Under the direct taxes code (DTC) regime, what happens if a salaried employee withdraws money from his/her approved Provident Fund (PF)/Superannuation fund (SF) /Gratuity and other retrial benefit schemes? How will the DTC affect pension plans?
In the initial draft of DTC, the government has proposed to move to the exempt-exempt-tax (EET) basis of taxation for long-term saving schemes. That is, exemption granted at the time of contribution (making an investment) and accrual on such investments. But at the time of withdrawal, such accumulations were proposed to be taxed. Under the revised discussion paper on DTC (RDP), released recently by the Government, it has been proposed to restore the exempt-exempt-exempt (EEE) basis of taxation for Provident Funds (Government, Recognised or Public), approved pension schemes, pure life insurance products and annuity schemes. Accordingly, the withdrawal from approved PF/SF may continue to be not taxable at the time of withdrawal.
Further, the retirement benefits have also been proposed to be exempted from tax subject to limits. Benefits such as gratuity, leave encashment, commutation of pension (linked to gratuity), would be exempt subject to the limits to be prescribed.
Currently an employer's contribution to provident fund/ approved superannuation fund (up to Rs 100,000) is exempt. Would these exemptions continue in DTC regime?
The RDP has proposed to exclude the employer’s contribution to PF and approved SF from the definition of the salary up to a certain limit. Accordingly, such contributions may not be taxable subject to the limits to be prescribed.
Would I be able to get the benefits of house rent allowance (HRA), medical reimbursement, leave travel assistance, etc. under the DTC regime?
The deduction of HRA and leave travel assistance would not be available. However the medical expenses reimbursement (which is presently not taxable upto Rs 15,000) is proposed to be reinstated with higher monetary limits.
What happens to the policyholders who have invested in unit-linked insurance plans (Ulip)? Whether the proceeds receivable on maturity is taxable under the proposed DTC regime?
The RDP has proposed to restore the EEE basis of taxation for saving schemes. As mentioned in answer to question no 1, such benefits have been extended to pure insurance products or annuity on schemes also. While the debate whether Ulip is an investment product or insurance product is still on, but there does not seem to be clarity in the RDP whether Ulip will enjoy the benefit of EEE basis of taxation or not. A clarity on this aspect in the final print of DTC would be useful keeping in view the fact that Ulip is a popular product. It has been proposed in the RDP that investments made in instruments before the commencement of the DTC, which currently enjoy the benefit of EEE basis of taxation would continue to get the same until their full term. Accordingly, investments made in Ulip schemes before April 01, 2011( when DTC is expected to be implemented), the benefit of EEE basis of taxation should be made available to that extent.
What is the tax implication of interest on housing loan paid/payable during the financial year 2011-12 (assuming that the DTC will come in force)?
The RDP has restored the deduction of Rs. 1.5 lakh on account of interest paid/ payable in relation to one not let out house property. Accordingly, the tax payer would be able to claim the above deduction.
Is there any exemption for senior citizens available under the DTC? Whether tax benefit available on reverse mortgage transactions would continue under the DTC regime?
Under the existing tax laws, a senior citizen pays tax only whom his/her taxable income exceeds Rs 240,000. The said limit has not been enhanced either in the DTC or the RDP. Further, the existing provisions of the Income Tax Act, 1961, exempts the reverse mortgage transaction from the definition of transfer and hence these transactions do not attract any tax. However, similar provisions are not there in the DTC and even the RDP has not indicated extension of any such benefit. One may hope that there would be some addressal on the reverse mortgage transactions when DTC is rolled out as these schemes are a mechanism to avoid financial hardship at old age.
source:business-standad. Written by Kuldip Nayyar.
The government plans to implement the Direct Taxes Code (DTC) from 2011-12 after addressing all concerns relating to controversial proposals like taxation of retirement benefits, weeding out incentives for housing sector and changes in the Minimum Alternate Tax (MAT).
The proposals in the Code are only “illustrative” and are open for discussion and there is no need to think that these”have been decided,” Finance Minister Mr. Pranab Mukherjee said.
Tax code proposes 10% tax on Rs 10 lakh income.
The government introduced a new direct tax code that seeks to simplify the tax regime in India. This was a much-awaited proposal as the government currently computes taxes based on the Income Tax Act 1961.
The main proposals of the new code are as follows:
1 Slash income tax rates
2 Most exemptions to go
3 Interest on savings to be taxed
4 Up to Rs 1.6 lakh: No tax
5 10 per cent tax for Rs 10 lakh income (Rs 1.2 lakh in hand)
6 20 per cent tax for Rs 25 lakh income (Rs 2.60 lakh more in hand)
7 30 per cent tax for income over Rs 25 lakh
8 To raise deduction limits for savings upto Rs 3,00,000
9 Corporate Tax: Down from 30 per cent to 25 per cent
10 Wealth tax to be levied for wealth above Rs 50 crore
Releasing the code that proposes to consolidate and amend the law relating to all direct taxes, Mr. Mukherjee expressed the hope that it would eventually pave the way for a single unified taxpayer reporting system and meet the aspirations of the young and professionally mobile population.
Income between Rs 10 lakh and Rs 25 lakh would be taxed at the rate of 20 per cent and earnings thereafter would attract a rate of 30 per cent, as per the draft of the new Direct Taxes Code which is aimed at radical direct tax reforms. At present, 20 per cent rate is imposed on income between Rs 3 lakh and Rs 5 lakh. Income beyond Rs 5 lakh attracts 30 per cent tax.
The new code was aimed at eliminating the scope of litigation as far as possible, Mukherjee said, adding that the government would have informed discussions with stakeholders on the tax code.
