SUBMITTED BY:

HEMANT BARANDA(STUDENT OF FORESIGHT SCHOOL)

Direct Tax Code and its impact on individuals

Backdrop & Objectives of the Code

BackdropCurrent law – Income-tax Act, 1961Almost five decades oldOver 5000 amendments – seriously mutilated!New Code in the making for four years Stated objectivesSimplicityMinimizing litigationBroad basing the tax baseEliminating exemptions

Objectives of the Study

- To understand the Direct Tax Code 2010.- To understand the current income tax provisions and compare them with Direct tax code provisions.- To find out the impact of Direct Tax Code on individuals tax calculation under various situations.

Research Methodology

- First we learnt the current income tax provisions and income tax rules.

- We understood the current income tax provisions and compare them with Direct tax code provisions.

- We found out the impact of Direct Tax Code on individuals tax calculation under various situations.

Comparison between current tax rates & Direct tax code slabs

  Income of Rs. 600000    

       

0upto 160000 0upto 160000

1400010% (160000-300000) 44000(160000-1000000) 10%

4000020%(300000-500000) 0(1000000-2500000) 20%

3000030%( 500000-600000) 0(2500000 or more) 30%

       

84000Total tax 44000Total tax

       

  Saving of Rs. 40000 47.60%  

Comparison between current tax rates & Direct tax code slabs

  Income of Rs.2900000    

       

0upto 160000 0upto 160000

1400010% (160000-300000) 3400010% (160000-1000000)

4000020%(300000-500000) 30000020%(1000000-2500000)

72000030% (500000-2900000) 12000030% (25,00,000 or more)

774000Total tax 454000Total tax

       

  Saving of Rs.220000 28.42%

   

Capital Gains Comparison

No distinction in short term and long term capital gain.

Indexation advantage available on asset held for more than one year.

Single tax rate for short term and long term capital asset.

Very disadvantageous for capital gains in case of equity shares which is zero at present.

Case Study of capital Gain

There will be no distinction in Short term and long term Capital Gains.

Mr. X sold 200 shares of Reliance @ 1100. 100 shares were purchased 5 years back by him at indexed cost of 500 and 100 shares were purchased 9 months back at the cost of 900. Calculate Capital Gains tax.

Calculations of Capital Gains

Current Tax Rates Long term zero. No tax on shares which are

listed and held for 1 year. Short term 100 Shares *( 1100{Selling price}-

900{Cost}) 20000 Rs.Capital Gain Tax is 10% of 20000 or Rs. 2000/- Direct Tax Code Tax is 200 shares(1100{selling price} - 900

{cost}) 40,000 Rs. Capital Gain Tax is 20% of 40,000 or Rs. 8000/-

Income from House Property

Two major changes have taken place in income from house property.

Amount of repairs allowed as deduction has been reduced from 33.33% of rent to 20% of rent.

Amount of deduction available on interest paid on own house, not let out is totally eliminated.

Case study on income from house property

Mr. A is the owner of 2 houses. House 1 is used by the owner as his residence. House 2 is let out by him and he is earning annual rent of Rs.90,000. The house which is used by him as own residence is purchased by taking a loan the interest of which is 45000.

Calculations

Current Tax Calculations Income from Own house Rent 0 (as it is not

let out) Interest paid -45000 Total -45000 Income from house let out Rent 90,000

Repairs 30,000 (1/3 of rent) Total 60,000 Total income from house property is 15,000.

Calculation

Direct Tax Code Calculation Rent - 0 Interest allowed - 0 Total - 0 Income from house let out Rent 90,000

Repairs 18,000 (1/5 of rent) Total - 72,000 Total income from house property is Rs.

72,000.

Income from Salary

Rent free accommodation calculation for government employees will be same as the non government employees.

Also a major development has been the EET proposal from EEE

EET stands for Exempt – Exempt – TaxWhenever money is invested it leads to

exemption if invested as per the act, the income earned on it is exempt and the proceeds received at the end will now be taxable.

Income from Salary & Case study

EEE stood for Exempt – exempt – exemptWhenever money is invested it leads to

exemption if invested as per the act, the income earned on it is exempt and the proceeds received at the end were also totally exempt from tax.

Mr. A has invested money in retirement benefit plan amounting to Rs.100,000 every year. He has been investing money since last 15 years. He gets Rs. 8500 as interest every year on the money invested which gets accumulated. On retirement he will get a total amount of Rs. 30,00,000.

Calculation under Salary

Current tax regime: EEE is the current system. So whenever he invests money he gets exemption of Rs.

100,000 every year. The interest earned by him every year is exempt from Tax. On retirement Rs. 30,00,000 received by him will be exempt

from tax. Direct Tax Code: EET is the proposed system. - So whenvere he invests money he gets exemption of Rs.

100,000 every year. - The interest earned by him every year is exempt from Tax. - On retirement Rs. 30,00,000 received by him will be taxable. - The taxable amount will be Rs. 15,00,000 (30,00,000-

15,00,000) There is no clarity on the plans which wont fall under EET scheme.

Case study on Rent free Accommodation

Mr. X is a government employee. He has been provided with the house by the

government. The rent paid by the government for that

house is Rs.1,20,000 per annum. The license fees paid for the house is Rs.

10,000. His total taxable salary including all the

allowances amounts to Rs. 15,00,000.

Calculation

Current Tax Regime Under the current tax regime the amount of

taxable Rent free accommodation will be the license fees that is Rs.10,000.

So taxable amount is Rs.10,000. Direct Tax Code Under the new tax code the taxable amount

will be: 10% of salary that is Rs. 1,50,000 or Rent paid by the government that is Rs. 1,20,000 whichever is less.

- So taxable amount is Rs. 1,20,000.

Other salient features of the Act

Capital Gains to be proposed at the normal rates as per the slab of the assessee.

Corporate tax will be reduced to 25%.

TDS of 10% on capital gains.

STT to be abolished.

Base year shifted from 1/4/1981 to 1/4/2000.

Other salient features of the Act

Capital Gains taxable at 30% for non residents.

Wealth Tax raised to 0.25% from 1%.

Wealth tax exemption enhanced from 30 lakhs to 50 crores.

80C benefit limit raised to Rs. 3,00,000.

Conclusion

The Direct Tax Code is in line with the objectives.

It is relatively simpler and better.

Removal of exemptions has been compensated by reduction in tax rates.

It is more advantageous for salaried and tax savings can be as high as 48%.

THANK YOU

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