Cracking The ‘DT' Code

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Lately, much noise has been made about draft direct tax code (DTC). Let us check what it means in terms of tax burden and capital gains for the tax payers, especially the salaried class and senior citizens. The revised paper has reintroduced a number of benefits to the middle class that were denied earlier. “The DTC now seems to be quite a comprehensive simple legislation for direct taxes and clearly indicates the end of the complex exemption/deduction regime. The rationalisation of tax slabs is highly appreciable,” lauds Abhay Vasant Arolkar, taxation expert. This means, the new code, when it takes the form of an Income Tax Act, would be easier, beneficial and simple to understand for the common man.

EET Gone, EEE Is Here To Stay
Now it is important to understand the EET and EEE in the light of revised DTC Code. Basically, EET stands for exempt, exempt and taxable. This is a method by which the taxability of any income is decided. In the original DTC, draft savings in approved schemes were proposed to be taxed under the EET method, i.e. a) contributions being exempt from tax, b) all accumulation accretions also exempt from tax, c) withdrawal from savings at any time to be taxed. It means that any contribution towards a saving scheme (PPF, for example) is, though exempt during such time when deposits and accretions are made to that scheme, taxable when any withdrawal is made from that scheme.

This has brought a stiff opposition, which has resulted in the government proposing to continue with the EEE method of taxation for contribution towards any GPF, PPF, EPF and recognised PFs as well as to annuity schemes, approved pure life insurance products and pension schemes administered by the Pension Fund Regulatory and Development Authority (PFRDA). “The idea is not to tax the savings that are long-term in nature and it is a step in the right direction since the government understands that in the absence of social security, facilities like retirements benefits shouldn’t be withdrawn,” comments tax consultant Anil Mitra.

Another change that is being brought in is related to ‘permitted saving intermediaries’. Through this, though a deduction of Rs 3 lakh would be available to the tax-payer, he or she can get it by simply investing into approved schemes, mostly long-term. But there is a catch. “The increased deduction of Rs 3 lakh is applicable to all the deductions put together, including the deduction for interest on housing loans. It simplifies the tax code. There is no point in having different deductions for different schemes and having different limits for different sections,” points out tax consultant A N Shanbhag.[PAGE BREAK]

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This is not to forget that presently a deduction of Rs 1 lakh deduction is available under Section 80C and the original DTC draft has proposed to raise it to Rs 3 lakh. But the deduction would only be available if the contribution is done to any account maintained with any permitted savings intermediary.

“The best news is that the NPS, which is EET under ITA, is slated to become EEE. The bad news is that only pure life insurance products (mostly term insurance) where the premium paid is less than 5 per cent of the sum assured will be rewarded with EEE. All the others such as ULIPs, equity-based MF schemes, bank FDs, senior citizens’ savings scheme, POTD, etc. will suffer under the EET regime,” Shanbhag adds.

Respite For The Salaried
In the original draft of the DTC it was proposed that the term salary would include the value of perquisites, profits in lieu of salary, amount received on voluntary retirement or termination, leave salary, gratuity and any annuity, pension or any commutation thereof. Also contributions made by the employer to an approved superannuation fund, provident fund, life insurer and the New Pension System Trust would  be considered as salary.

This provision was quite hurting as it removed all the cushioning available to the salaried class and made everything taxable. Also, it was mooted in the DTC that the retirement benefits would be exempt only if deposited in a retirement benefits account and would be subject to tax on withdrawal from any such account. Redressing the apprehensions of the salaried class, the government has now proposed that the employer’s contribution to an approved provident fund, superannuation fund and the New Pension Scheme Trust within the limits prescribed shall not be considered as salary in the hands of the employee. As of now there is no need to open a retirement benefit account. “From the revised paper it is also very much clear that any withdrawal from an approved superannuation fund, provident fund, life insurance and the New Pension Fund Trust shall continue to be exempt if within the specified limit,” confirms chartered accountant Shivkant Vaish.

Another benefit has been derived in the form of perquisites in relation to medical facilities and/or reimbursements provided by the employer. In the revised paper it has been proposed that the value of such perquisites would be as per the existing law and that too with an appropriate enhancement of the monetary limit. [PAGE BREAK]

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Bear in mind that in the original draft, medical reimbursement was included in salary and no exemption was available. In the same way, there is a clarification in the case of rent-free accommodation. “In the original draft the perquisite value of rent free accommodation was proposed to be computed on a market value basis whereas in the second draft this proposal has been done away with,” Vaish informs.

Breather On Home Loans
The home loan takers had perhaps suffered the biggest shock when the original DTC draft was tabled in August 2009. It was then proposed that the deduction of Rs 1.50 lakh available on account of the interest on the loan taken for a house would be removed. Now the government has given a breather in the revised draft. “This benefit is surely needed by certain sections of the society, especially the lower and middle classes,” remarks Arolkar. In the revised draft it has been proposed that deduction up to the limit of Rs 1.50 lakh would be allowed in respect of any one house property that has not been let out during the year.

Another change the revised draft has proposed in relation to gross rent is that the concept of presumptive rent would no longer be taken into account to calculate the gross rent and it will only include the amount of rent received or receivable. Notably in the earlier draft there was a proposal to calculate the gross rent while taking into account a presumptive rent that was 6 per cent of the ratable value fixed by the local authority or in the absence of ratable value the cost of construction of acquisition was to be used.

The Real Bombshell
Still, there is a twist in the tale to this ‘feel good’ factor. The new DTC draft proposes that the capital gain from the transfer of capital assets will be taxed as normal income at the marginal rate applicable. Also, if the asset is listed equity shares or units of an equity-oriented fund that has been held for more than one year, the capital gain arising on the sale of such an asset will be taxed as normal income of the assessee. [PAGE BREAK]

That clearly means that the distinction between short-term capital gain (STCG) and long-term capital gain has been removed. Currently, while STCG is taxable at a rate of 15 per cent, LTCG arising from financial assets is exempt.  Similarly, for capital assets other than listed equity shares or units of an equity-oriented fund, the base year for deter-mining the cost of acquisition is also proposed to be changed from April 1, 1981 to April 1, 2000.

The result of this would be that all the unrealised capital gains on the appreciation of such assets between April 1981 and March 2000 wouldn’t be liable to tax and the price prevailing on April 1, 2000 can be taken as the cost of acquisition. The capital gain is to be calculated after taking into account the indexation from the raised base year. This capital gain will also be included in the normal income of the person and will be taxed at the Though this provision seems to be too harsh, some experts think otherwise. “Presently there is a kind of double benefit available in the matter of LTCG. First, indexation is available which reduces the taxable capital gain to a great extent and second, whatever capital gain is being arrived at is exempt from tax. This is not at all justifiable and so making LTCG taxable is quite appropriate,” Arolkar asserts. Also, the securities transaction tax (STT), which was proposed to be abolished earlier, has made a cracking comeback in the revised draft. However, its rate is yet to be finalised and it is proposed to be calibrated based on the revised taxation regime for capital gains and the flow of funds to the capital market.