The Government introduced the Direct Tax Code Bill today. After some serious amount of searching, I found the bill online, after struggling with pages timing out, debugging communication messages and guessing IP addresses. (Read: It was darn easy in the end, but I had spent so much time I needed to make it look like it was a bloody difficult job).
What matters is not that I found it. What matters is what is in it.
First, this bill of the DTC applies from 1 April 2012, so heave a sigh of relief.
For salaried income: Deductions are Employment Tax, Travel allowance (currently Rs. 800 a month), actual reimbursements, employer’s contribution to pension [upto 10% of salary], retirement or provident fund [upto 12%].
Housing rent allowance is fully exempt, without the complex formula – now it is limited to the rent actually paid. Nice.
Property income: Only rent actually received is taxable. You get to deduct local taxed and 20% of the gross rent, plus all interest paid on a loan for that property. If you take on a loan before the property is ready, you get to amortize the interest paid before possession over the subsequent five years, equally.
Securities Transaction Tax stays. We will now pause for a minute to pray for the arbitrageurs that died after that sentence.
Capital Gains: First calculate the gain as selling price minus cost price minus all intermediate costs. For shares and equity mutual funds on which STT is paid and held over a year, ZERO. Rejoice.
Shares and MFs with less than one year of holding – 50% of the gain (or loss) is “ditched” and the rest added to income.
For debt MFs or shares transferred off-market or Gold ETFs or things like that: To qualify for LTCG (Long Term Capital Gains) you have to hold the asset for “one year from the end of the financial year in which the asset is acquired”. If you buy on April 1, 2012, you have to hold it till after March 31, 2013 – that’s two years at the extreme. Then, you get to index the costs to inflation. If you’ve bought the asset before 2000, then you must assume indexation from 2000, but you get the option – and I mean it’s your choice to do this if it works in your favour – of using the price on April 1, 2000. This is incredible, for me, because my family owns shares held for over 20 years.
Any other short term capital gains are simply added to income.
There will be a Capital Gains Deposit Scheme where you can dump the proceeds (not just the gains, the entire proceeds) of capital asset sales (long or short term) and not pay tax. You can buy a house or agricultural land to offset cap gains taxes, within a year after the sale or use the Cap Gains Deposit Scheme, to park money upto three years to invest in such a tax-offsetting asset. You get to do this for max two residential properties for a person.
Deductions: Everyone gets a Rs. 100,000 deduction for money put into “approved funds”. What we don’t know – are ELSS mutual funds “approved”? Are "ULIPs” approved? Most likely no to both. They do mention that approved funds are –
- PF, retirement or gratuity funds
- Pension funds
- Any thing else specifically approved
An additional Rs. 50,000 is deductible under 3 heads – 50K is the limit for all of them added up.
- Pure life Insurance – defined as any policy where the premium is less than 5% of the sum assured for ALL years of the policy,
- Health insurance
- Two children’s tuition fees (including pre-school fees). But no donations or “development fees”.
Housing: This gets interesting. First, no principal deduction. Second, interest is only deductible if the house is completed within three years of the loan commencement. (And the pre-completion interest is amortized forward over five equal yearly installments. You don’t get the deduction during the pre-completion phase) The interest deduction limit is Rs. 150,000.
Higher Education loan interest is deductible for seven years, but it’s gotta be from a bank or FI (not relatives) and for a course the govt. recognizes. (Sorry, IIPM. Perhaps even ISB will not qualify!)
Medical expenses get a 40K deduction if you actually spend the money on medical treatment. 60K for treatment of senior citizens. Oh, and if you get insurance, that much is not counted.
Tax slabs: Upto 200,000 a year, no tax.
Rs. 200,000 to 500,000: 10%
Rs. 500,000 to 10 lakhs: 20%
> 10 lakhs: 30%.
It’s progressive, and slabbed. For senior citizens (65+), the first slab is 250,000. For companies, the rate is 30%, and Minimum Alternate Tax is 20% (but you can claim it back within 15 years)
Dividends and Insurance income distribution from “Equity Oriented Insurance Schemes” (ULIPs) get taxed – at 5%. The 15% dividend distribution tax stays. That means to go through equity mutual funds you actually pay a lot – first companies pay 15% tax on dividends, then the mutual funds get a tax hit of another 5%.
Wealth tax: 1% of whatever’s above 1 crore rupees, every year. But not including the house you live in. This is just horrible, but amounts to just 1% more income tax, if you look at it. But if someone has money in illiquid assets like multiple houses, or equity, they’ll find the going tough. Think of the promoters of Indian companies!
With about 35 lakh crores under private sector ownership, that alone will give the government more than 30,000 cr. of wealth tax revenue.
But the section actually doesn’t count assets like shares and bonds! This needs lawyer input but it seems like for wealth, they consider land, farm houses, cars/yacht/aircraft, jewellery and bullion, antiques and paintings, expensive watches, cash, and shares held in foreign companies. Nothing about Indian company shares, or bonds, or mutual funds.
EEE or EET: NPS goes Exempt on withdrawal – commutation of pension (lumpsums) upto 1/3rd or 50% of the amount in different cases.
Life insurance paid on death is exempt. This is still a great way to transfer assets without a will.
All exemptions for donations to non-profits, political parties etc. stay.
Nothing much changes, really, other than a few exemptions gone, and wider tax slabs. Retaining LTCG at zero for equity markets is good, of course, but it won’t last that long. Wealth tax can be a huge issue or a non-issue, if there is clarity on whether it applies on share/bond holding.
To me this is no big deal – just business as usual. But the equity markets have reason to rejoice.
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