The Direct Tax Code (DTC) is here and will take effect from April 1, 2012. The DTC brings with it a host of new changes to the tax code and it is time you get to know how it could impact your investments, savings and taxes. In this first part of the series we will see the basic changes to the tax slabs and changes to the deductions.
The DTC has increased the basic exemption limit to Rs. 2 lakh for men, women and Hindu Undivided Family (HUF) and to Rs. 2.5 lakh for senior citizens. However, the preferential tax treatment for women has been removed.
From April 1, 2012, the income tax slab rates will look like this:
10% tax on income up to Rs 5 lakh
20% tax from Rs. 5 to 10 lakh
30% tax on income over Rs. 10 lakh
Why it is good? This increase in exemption limit can act as a buffer in these days of escalating inflation. This increase in tax slabs will mean Rs. 24,000 more savings. Moreover, the removal of education cess will also come handy in saving taxes.
Where you can continue to claim deductions!
Tax saving Instruments
Under the present Income Tax Act, you can save taxes by investing up to Rs. 1.10 lakh in the various tax saving schemes and in children’s tuition fees and investment in infrastructure bond (up to Rs. 10, 000) and health insurance (up to Rs. 15, 000). On a total, you can invest up to Rs. 1.35 lakh and save taxes.
Under the new DTC bill, this investment limit is further raised to Rs. 1.5 lakh, which means that you can invest up to Rs. 50,000 in life insurance policies, health insurance and tuition fees for your children and up to Rs. 1 lakh in other tax saving instruments like EPF, PPF, the various pension plans besides the ELSS and ULIP.
Why it is good? If you are someone in the higher tax bracket of Rs. 10 lakh annual income, the new DTC will help you save you additional Rs. 4,500 towards taxes. The increase in investment limit to Rs. 1.5 lakh will effectively mean your savings under the new DTC will increase to Rs 45,000 from Rs 40,500 under the present IT Act.
Sale of shares and equity oriented mutual fund units
The new DTC Bill will continue to offer the NIL tax on gains when equity shares and equity oriented mutual fund units are sold after 12 months. And there will be a 50% deduction mechanism in place on gains from sale of shares made within 12 months.
Why it is good? The 50% deduction on gains from sale of shares held within 12 months will ensure there will be lower tax impact.
PF and Public PF
The Exempt-Exempt-Exempt (EEE) will be continued in popular schemes like Government PF, recognized PFs and Public PFs.
Why it is good? This will continue to lessen the tax burden on popular schemes.
The new DTC Bill will continue EEE on superannuation of funds and there will continue to be no tax liability on end-payments. Also, the Bill will exempt the employer’s contribution to superannuation funds that are approved.
Why it is good? The will end the present provision of part double taxation of employer’s contribution.
Where you cannot claim deductions!
Mutual Fund (ELSS)
Under the new DTC Bill from April 1, 2012 you cannot claim deduction for investments in mutual fund investments (ELSS) or when you repay the principal amount on your housing loan. Under the present IT Act, these payments were eligible for Rs 100,000 deduction limit.
Other taxes and deductions
The Securities Transaction Tax (STT) on sale or purchase (and redeeming equity oriented mutual funds) carried out on stock exchanges will be continued in its present form.