Direct Tax Code and its impact

on individuals

SUBMITTED BY:

HEMANT BARANDA
(STUDENT OF FORESIGHT SCHOOL)
 Backdrop & Objectives of the Code

Backdrop
Current law – Income-tax Act, 1961
Almost five decades old
Over 5000 amendments – seriously mutilated!
New Code in the making for four years

Stated objectives
Simplicity
Minimizing litigation
Broad basing the tax base
Eliminating 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    

       

0 upto 160000 0 upto 160000

14000 10% (160000-300000) 44000 (160000-1000000) 10%

40000 20%(300000-500000) 0 (1000000-2500000) 20%

30000 30%( 500000-600000) 0 (2500000 or more) 30%

       

84000 Total tax 44000 Total tax

       

  Saving of Rs. 40000 47.60%  

 Comparison between current tax rates & Direct
tax code slabs

  Income of Rs.2900000    

       

0 upto 160000 0 upto 160000

14000 10% (160000-300000) 34000 10% (160000-1000000)

40000 20%(300000-500000) 300000 20%(1000000-2500000)

720000 30% (500000-2900000) 120000 30% (25,00,000 or more)

774000 Total tax 454000 Total 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 – Tax
Whenever 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 – exempt

Whenever 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%.
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