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Direct taxes Code - Highlights

 

Check out for: Direct Taxes Code - Bill 2009 [PDF] | Discussion paper [PDF]

The new Direct taxes code has been published by Finance ministry, which would replace current Income Tax structure from 2011-12.

This draft is put for public opinion and will be presented to parliament by Winter session. If passed, this will be applicable from Financial Year 2011-12. (Starting from 1st Day of April 2011). But transitional changes will be expected from 2010-11. This means the coming budget will bring in more measures to streamline the transition procedure.

A brief of the same is provided below:

In General:

  1. Earlier Income Tax Act and Wealth tax Act (Covering Income Tax, TDS, DDT, FBT and Wealth taxes) are abolished and single code of Tax, DTC in place.
  2. Concept of Assessment year and previous year is abolished. Only the “Financial Year” terminology exists.
  3. Only status of “Non Resident” and “Resident of India” exits. The other status of “resident but not ordinarily resident” goes away.
  4. Earlier the terminology of assessee was meant for the person who is paying tax and/or, who is liable for proceeding under the Act. Now it has been added with 2 more definitions namely a person, whom the amount is refundable, and/or, who voluntarily files tax return irrespective of tax liability.
    1. This helps any person to file his returns and maintain the record of tax return filing.
  5. No changes in the system of Advance Tax, Self Assessment Tax and also TDS. Amendment of TDS goes in line with earlier Notification 31/2009 which speaks of Form 17/UTN/etc.
    1. In TDS, a new return, if found required, will be introduced for Non TDS payments.
  6. Government assessee is covered in Direct Tax Code. Even though they are not liable for Income Tax / Wealth Tax, Government Assessees are required to Comply with provision of TDS and TCS. (Current act was not covered with Government Assessees)

New Tax rates: (For Ordinary source of income)

Slab

Income Between

Tax rate

1

0 - 1.60 Lakhs

0%

2

1.60 Lakhs to 10 Lakhs

10%

3

10 Lakhs to 25 Lakhs

20%

4

Above 25 Lakhs

30%

  1. For Female, second slab begins from 1.90 Lakhs and for Senior citizen it begins from 2.40 Lakhs
  2. Companies tax rate changed from 30% to 25%.

New due dates for Tax Returns:

Sl No

Type

Date

First filing (under DTC)

1

Non-Business / Non-Corporate

30th June

30/06/2012

2

Others

31st August

31/08/2012

 Tax incentives:

  1. Earlier terms Deductions under Chapter VI A will be treated as Tax incentives.
  2. 80C gets a major hit by introduction of EET methodology (Exempt - Exempt - Tax). The investment is Exempted when invested. The investment is Exempted till it is remained invested. The investment is Taxed when it is withdrawn.
    1. Also, investments are considered only of those invested through savings intermediaries approved by PFRDA (Pension Fund Regulatory and Development Authority)!!
      1. Such savings intermediaries may in turn invest in ELSS mutual funds, government securities, Public sector securities, etc.
      2. Such investments are also exempted to the maximum of Rs. 3 Lakhs.
    2. All such savings will be governed directly by government by an appointed depository (an independent agency).
    3. Other than this, Tuition fees for children will be allowed as deductions.
    4. No maximum limit for this, as savings are charged once they are withdrawn.
  3. Medical treatment, higher education loan interest, donation and rent paid by self-employed individual are deductible.
  4. New provision comes for Handicapped individuals to get deductions upto 75,000.

Major Deductions applicable under Tax Incentives for an individual:

  1. Investments through PFRDA approved agencies (Max of 3 Lakhs)
  2. Payment of tuition fees
  3. Medical treatment
  4. Health insurance
  5. Donations
  6. Interest on loan taken for higher education
  7. Maintenance of a disabled dependant
  8. Interest income on Govt bonds

*Some more for specific cases, like political contributions, royalty, etc

Deductions from Salaries:

  1. Allowed are only, PT, Transport Allowance (limit prescribed) and special allowances given exclusively to meet duties (to the extent actually incurred).
  2. Also deduction is allowed for PF as tax incentives.
  3. And last, deductions are allowed for Voluntary retirement, Gratuity on retirement and pension received.
  4. No deductions on HRA, Medical reimbursements, etc, etc.
  5. Employer part of PF paid will be exempt from tax as Tax Incentives under EET methodology (to employees).

 House Property:

  1. No deduction for Housing loan repayment of Self-Occupying property. This includes interest as well as part of principal.
  2. Only Let out properties are considered and the Gross rent and specified deductions are taken with simple calculations.

Residuary Sources (Other Sources)

  1. Earlier things follow almost.
  2. Any amount exceeding 20,000 taken / accepted / repaid as loan or deposit, otherwise by an account payee cheque/draft shall be added to the income.

 Computation of total Income

  1. Incomes are broadly divided into 2 sources, namely Special Sources and Ordinary Sources.
  2. Special sources are given no deduction and what is earned is taxed directly (generally at a lower rate).
  3. Ordinary sources are divided into further categories, namely:
    1. Income from employment.
    2. Income from House Property
    3. Income from Business
    4. Capital gains
    5. Income from Residuary Sources (Similar to other sources, with some minuses)

Ordinary Sources:

  1. The 5 categories of Ordinary sources can have multiple sources under each head (Eg: Multiple employer, Multiple Business, Multiple Properties, etc).
  2. The income will be computed in 2 step procedure for each head:
    1. Calculate for each source under each head of Income.
    2. Aggregate the total under each head and arrive a total profit or loss under such head.
  3. Then aggregate all the 5 heads and arrive the figure of “Current Income from Ordinary Sources”.
  4. Then this value has to be aggregated with “unabsorbed losses as of immediate preceding financial year”. Such aggregated income will be treated as “Gross Total income from Ordinary Sources” .
    1. If such result is negative, then Gross Total Income will be NIL and value will be treated as “Unabsorbed current loss from ordinary sources”.
  5. Such Gross Total Income will be further reduced by incentives similar to earlier Chapter VI A deductions. The resultant amount will be 'Total income from ordinary sources'.

 

Some cases for Ordinary Sources GTI deriving:

Description

Case - I

Case - II

Case - III

Case - IV

Case - V

Current income from ordinary  sources

1000

1000

1000

(-)1000

(-)1000

Unabsorbed preceding year  loss from ordinary  sources

Nil

(-)500

(-)1500

Nil

(-)1500

Gross total income from ordinary sources, of the financial year

1000

500

Nil

Nil

Nil

Unabsorbed  current loss from ordinary sources  of the financial year

Nil

Nil

(-)500

(-)1000

(-)2500

Special Sources:

  1. This includes incomes like:
    1. Any assessee
      1. On income by way of winnings from
        1.  any lottery or crossword puzzle
        2. race, including horse race (not being the income from the activity of owning and maintaining race horses)
        3. Card game or any other game or gambling or betting.
    2.  Non-resident
      1.  On investment income by way of  Interest, dividends on which distribution tax has not been paid, capital gains, any other investment income
      2. On income by way of royalty or fees for technical services
    3. Non-resident sportsman who is not a citizen of India
      1.  On income by way of  participation in India in any games, advertisement or contribution of articles relating to any game or sport in newspapers, magazines or journals in India
    4.  Non-resident sports association or institution
      1. On income by way of guarantee   money in relation to any games or sports played in India.
  2. The income on such way will be aggregated “Current Income from Ordinary Sources”.
  3. Then this value has to be aggregated with “unabsorbed losses as of immediate preceding financial year”. Such aggregated income will be treated as “Gross Total income from Special Sources” .
    1. If such result is negative, then Gross Total Income will be NIL and value will be treated as “Unabsorbed current loss from Special sources”.
  4. Such Gross Total Income will be calculated separately and adjusted will losses. Then the resulting values will be aggregated and the resultant amount will be 'Total income from Special sources'.

Total Income:

  1. 'Total income from ordinary sources' PLUS 'Total income from Special sources' = Total Income.
  2. The losses can be carried forward for any number of financial years, with year on year adjustment system.
  3. Loss under Capital Gains and Loss under Speculative business are ring-fenced and can be adjusted only against respective heads.

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