As per changes on 15th June, 2010, Tax exemption at all three stages (EEE) savings, accretions and withdrawalsto be allowed for provident funds (GPF, EPF and PPF), NPS (new pension scheme administered by PFRDA), Retirement benefits (gratuity, leave encashment, etc), pure life insurance products & annuity schemes. Earlier DTC wanted to tax withdrawals.

7. Education Cess: Surcharge and education cess are abolished

8. Income arising from House Property: Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent. Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not put to rent. But, under the Direct Tax Code 2010 , such a concept has been abolished. 9. LTA (Leave travel allowance): Tax exemption on LTA is abolished. 10. Education loan: Tax exemption on Education loan to continue. 11. Corporate tax: Corporate tax reduced from 34% to 30% including education cess and surcharge. 12. Taxation of Capital gains from property sale : For sale within one year, gain is to be added to taxable salary. For long term gain (after one year of purchase), instead of flat rate of 20% of gain after indexation benefit, new concept has been introduced. Now gain after indexation will be added to taxable income and taxed at per the tax slab. Base date for cost of acquisition has been changed to 1st April, 2000 instead of earlier 1st April, 1981. 14. Medical reimbursement : Max limit for medical reimbursements has been increased to 50,000 per year from current 15,000 limit. 15. Tax on dividends: Equity mutual fund will attract 5% dividend distribution tax (DDT). DDT has been removed from debt and non-equity based mutual funds but now dividends on nonequity funds will be taxable in investors hand as per his slab rates. There will also be a TDS 0f 10% (20% in case of NRI and companies) if dividend is more than 10,000 Rs for non-equity funds. 15. News for NRIs : As per the current laws, a NRI is liable to pay tax on global income if he is in India for a period more than 182 days in a financial year. But in new bill, this duration has been changed to just 60 days. An NRI will be deemed as resident only if he has also resided in India for 365 days or more in the preceding four financial years, together with 60 days in any of these fiscal years. Even if an NRI becomes a resident in any financial year, his global income does not immediately become liable to tax in India. Global income would become taxable only if the person also stayed in India for nine out of 10 precedent years, or 730 days in the preceding seven years.

This is very unfair to Seafarers. To avoid any income tax, an Indian sailor employed with a foreign ship will have to stay maximum for 60 days in India.

Amendments Proposed to Draft Direct Taxes Code

The draft Direct Taxes Code Bill seeks to consolidate and amend the law relating to all direct taxes and will replace the Income Tax Act, 1961. The draft Bill, along with a discussion paper, was released for public comments in August 2009.Following inputs received, the government proposed revisions to the draft Bill in June 2010. The table below summarises these revisions. The government has not released the changes proposed in the form of a revised draft bill however, but as a new discussion paper. The note is based on this discussion paper. The Code had proposed a number changes in the current direct tax regime, such as a minimum alternate tax (MAT) on companies assets (currently imposed on book profits), and the taxation of certain types of personal savings at the time they are withdrawn by an investor. Under the new amendments, some of these changes, such as MAT, have been reversed. Personal savings in specified instruments (such as a public provident fund) will now continue to remain tax-free at all times. The tax deduction on home loan interest payments, which was done away with by the Code, has now been restore.

However, the discussion paper has not specified whether certain other changes proposed by the Code (such as a broadening of personal income tax slabs), will continue to apply. Issue Income Tax Act, 1961 MAT currently imposed at 18% of profits declared by companies to shareholders. Certain personal savings, such as public provident funds, are not taxed at all. Taxable rent is higher of actual rent or reasonable rent set by municipality(less specified deductions). Rent is nil for one selfoccupied property. Interest on home loans is tax deductible Draft Direct Taxes Code (August 09) To be imposed on assets rather than profits of companies. Tax rate proposed at 2% (0.25% for banks) Such savings to be taxed at the time of withdrawal by the investor. Revisions Proposed (June 2010) MAT to be imposed on book profit as is the case currently. Rate not specified.

Minimum Alternate Tax (MAT)

Personal Saving / retirement benefits

Such savings to remain tax-exempt at all stages, as is the case currently.

Income from House Property

Taxable rent is higher of actual rent or 6% of cost /value set by municipality (less specified deductions). Rent is nil for one selfoccupied property.

Taxable rent is no longer presumed to be 6% in case of non-let out property. Tax deductions allowed on interest on loans taken to fund such property.

Interest on Home loans

Tax deductions on home loan interest not allowed.

Tax deductions for interest on loans allowed, as is currently the case. Equity shares/mutual funds held for more than a year to be taxed at an applicable rate, after

Capital Gains

Long term and short term gains taxed at different rates.

Distinction between long and short term capital gains removed and taxed

Issue

Income Tax Act, 1961

Draft Direct Taxes Code (August 09) at the applicable rate; Securities Transaction Tax done away with.

Revisions Proposed (June 2010) deduction of specified percentage of capital gains. No deductions allowed for investment assets held for less than a year. Securities Transaction tax to be calibrated based on new regime. Income on securities trading of FIIs to be classified as capital gains and not business income.

Non-profit Organisations

Applies to organizations set up for charitable purposes. Taxed (at 15% of surplus) only if expenditure is less than 85% of income.

To apply to organizations carrying on permitted welfare activities. To be taxed at 15% of income which remains unspent at the end of the year. This surplus is to be calculated on the basis of cash accounting principles.

Definition of charitable purpose to be retained, as is the case currently. Exemption limit to be given and surplus in excess of this will be taxed. Up to 15% of surplus / 10% of gross receipts can be carried forward; to be used within 3 years. Grandfathering of exemptions allowed for units in SEZs as well as developers.

Units in Special Economic Zones

Tax breaks allowed for developers of Special Economic Zones and units in such zones.

Tax breaks to be done away with; developers currently availing of such benefits allowed to enjoy benefits for the term promised (grandfathering). Companies are resident if their place of control and management is situated wholly or partly in India, at any time in the year. The Bill does not define partly

Non-resident Companies

Companies are residents if they are Indian companies or are controlled and managed wholly out of India.

Companies are resident if place of effective management is in India i.e. place where board make their decisions/ where officers or executives perform their functions.

Issue

Income Tax Act, 1961 In case of conflict between provisions of the Act, and those in a tax agreement with another country, provisions which are more beneficial to the taxpayer shall apply

Draft Direct Taxes Code (August 09) The provision which comes into force at a later date shall prevail. Thus provisions of the Code would override those of existing tax agreements.

Revisions Proposed (June 2010) Provisions which more beneficial shall apply, as is the case currently. However, tax agreements will not prevail if anti-avoidance rule is used, or in case of certain provisions which apply to foreign companies. CBDT to issue guidelines as to when GAAR can be invoked; GAAR to be invoked only in cases of tax avoidance beyond a specified limit; disputes can be taken to Dispute Resolution Panel. Wealth tax to be levied broadly on same lines as Wealth Tax Act, 1957. Specified unproductive assets to be subject to wealth tax; nonprofit organizations to be exempt. Tax rate and exemption limit not specified.

Double Taxation Avoidance Agreements

General AntiAvoidance Rule

No provision

Commissioner of Income Tax can declare any arrangement by a taxpayer as impermissible, if in his judgement, its main purpose was to have obtained a tax benefit. To be charged at 0.25% on net wealth above Rs 50 crore; scope of taxable wealth widened to cover financial assets.

Wealth Tax

Charged at 1% of net wealth above Rs 15 lakh

Source: Income Tax Act, 1961, Draft Direct Taxes Code Bill (August 2009), New Discussion Paper (June 2010), PRS

Direct Tax Code (DTC) will be effective from April 1, 2012 onwards and will bring several changes as regards how you invest across various asset classes. So you as an individual need to rejig your investments accordingly. The original draft of DTC was much different from what it is in current form. Having said that you still need to make you investments DTC Compliant. Heres some more in depth analysis: How insurance gets impacted: DTC will have significant impact on insurance. Under DTC, to be eligible for tax deduction, a policy should give life cover of at least 20 times the annual premium. If this condition is not met, you will not get any tax deduction on the premium and even the income from the policy will be taxable. Right now income received from insurance policies is free. So make sure if you are looking for tax deduction on insurance plan, make sure you buy a policy which offers a bigger cover. This is possible only if term plan is for duration of 20-25 years. Bigger the cover, better for the policy holder. Another not so good news is that tax deduction limit for life insurance will get reduced from present Rs 1 lakh a year to Rs 50,000 an year. This annual limit of 50,000 will include the amount paid for tuition fees of children as well as medical insurance for self and parents. So an insurance policy with a large premium, around 80,000 1 lakh will fetch maximum tax deduction of only Rs 50,000. The DTC will also nudge policyholders to take long term view on investments. Premature withdrawals from ULIPs will be taxed, so think twice before deciding on an insurance policy. Agent telling you that surrender charges have been waived off and you can withdraw money after 5 years without paying anything wont hold true anymore. How equities investment will be effected: Exemption on long term capital gains continuing is definitely positive news here. Investors can continue with their investments as planned without any need to rejig them due to DTC.

However ELSS Mutual Fund schemes tax exemption will go and they will be treated at par with other schemes in market with no tax exemption. Investors who are looking for Mutual Funds for tax exemption should consider this factor while investing. Definite impact on Pension Funds: Under the DTC, most of current tax saving investment will not be eligible for deduction. Instead focus has shifted to long term options with pension funds leading the way. An annuity is an investment that gives out a regular income to the investor. Pension plans require an investor to put at least 65% of corpus received on maturity in an annuity which then gives him monthly pension. Though more details are awaited but DTC ahs proposed to make annuity income exempt from taxation which makes them good tax saving instrument. The New Pension scheme is low cost pension fund which an investor can consider. DTC impact on Real Estate: The repayment of principal of your home loan will not be eligible for tax deduction under the DTC. But there is also a bright spot wherein there is removal of tax on notational rent. Right now people who own more than one house have to pay tax on notational rental income even if second house is lying vacant. The DTC will remove this anomaly and make investment in second home more tax efficient. Another landlord friendly move is that advanced tax received from a tenant will be taxed in year it relates, not when it was received. DTC, more importantly has retained tax benefit on the interest paid on home loan. The tax benefits reduce the effective cost of home loan thus making it affordable for borrowers. DTC impact on debt schemes: Most significant point here is that earlier proposal of taxing withdrawals from PPF is junked. Another significant change that will impact investments in debt funds is the new rule for calculating the indexation of capital gains. Indexation takes into account inflation during the holding period and allows investor to adjust his buying price. The DTC has changed this and the asset will have to be held for more than 1 year from the

end of financial year in which it was bought to avail indexation benefits. This is a significant change and will impact the way investors in FMPs and debt funds use this benefit In nutshell, lets review the changes proposed on different investment instruments:
Investment Instrument Whats Changed Your strategy

Public Provident Fund (PPF)

Nothing at all. Earlier plans to tax withdrawals withdrawn

Continue your investment in this tax- free financial instrument as part of your debt portfolio.

Pension Plans

Annuity income to be exempt from tax

National Pension Scheme (NPS) will get a look in. Invest in this low-cost product and secure your life after retirement. Choose your fund manager carefully after proper research.

Real Estate

Deduction for interest to continue but not for principal. No more tax on notational rent

You need to save more to shelve out EMIs

Fixed Deposits , Bonds

Nothing .Interest to be taxed at normal rates.

Keep investing as part of debt portfolio.

Equities and Equity Oriented Funds

No change for long term gains. Short term gains to be taxed at lower rate.

Continue investing as per your asset allocation. Use SIP for compounding. Exemption on ELSS will go.

Life Insurance

Deduction lowered to 50,000 per year. Life cover of 20 times the annual premium must for tax deduction, exemption.

Buy term plans for life insurance.

Debt Funds and Other Non Equity Schemes

Long term gains to be taxed as income

Go for arbitrage funds that are treated as equity funds. Buy before financial year ends to gain from indexation.