GOVT GIVES A BOOST TO LONG TERM INVESTMENTS

The proposed Direct Taxes Code (DTC) tabled in Parliament on Monday signals some key changes for you. Women taxpayers would enter a new taxing era, where they won’t get the exemption edge that they have been enjoying till now. While the overall deductions have moved up only marginally by `15,000, some instruments have been moved out from the deduction ambit.

“I feel this is a diluted version of the first draft. In terms of tax exemption limit and deductions, the difference is not huge,” says Nikhil Bhatia, executive director (direct tax), PricewaterhouseCooper.

The income-tax exemption limit for both men and women has been moved up to `2 lakh. While for men this is a jump of `40,000 from their existing limit of `1.6 lakh, women’s benefit has been restricted only to `10,000 from their current `1.9 lakh limit. Senior citizens, too, would see a rise of only `10,000—the new exemption limit has been raised to `2.5 lakh from the current `2.4 lakh.

Exemption means the income threshold before which no income-tax is due. So, a man earning `3 lakh a year will have to pay tax only on `1 lakh; `2 lakh becomes his tax-free income or income exempted from tax. Add a deduction of `1 lakh and he can bring his tax liability to nil. Also, any individual claiming a deduction of `1.5 lakh can ensure that `3.5 lakh of his income is tax-free.

Deductions up to `1 lakh will be available on savings, pension funds and pension schemes. These include long-term savings options, such as the Employees’ Provident Fund, Public Provident Fund, other government approved provident funds and contributions made to the tier I structure of the New Pension System.

Another `50,000 will be available on life insurance and health insurance premiums and tuition fees. Additionally, the interest on loans taken for higher education is also deductible. However, premiums paid on a life insurance policy can’t exceed 5% of the sum assured.

Earlier, the total deduction came to `1,35,000, including instruments under section 80C up to `1 lakh, infrastructure bonds up to `20,000 and health insurance up to `15,000. Now, it comes to `1.5 lakh.

Home loan principal: The deduction up to `1.5 lakh on interest paid on home loans continues. However, the principal on home loans is not eligible for deduction any more.

Equity-linked savings scheme (ELSS): In a blow to the mutual fund industry, the tax-friendly ELSS is out of the deduction ambit.

Others: Five-year fixed deposits (FDs), which were earlier included in `1 lakh deduction list, are out. Infrastructure bonds, introduced in this year’s Budget for an additional deduction of `20,000, seem to have a short life. They, too, are not part of the new list.

“The deduction of up to `1 lakh under DTC is applicable on approved funds that currently consist of provident funds, pension and superannuation schemes. It seems to suggest that ELSS and infrastructure bonds will no longer enjoy tax deduction,” says Bhatia.

The proposed DTC brings cheer to those who have made capital gains. The previous version of the DTC proposed to tax a portion of long-term capital gains (LTCG), the current proposal has removed it altogether. For listed securities, LTCG will be nil as is the norm now.

In case of short-term capital gains (STCG), gains made within a year, 50% of the profit will be taxed at your tax slab. Effectively, that would mean a tax rate of 5%, 10% and 15% for those in tax slabs of 10%, 20% and 30%, respectively. At present, STCG is taxed at 15%, which is levied on the entire amount.

This means that those in lower tax bracket would gain out of this move. Says Sudhir Kapadia, tax market leader, Ernst and Young, a consulting firm: “Investors in the lower tax bracket will stand to gain as they will pay less than the current 15%.”

The rich will have to pay a wealth tax if the proposed DTC is passed in its present form. Net assets in excess of `1 crore will be taxed every year at the rate of 1%. Net assets is the difference between the value of all assets owned by a person (including a house, land, car, yacht, helicopter, jewellery, furniture, utensils, archaeological collections, paintings, cash and deposits in banks outside India, among others) and debts associated with the above assets.

The tax will have to be paid by the date for filing of tax returns. There are a plenty of exclusions in this DTC clause, so do talk to your financial planner before you panic.

The restructuring of deductions is aimed at encouraging long-term savings. By increasing the deduction limit for pension products, the government clearly aims at boosting retirement savings. Also, removal of short-term tax-saving tools, such as ELSS and five-year FDs, shows that the new focus period is long term.

Also, with deductions on insurance premiums limited to `50,000, sticking to the simplest and cheapest term insurance would make more sense for you. Earlier, agents often pushed insurance products as a tax-saving tool; they can’t use that pretext any more.

Deepti Bhaskaran, deepti.bh@livemint.com