New Direct Tax Code & Personal Income Tax

Personal income tax in India is one of the highest in the world. The new Direct Tax Code (DTC) aims at reducing the tax burden of salaried people as also to widen the tax base and make tax evasion difficult. The new Tax Code aims to replace the existing Income Tax Act of 1961.

According to Mr. Pranab Mukherjee, Hon. Finance Minister of India, the aim is to eliminate distortions in the tax structure, introduce moderate levels of taxation, expand the tax base, improve tax compliance, simplify the language and lower tax litigation.

Impact of new DTC on salaried individuals

Income slabs – The first version of DTC which was released in August 2009 had generated lots of hope for a streamlined, simple tax structure with significant widening of income slabs. But all hopes of any worthwhile changes faded with the revised DTC bill that was tabled in the parliament on Aug. 30, 2010.

The major feature affecting personal income tax is the widening of the income slabs. The original version of DTC had retained the basic exemption limit of Rs. 1.6 lakhs,, but widened the slabs significantly, bringing cheers for many. The tax rate was proposed to be 10% for income between Rs. 1.6 lakh & Rs. 10 lakh, 20% for income between Rs.10 lakh & Rs.25 lakh, and 30% for income above Rs. 25 lakh. This would have meant that an individual with Rs. 10 lakh taxable income would be paying Rs. 51,000 as tax instead of Rs.1.68 lakhs (at the current rate of 30%), thus reducing the tax burden considerably. Besides, exemption limit for women was Rs.1.90 lakhs and for senior citizens Rs.2.40 lakh.

The revised version is in no way matching the expectations of the tax payer. There are only minor changes from the current tax code. Only the basic exemption limit has been raised to Rs. 2 lakhs from the current Rs. 1.6 lakh. It is the same for women. Senior citizens get a higher exemption limit of Rs. 2.5 lakh. The present and new tax slabs are as follows-

Present Tax Rates

Proposed Tax Rates (2011-12)

The middle income groups will get some relief. The situation remains same for people who earn Rs. 1.6 lakh or less and those with income above Rs.10 lakh. There will be some savings for those with income above Rs. 1.6 lakh and below Rs. 10 lakh. Those with income between Rs. 8 lakh & Rs. 10 lakh will now pay at the rate of 20%, instead of 30 %. The savings are not anything significant.

Tax saving on investments – Tax saving based investment limit remains Rs. 1 lakh. Another Rs.50,000 has been added just for pure Life Insurance ( sum insured should be at least 20 times the premium paid), health insurance, mediclaim policies and tuition fees of children, taking up the total to Rs. 1.5 lakh.

This Rs. 1 lakh investment can only be done in Provident fund, superannuation fund, gratuity fund and new pension fund. Unit linked investment plans (ULIP), Equity mutual funds, term deposits, National Saving certificate, long term infrastructure bonds, house loan principal repayment have been removed from the exempted income category.

Exemptions remain same as Rs. 1.5 lakh per year for interest on housing loan for self occupied property. Surcharge & education cess is abolished.

Medical reimbursement – Maximum limit for medical reimbursement has been increased to Rs. 50,000 per year from the current Rs. 15,000.

Gross salary - As per the DTC bill 2010, the gross salary includes all of the following:

• Any sum received from the employer under employment.
• Any allowance provided for journey between residence and office & other work places, accommodation/rent, other personal expenses.
• Contribution of employer towards approved pension fund, superannuation fund, provident fund.
• Benefits like LTA, car, employee stock option will be taxable under DTC

The new DTC does not differ much from the old Income Tax Act, 1961.

The income slabs have been widened, but allowances have become taxable by making them part of the gross salary. Had the original version of DTC been implemented it would have been beneficial to ask for high basic salary. It would have reduced the tax burden of a considerable percentage of population in the middle bracket, resulting in less tax evasion and better compliance.