The year 2009 was a landmark year for Indian taxes. In this year, the government introduced the landmark Bill, The Direct Taxes Code Bill. It is going to affect all of us as it will not only alter the tax you pay, but will also impact your investments, borrowings, and expenses. Here is how it will affect all of us. |
Changes in Tax Slabs:
The biggest impact of the new tax system is the significan
t widening of income slabs.
According to this, people with annual income not exceeding
According to this, people with annual income not exceeding
1.6 lakhs will not have to pay any tax.
For those with an annual income from Rs. 1.6 lakhs to
For those with an annual income from Rs. 1.6 lakhs to
Rs. 10 lakhs, you pay tax at 10%; for incomes from
Rs. 10 lakhs to Rs. 25 laks the tax is 20% and 30% for
incomes exceeding Rs. 25 lakhs.
So if your annual income is Rs. 2 lakhs, you fall in the 10% tax slab.
So if your annual income is Rs. 2 lakhs, you fall in the 10% tax slab.
These rates and slabs would be applicable from the financial year 2011-12.
However with this move the government plans to make most of your
However with this move the government plans to make most of your
allowances taxable. Hence if you are a high earner, earning a lot
of allowances, your tax liability will go up significantly.
Effect On Capital Gains:
As per the new tax code, both the short-term and long-term capital
gains are treated equally.
It recommends making both the contribution and return from your
It recommends making both the contribution and return from your
investments tax-free but proposes to tax the maturity proceeds.
This will affect your stocks and equity mutual funds.
This is different from the present system, in which the maturity proceeds are tax-free.
Impact on tax savings: With the introduction of this code,
Impact on tax savings: With the introduction of this code,
the government has eliminated the various tax breaks.
However the government has hiked the tax savings limit to
Rs. 3 lakhs per annum, while restricting the available investment alternatives.
So now you can invest only in PPF, EPF, life insurance, superannuation
So now you can invest only in PPF, EPF, life insurance, superannuation
funds and NPS. Besides you can also claim tax benefits on your children's
education. But no more tax benefits for investing in NSCs, Senior Citizens
Savings Scheme, tax-saving bank FDs and ELSS.
Impact on home loans:
As of now, if you have taken a home loan, the interest
payments up to Rs. 1.5 lakh and up to Rs. 1 lakh towards
principal repayment are eligible for tax benefit. But this
is set to end once the new code comes into effect.
So if you have paid Rs 3 lakhs as interest and Rs 2 lakhs
So if you have paid Rs 3 lakhs as interest and Rs 2 lakhs
as principal, you will not get any tax benefit. But if you have
rented out a home, you can still avail of the tax benefits for
taking the home loan.
The exemptions allowed: With the code, the government aims
The exemptions allowed: With the code, the government aims
to tax the maturity proceeds of PPF as well as insurance.
However in case of insurance, deduction will be given only for
the sum obtained only if the premium payable is not more than 5% of
the sum assured and the sum assured is obtained only when the
insurance term is over.
For PPF, the balance in the account as
For PPF, the balance in the account as
of 31st March 2010 won't be taxed on withdrawal.
Effect of new tax code:
Here is a simple example to help figure the
effect of the new tax code.
Rahul is a salaried employee. His annual salary is
Rahul is a salaried employee. His annual salary is
Rs. 5 lakhs. He has invested Rs. 50,000 in mutual
funds, Rs. 20,000 in insurance and Rs 40,000 in PPF
. Moreover he has taken a home loan of which he has
already paid Rs. 80,000 as principal and Rs. 1 lakh as
interest. Let us see how his situation will change once
the new tax code comes into effect.
Rahul's present situation: Currently Rahul gets tax benefit
Rahul's present situation: Currently Rahul gets tax benefit
on the amounts he has invested in PPF, mutual funds,
insurance as well as on the principal repayment of his home loan.
The limit on this amount is Rs 1 lakh. Besides Rahul has also paid
interest on his home loan. So the total amount tax exempted is
Rs. 2 lakhs (Rs. 1 lakh tax exemption under section 80C and Rs. 1 lakh
as interest on home loan.).
Hence now Rahul's taxable amount is Rs. 3 lakhs.
Hence now Rahul's taxable amount is Rs. 3 lakhs.
(Rs 5 lakhs of salary - Rs. 2 lakhs of amount exempted).
So the total tax that Rahul will pay on the
amount of Rs. 3 lakhs is Rs. 15,000
(Rs. 3 lakhs - Rs. 1.5 lakhs = Rs. 1.5 lakhs is the taxable
amount and the tax rate applicable is 10%).
So as of now, he is paying Rs. 15,000 as tax.
Rahul's situation after the new code: Rahul's total amount
exempted from tax is Rs. 1.1 lakhs (total of his amounts invested
in mutual funds, PPF and insurance) + Rs 1 lakh paid
towards home loan interest. So his tax exempted amount goes up to Rs. 2.1 lakhs.
His total taxable income now becomes Rs. 2.9 lakhs.
His total taxable income now becomes Rs. 2.9 lakhs.
Ultimately he ends up paying Rs. 13,000
(Rs. 2.9 lakhs - Rs. 1.6 lakhs = Rs. 1.3 lakhs that is taxed at 10%).
Rahul will now save Rs. 2000 in tax. He can do this because
Rahul will now save Rs. 2000 in tax. He can do this because
with the new tax code, the government plans to hike the tax slabs
. While the original tax slab for which tax was not applied was
0-Rs. 1.5 lakhs, the upper limit after the tax code comes into
effect goes up to Rs. 1.6 lakhs.
Moreover the new code has hiked the tax exemption
Moreover the new code has hiked the tax exemption
limits to 3 lakhs from present limit of Rs. 1 lakh.
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