Budget 2010 and the New Direct Tax Code

By BankBazaar.com | February 16, 2010

The New Direct Tax Code talks of talks of going for EET for most of the favoured investment and savings avenues of Indians today. Life insurance, provident funds and superannuation are the schemes that will be affected. The New Pension Scheme had at the time of launch itself been under the EET regime. The budget 2010 may include some of the others also in the EET scheme of taxation.

The New Direct Tax Code is proposed to be implemented from the year 2011. For its smooth implementation, changes in the present system have to be made on an on going basis. The forth coming budget may thus be expected to bring about some of the changes for a smoother transition. This article will focus on the impact of the forthcoming budget and the New Direct Tax code with respect to individuals only.

Personal Income Tax Rates

The New Direct Tax Code talks of substantial increase in the tax slabs for an individual tax assessee. A part of this may be implemented in forthcoming budget. The Tax Code Bill 2009 talks of increasing the 10% slab to Rs.10 lakhs, 20% slab between Rs.10 lakhs and Rs.25 lakhs and 30% above Rs.25 lakhs.

The difference between the current slabs and the New Direct Tax Code is very high. The gap may be bridged at least to the mid way or even slightly higher in this budget.

Perks to be Part of Salary

This will negate the increase in the tax slabs to some extent. The impact will be felt by all salaried persons as currently items like Leave Travel Allowance, House Rent Allowance and Medical Reimbursement can be tax free (or less taxed)  if supporting expenses documents are provided. This budget may not make any sweeping changes in this area, as the New Direct Tax Code proposed taxable slabs may not be implemented in full.

Reduction in Wealth Tax

Currently Wealth tax is at the rate of 1%. This is proposed to be reduced to 0.25% in the New Tax Code. This may be implemented immediately in the budget. The need of the hour is to increase the number of people who pay wealth tax. The current compliance is very less.

To better the compliance the slab for the wealth tax has been proposed to be increased to Rs.50 crores. This is a huge jump from the current Rs.30 lakhs.

80C Limit Increase

It is proposed in the New Direct Tax Code to increase the 80C limit to Rs.3 lakhs from the current Rs.1 lakh. There may be a marginal increase in this limit in the current budget. The increase in limit is proposed to be applicable to individuals and HUFs (Hindu Unified Families).

EET (Exempt – Exempt – Tax)

The New Direct Tax Code talks of talks of going for EET for most of the favoured investment and savings avenues of Indians today. Life insurance, provident funds and superannuation are the schemes that will be affected. The New Pension Scheme had at the time of launch itself been under the EET regime. The budget 2010 may include some of the others also in the EET scheme of taxation.

The benefit to investors however is given by the making the shifting of investment from one eligible scheme to another eligible scheme not taxable.

Change in Rate of Capital Gains

The New Direct Tax Code proposes to remove the concept of a separate Capital Gains Tax rate and tax capital gains at the applicable income rate itself. This concept may be implemented during this budget itself, incase the tax slabs are sufficiently raised.

Rent Deduction Reduction

In case of rental income 30% was the deduction allowed for maintenance of the property. The New Direct Tax code plans to reduce this to 20%.

Any service tax paid for receiving services related to the house property is deductible. This is a feature which is currently not available on any income for individuals.

The current budget may implement the rent deduction reduction immediately. This will affect those who depend on rental income as their primary source of income. However the limit hike in the wealth tax and the service tax benefit will offset the increase in the rental income in a big way.

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