Finance ministry has released the second draft of proposed Direct Tax Code (DTC) today, which upon approval will be effective from financial year 2011-12. You can read my initial article on the first draft of DTC if you aren’t aware of this proposal. Let us look at some of the highlights of this draft.
- It proposes the “Exempt-Exempt-Taxation” (EET) method of taxation for savings.
- Based on the EET principle, the Code provides for deduction in respect of aggregate contributions upto a limit of three hundred thousand rupees (both by the employee and the employer) to any account maintained with any permitted savings intermediary, during the financial year.
- The DTC provides that the withdrawal of any amount of accumulated balance as on the 31st day of March, 2011 in the account of the individual in a Provident Fund (PF), Public Provident Fund (PPF), Recognized Provident Funds (RPFs) and the Employees Provident Fund (EPF) will not be subject to tax. There after the new contributions will be subjected to tax as per EET method.
- Tax payers require some flexibility in making withdrawals in lump sum without being subjected to tax. People may need lump sum funds on retirement for various family obligations. Requests have therefore been made for continuation of Exempt Exempt Exempt (EEE) method of tax treatment of investments.
- Investments made, before the date of commencement of the DTC, in instruments which enjoy EEE method of taxation under the current law, would continue to be eligible for EEE method of tax treatment for the full tenure of the instrument.
- An employer‟s contribution to an approved provident fund, superannuation fund and New Pension Scheme within the limits prescribed shall not be considered as salary in the hands of the employee. Also, retirement benefits received by an employee will be exempt subject to specified monetary limits.
- Home Loans : The following deductions will be admissible against the gross rent:-
- Amount of taxes levied by a local authority and tax on services, if actually paid.
- Twenty per cent of the gross rent towards repairs and maintenance as against thirty per cent at present.
- Amount of any interest payable on capital borrowed for the purposes of acquiring, constructing, repairing, renewing or re-constructing the property. (ceiling of Rs. 1.5 lakh)
- No distinction of short-term investment asset and long-term investment asset.
- The capital gains from all investment assets will be aggregated to arrive at the total amount of current income from capital gains.
- The DTC proposes to abolish Securities Transaction Tax.
- The net wealth of an individual or HUF in excess of Rupees fifty crore shall be chargeable to wealth-tax at the rate of 0.25 per cent.
For more information on the revised Discussion Paper on the proposed DTC is available on this link as well as on these two websites – finmin.nic.in and incometaxindia.gov.in Responses to the Revised Discussion Paper should be sent online through the link provided at those mentioned websites or by sending an e-mail to email@example.com All the responses are solicited upto 30th June, 2010.
if this happens,i would have to pay abt 20 lakhs as tax per annum as i lose NRI status as a seafarer.Thousands of seafarers would be put in the same situation in India working for foreign companies thereby earning foreign exchange.Consequently foreign exchange earning is not encouraged.I may leave the country or find some other job that does not earn the country that much tax that it does not actually deserve.
DR. rk kalgaonkar says
I am asenior citizen. I tried to know the tax table, but it is not available. my interest is to know how long a senior citizen has to pay the tax in India, whoes pension income is within 4 lacks.
Dr., it will be tabled in parliament tomorrow. Upon discussion, there may be few modifications as well. Watch out this place for more info once it is finalized and made public.
pl. let me know the status of senior citizen. what a senior citizen has got in new taxcode. his exmp. limit is enhanced or it is the same.
What is the latest status of the draft?
Is there a revised version and are there any more modifications?
Dear Nagendra, this draft will be tabled in parliament tomorrow.
3.1 Therefore, as of now, it is proposed to provide the EEE method of taxation for Government Provident Fund (GPF), Public Provident Fund (PPF) and Recognised Provident Funds (RPFs) and the pension scheme administered by Pension Fund Regulatory and Development Authority. Approved pure life insurance products and annuity schemes will also be subject to EEE method of tax treatment. In order to achieve the objective of long term savings, the rules for contribution as well as withdrawal will be harmonised and made uniform so that such savings are actually made and utilised by the taxpayer for the long term. Investments made, before the date of commencement of the DTC, in instruments which enjoy EEE method of taxation under the current law, would continue to be eligible for EEE method of tax treatment for the full duration of the financial instrument.
Agree with you Kalyan, but read about section 1.2 as well!
I would like to think Section 1 is a summary of the DTC 1 and section 3 talks about the revision made.
Here again (3.1) clarity is reqd:
They propose to make PF, PPF ect. EEE. Then they write for current EEE instruments investments after mar 31st 2011 will be subject to EET.
Are they talking about all present EEE instruments or about instruments like ULIPS, ELSS etc. (other than PF, PPF, NPS, etc. mentioned in the first line). Todays Hindu seem to agree with yout view thar DTC-2 is comitted to EET. Wish they make things more clear.
I am glad the media folks have started to read through the document properly and then writing columns. Wish others follow the same too instead of just doing a copy-paste from one source…
Mohan, just wanted to pint that point3 which you have written was in earlier draft and not in the revised draft. New draft proposes EEE system for all retirement benefits like PF, Pension etc
Shalini, I still see it in the second draft. Please refer to chapter II and section 1.2 on page 6. I have provided the link to official second draft towards the end of the article.
Mohan, the pension related investment and various forms of PF would fall under purview of EEE. Please check the link:
And STT would be gradually(calibrated) reduced.
I see a conflict in the statements in 2nd draft. You can read the sections 1.2 and 3.1 in the original draft (Link provided in the article). I think we need more clarity on this.
After considering public opinion the draft has been modified to make long-term investments more fruitful.
Right! No distinction between short and long term capital investments now!
These details are for first draft. 2nd version has proposed to keep PPF, pension plans and pure life insurance plans keep under EEE while STT will not be abolished and every one has to pay long term capital gain tax.
Did I get that wrong? well, that is what the second draft says as put up on the finance ministry website, for which I have provided a link too towards the end of the article. Am I missing something here?
Thanks for the wonderful posts.I know I dont comment always but I am a huge fan of your writings on financial policies and investments and like.I am a layman(or woman) but I have this mantra “when in doubt see what Mohan has written.” Thank you so much for keeping fools like me enlightened and even if I am too lazy to say it always,thank you thank you for the wonderful blogs!
Thanks for your encouragement and continued support all long Olivia! Appreciate it 🙂
I missed the first draft but then read it now with the second one! And look forward to more and more analysis. Though DTC is looking promising.. I do not want to be disappointed when go deep into details.
One thing which I was not clear about was the Home Loans part of it. The interest paid towards home loans now seem to be included for the exemption but with frills attached! Do you have more info on that?
Yes, the max that can be exempted from salary has a ceiling of 3L which includes home loan interest component which is capped at 1.5L.