The Government of
Even though the RDP has touched upon a total of eleven issues, the
present article will confine itself to the impact of these provisions on
individuals and salaried class.
Abbreviations Used:
DTC 2009-Direct Taxes Code August 2009
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PFRDA-Pension Fund Regulatory and
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EEE-Exempt, Exempt & Exempt
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Development Authority
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EET-Exempt, Exempt & Tax
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PPF-Public Provident Fund
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ELSS-Equity Linked Savings Scheme
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RDP-Revised Discussion Paper of DTC
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of the mutual funds
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released by Govt on 15.6.2010
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EPF-Employee Provident Fund
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GPF-Government Provident Fund
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SCSS-Senior Citizen Savings Scheme
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NPS-New Pension System administered
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ULIP-Unit Linked Insurance Plan of
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by
PFRDA
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insurance companies
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NSC-National Savings Certificate
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PF-Provident Fund
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VPF-Voluntary Provident Fund
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What are the new
proposals in the RDP?
The proposals of the Revised Discussion Paper are
explained in relation to the existing tax provisions so that readers can
appreciate how their tax liability is going to be changed in future if and when
the DTC comes into force.
1. Tax
treatment of savings – EEE regime versus
EET regime:
TABLE 1
Existing Tax
Provisions
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Revised Discussion
Paper
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Many investments are under the purview
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In future, the EEE method is applicable
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of EEE method now. These investments
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only to the following:
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include GPF, EPF, PPF, most of the
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insurance policies (except annuities),
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GPF
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recognised PFs, NSC, ULIPs, ELSS,
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Recognised PFs
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deposits in SCSS, 5-year bank term
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PPF
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deposits, 5-year post office fixed
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NPS
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deposits, etc
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Approved pure life
insurance products*
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Annuity schemes
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As of now, NPS is subject to EET.
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Note: To know about what EET method
and EEE method are, please see Annexure I
* There is a lot of confusion as the Government has not defined what an
‘approved pure life
insurance product’ is. Some experts believe that it refers to pure term
insurance policies.
EEE Method: In India
EET Method: After reading the intent and purpose of the
Government as given out in RDP and DTC Bill 2009, it can be interpreted that
the following schemes will not be subject to tax at the time of investment and
accumulation period only; but, investors will have to pay tax at the time of
withdrawal: NSC, ULIPs, ELSS, SCSS, 5-year bank term deposits and 5-year post
office term deposits. All these schemes will be subject to EET method once DTC
comes into effect.
A Consolation: Investments made, before the date of commencement
of the DTC, in instruments which enjoy EEE method of taxation under the current
law, would continue to be eligible for EEE method of tax treatment for the full
duration of the financial instrument (this is called grandfathering clause).
2. Taxation of Retirement Benefits and Perquisites:
TABLE 2
Existing Tax
Provisions
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Revised Discussion
Paper
|
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An employer’s contribution to PF,
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The status quo will be maintained
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superannuation fund and NPS
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and these will continue to be exempt
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are not subject to tax. Retirement benefits
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from tax even after DTC comes into
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received by an employee are out of the
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effect.
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tax purview subject to monetary limits.
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||
As per RDP, the Government has
clarified that the following will be exempt from tax, subject to specified
limits, for all employees:
ü amount
of gratuity received,
ü amount
received under a voluntary retirement scheme,
ü amount
received on commutation of pension linked to gratuity received
ü amount
received from encashment of leave at the time of superannuation
(In the original DTC 2009, it was proposed
to include them under salary and a Retirement Benefits Account – RBA – was
proposed to be created to enjoy tax benefits. Now, the idea of creation of the
RBA was scrapped as per the RDP.)
Valuation of Perquisites: It was proposed in the original
DTC 2009, that the perquisites provided by the employer to the employee
relating to lease housing accommodation, leave travel concession, encashment of
unavailed earned leave, medical reimbursement and cost of medical treatment
will be included in the salary of the employee and taxed accordingly.
As per the RDP, the Government
has now clarified that the method of valuation of perquisites will be appropriately
provided in the rules. It is proposed that perquisites in relation to medical
facilities/reimbursement provided by an employer to its employees shall be
valued as per the existing law with appropriate enhancement of monetary limits.
It is clarified that the DTC does not propose to compute perquisite value of
rent free accommodation based on market value. The revised RDP has provided
partial relief to the salaried class as far as taxation of retirement benefits
and perquisites is concerned.
In real life, it so happens
that what is not stated explicitly is
more important than what is stated. Investors will probably be shocked to know
that many existing exemptions will be withdrawn once the DTC comes into force.
For such exemptions to be withdrawn, please see Annexure II given at the end of
this article.
3. Taxation of Income from House Property:
The DTC 2009 had proposed that income
from house property would be calculated as gross rent less specified
deductions. The gross rent would be higher of the following:
(i). the amount of contractual rent for the
financial year
(ii).
the presumptive rent calculated at 6% pa of ratable value
fixed by the local authority
The DTC 2009 had proposed to withdraw tax
exemption of Rs 1.50 lakh for interest on borrowed capital relating to
self-occupied property.
The above proposals have received
criticism from various quarters. Taking these views and criticism into
consideration, the Government has now proposed the following modifications as per
the RDP:
ü In case of let
out house property, gross rent will be the amount of rent received or receivable
for the financial year
ü Gross rent will
not be computed at a presumptive rate of six per cent of the rateable value or
cost of construction/acquisition
ü In case of any
one self-occupied property, an individual or HUF will be eligible for deduction
on account of interest on capital borrowed for acquisition or construction of
such house property subject to a ceiling of Rs. 1.50 lakh from the gross total income
The above modifications have been widely
welcomed by the public.
As far as Rs 1.50 lakh deduction from the
gross total income is concerned, the Government says it would retain the
existing tax provisions. However, the Government has stated that the overall
limit of deduction for savings will be revised accordingly. Which means, the
Government is likely to revise the tax rates and tax slabs that were proposed
in the original DTC 2009.
4. Taxation of Capital Gains:
As per the RDP, income under the head Capital Gains will be considered as income
from ordinary sources in case of all taxpayers. It will be taxed at the rate
applicable to that taxpayer.
(A).
Long-term capital gain for listed equity shares and equity mutual funds
TABLE 3
Existing Tax
Provisions
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Revised Discussion
Paper
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If a listed equity share or equity MF is held
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If a listed equity share/equity mutual fund
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for more than one year, any gain from sale
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is held for more than one year from the
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of such asset will be treated as long-term
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end of the financial
year in which it is
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capital gain or LTCG.
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acquired, the gain from sale of
it
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will be considered as LTCG.
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As of now, LTCG attracts zero tax rate.
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A specified deduction will be allowed
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without any indexation benefit. Such
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adjusted LTCG will be included in one’s
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income and taxed at the applicable rate. *
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* The Revised
Discussion Paper (RDP) does not mention any specified deduction rate, but gives some illustrations based on 50,
60 & 70% specified deduction. The Government states that the specified
deduction will be decided later keeping in view the overall tax rates. This is
a BIG NEGATIVE for investors who have accumulated substantial long-term capital
gain over a period of several years. The Government’s flip-flop is causing
severe heartburn to long-term investors.
One important feature of RDP is
the definition of long-term capital gain itself. The distinction is stated in
Table 3 above. The Revised Discussion Paper states that a long-term capital
gain is gain from sale of a listed equity share or equity mutual fund that is
held for more than one year from the end
of the financial year in which such listed equity share or equity mutual
fund is acquired. For example, if you buy a share on April 1, 2011 and sell it
on or before March 31, 2013; any gain from such share will be considered as
STCG. Suppose, if you sell it on or after April 1, 2013, any gain from such
sale will be considered as LTCG. Effectively, the holding period for LTCG
consideration can be between 366 days and 729 days. The Government has created
unnecessary confusion among public with such revised definitions.
STT
stays: When
the tax on long-term capital gain was abolished by the then Finance Minister
while presenting the Union Budget 2004-05, he introduced Securities Transaction
Tax (STT) to fill the tax revenue gap caused by the abolition of LTCG.
Unfortunately, the RDP says that STT will be revised suitably. Now, equity investors
will have to pay both the STT and LTCG once DTC comes into force, which was not
the case prior to the introduction of STT in 2004. In toto, the Government has
messed up the provisions relating to capital gains tax.
As there will be a shift from nil rate of
tax on listed equity shares and units of equity oriented funds held for more
than one year, an appropriate transition regime will be provided, if required,
claims the Government as per the RDP.
(B). Long-term
capital gain for assets other than listed equity shares and equity mutual funds
@
TABLE 4:
Existing Tax
Provisions
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Revised Discussion
Paper
|
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Long-term capital gain for assets like
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If such asset like house property, land,
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house property, land, gold, etc (other
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gold, etc (other than listed equity share or
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than listed equity shares or equity MFs)
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equity MFs) is held for more than one
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is gain that arises from sale/transfer of
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year from the end of the
financial year
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such asset after holding it for more than
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in which it is
acquired, gain arising from
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three years from the date of purchase.
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sale of such asset will considered as
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LTCG.
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Such LTCG at present is being taxed
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The LTCG will be adjusted with indexation
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at 20% after providing indexation
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benefits; and such adjusted LTCG will be
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benefits based on cost of inflation index.
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included in one’s income and taxed at the
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applicable rate. $
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@ Such assets
include house property, land, gold, etc.
$ The base
date for determining the cost of acquisition will now be shifted from 1.4.1981
to 1.4.2000. As a result, all unrealized capital gains on such assets between
1.4.1981 and 31.3.2000 will not be liable to tax. The capital gains will be
computed after allowing indexation on this raised base.
The existing
Capital Gains Account Scheme will be discontinued as per the RDP.
One important feature of RDP is
the definition of long-term capital gain itself. The distinction is stated in
Table 4 above. The Revised Discussion Paper states that a long-term capital
gain is gain arising from sale of an asset like house property, land, gold, etc
(other than listed equity share or equity mutual fund) that is held for more
than one year from the end of the
financial year in which such asset is acquired. The Government has created
unnecessary confusion among public with such revised definitions.
(C). Short-term
capital gain for assets including listed equity shares, equity mutual funds,
house property, land, gold, etc:
TABLE 5:
Existing Tax
Provisions
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Revised Discussion
Paper
|
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For shares and equity
MFs:
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As per RDP, the tax treatment of all assets,
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Short-term capital gain is the gain that
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(whether shares, mutual funds, immovable
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arises from sale of a listed equity share or
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property, gold or others) will be the same.
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an equity MF after holding it for less than
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1 year. Such STCG is taxed at 15%.
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Short-term capital gain is the gain from sale
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of an asset holding it for less than 1 year
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For assets other than
listed equity
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from the end of the
financial year in
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share or equity mutual
fund:
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which the asset is
acquired.
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STCG is gain from sale of house,
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land, gold, etc, after holding it for less
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Short-term capital gain will be taxed at
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than three years. Such STCG is included
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the rate applicable to taxpayer. No
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in one’s income and taxed at the rate
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specified deduction or indexation will be
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applicable to the taxpayer.
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allowed while calculating STCG.
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One notable feature of the RDP
is that it treats all assets as same as far as treatment of short-term capital
gains is concerned. As mentioned in Table 5 above, under existing tax
provisions, the tax treatment of short-term capital gains for listed equity
shares or equity mutual funds; and other assets like, immovable property or gold
is different.
Another important feature of
RDP is the definition of short-term capital gain itself. The distinction is
stated in Table 5 above. The Revised Discussion Paper states that a short-term
capital gain is for assets that are held for less than one year from the end of
the financial year in which the asset is acquired.
(In fact, the RDP
does not use the words, short-term capital gain or long-term capital gain. For
the sake of simplicity and better understanding, the words STCG and LTCG are
used in this article as they have been in existence for than five decades.)
Other
issues covered in the Revised Discussion Paper:
v
Minimum Alternative Tax (MAT) will be based on
book profits as is the current practice. However, the Government has not given
any MAT rates.
v
Non-profit organizations can carry forward
unused grants for three years
v
Wealth tax will be paid by all taxpayers except
non-profit organizations
v
Existing units in Special Economic Zone (SEZ)
will enjoy profit-linked deductions just like the developers of these zones for
a limited period when the new Code comes into force
Annexure I
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WHAT IS THE DIFFERENCE BETWEEN EEE and EET METHOD?
As of now, individuals enjoy
several tax benefits – of course, subject to certain quantitative limits – on
their investments in a variety of savings instruments; namely, EPF, VPF, PPF,
GPF, NSC, insurance policies, ULIPs, ELSS, bank fixed deposits, post office
deposits, housing loan instalments, interest paid on housing loan, etc. The
present system is called ‘EEE’ meaning investments enjoy benefits in three
stages: 1). Exemption allowed at the time initial contribution, 2). Exemption
through out the accumulation period, and 3). Exemption at the time of
withdrawal. (EEE stands for Exempt, Exempt and Exempt).
It was proposed in the DTC 2009
that the EET method will apply for new contributions made after the
commencement of the DTC. The DTC 2009 had proposed to shift to a new system called
‘EET’ whereby exemption would be allowed at the time of initial investment and
accumulation period only; but the withdrawals will be included in the taxable
income and taxed according to one’s tax slabs. (EET stands for Exempt, Exempt
and Tax).
Simply put, under the proposed
EET regime, tax savers will be postponing their tax liability for future or
till the date of retirement. Is retirement the best time to pay our taxes by
avoiding payment of taxes during our earning years?
Logically, EET system is sound in principle and
good for the economy. However, in India
Annexure II
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TAX DEDUCTIONS/INCENTIVES TO BE
WITHDRAWN:
A careful reading of the provisions and the RDP
and DTC 2009 indicate that the Government is most likely to withdraw the
following existing tax exemptions being enjoyed by the taxpayers. One is forced
to come to this conclusion because the Government has maintained a strange
silence on these issues and these issues have not been mentioned either in the
DTC 2009 or the RDP released on June 15, 2010. So, the important deductions
that are most likely to be disallowed in
future under proposed DTC could be:
o
Housing Loan instalments of up to Rs 1.00 lakh in a
financial year and allowed as deduction under Section 80C of existing IT Act
may not be allowed as deduction under the proposed DTC 2009
o
Contributions made to Equity Linked Savings Schemes
of Mutual Funds
o
Notified Bank Time Deposits for a term of 5-years
or more
o
Accrued Interest on NSCs
o
Contributions made under Unit Linked Insurance
Policies
o
Under DTC, bonuses or sums received from life insurance
policies may not be allowed for deduction in case: (1). Annual premium paid is
more than five per cent of the sum assured; and (2). If the policy is
surrendered before the maturity date (as per clause (a) of sub-section 3 of
section 57 of DTC 2009)
References:
1. Revised Discussion Paper
released by Ministry of Finance, GOI
dated June 15, 2010
2. Direct Taxes Code Bill and
discussion paper released by Ministry of Finance,
GOI in August 2009
3. Newspapers
Author’s Disclaimer: The author’s views are
personal. The above article is written for information purpose only. Every care
has been taken to provide authentic information as far as possible; however,
the author is not responsible for any inadvertent discrepancies that may have crept
in. Readers should consult their own certified tax consultants or experts to
correctly interpret the provisions of tax laws or other matters.
To read other important documents on Direct Taxes Code, just click:
Revised Direct Taxes Code 2010-
|
Criticism of the Revised Discussion Paper
|
Direct Taxes Code-DTC-Its impact on Salaried Class
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and Individuals
|
Direct Taxes Code 2009-DTC-Its impact on individuals, etc
|
Direct Taxes Code 2009-DTC-Its impact on Long-term
|
Capital gains and short-term capital gains of shares/MFs
|
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