What is Direct Tax Code and How does it impact common person

POSTED BY Jagoinvestor ON August 13, 2009 COMMENTS (80)

There is going to be some really big changes in Taxation laws if “Direct Tax Code” comes into existence year 2011. There are some big changes proposed in the Draft which if implemented will be the biggest ever change in Tax laws and will impact people in a big way.

Let us see what are the changes Proposed and How they will affect you?

direct tax code

What is Direct Tax code ?

The Finance Ministry has released a new draft direct tax code, which is a document containing changes in Exemptions, Tax slab. This will be a big change to four-decades old Income Tax Act . As per the proposal, the new tax slab would be

  • 0% : Less than 1.6 lacs
  • 10% : 1.6 – 10 Lacs
  • 20% : 10 – 25 Lacs
  • 30% : 25+ Lacs

This sounds really amazing that almost 90% of Indian (tax payers) will then pay 10% tax because majority of the income earned will be below 10 lacs (that’s very obvious). We will a comparison at the end. Don’t Worry 🙂

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Other Major Changes which can affect a Common person

1. Tax Exemptions upto 3 Lacs

At present we get exemptions upto 1 lac under section 80C . This may be raised to 3 lacs . This will encourage people to invest and help.

2. Proposes tax on Maturity amount from Insurance Policies, PPF, EPF and GPF

This is a big turnoff. So as per the new draft, the amount you get on maturity from your PPF, EPF or Insurance policies will be taxable, just like NPS right now. As per the proposal, the amount accrued till 2011 will be non-taxable, this will be applicable to all the proceedings after 2011. So some relief here.

3. Interest you pay for housing loans cannot be exempted and your tax burden increases.

I know it can spill water on your plans to buy home, but that’s true. If new proposal becomes a law you will then be paying tax on that 1.5 lac which you could have saved. Business Pundit has a view that Removing the tax benefit on Home Loan Interest part is positive news and will impact positively . Read it

4. Recommends Long term capital gains tax to be reintroduced and Short Term Capital gain tax to be added in Income

Enough is Enough- is what you may be thinking. 🙂 But tax on long term capital gains may be introduced which means that you will have to pay some tax on that profit from Mutual funds or Shares which was tax-free after 1 yrs. Short term capital gains will be added in Income and taxed at applicable rate.

Also Short Term capital gains would be before 3 yrs and Long Term capital gain after 3 yrs. Long term Capital Gains will be less than regular tax slab, I think around 10% or 15%.

5. Suggested abolishing the Securities Transaction Tax (STT)

So the STT which was paid while buying shares will be abolished. Currently when you buy shares you pay a small tax called STT which is included in share cost by your Share broker, this will be no longer there 🙂

6. Perks now will be included as a part of the income for purpose of tax calculation, so tax burden may be sightly more.

All the perks you were getting from your employer like interest free loan, free lunch etc will get added to your income and be taxed.

7. Lowering Corporate tax to 25% from 30%

This will cheer up companies as their tax burden would reduce. I am not sure about its impact on common person.

Watch this video to know more about direct tax code:

Comparison of New Vs Old Tax Code

Lets see an Example
Name : Ajay Patel
Salary : 8 lacs per year
Investments : Investment of 30k in Mutual funds, 30k in EPF, 20k in PPF and 20k in Insurance Policy.
Home Loan : Taken a Home loan and pays 80k as Principle and 1.4 lacs as Interest.

Tax as per Current System

Amount Exempted = 1.4 lacs as home loan interest + 1 lac in 80C = 2.4 Lacs
Taxable Income = 5.6 lacs
Tax = 14k (10% from 1.6 to 3 lacs) + 40k (20% from 3 – 5 lacs) + 18k (30% on 5 – 5.6 lacs) = Rs.72,000

Tax as per New Tax Code

Amount Exempted = 1 lac from (mutual funds , PPF , EPF , Insurance) + 80k as Home loan principle = 1.8 lacs
Taxable Income = 6.2 lacs
Tax = Rs 44,000 (10% on 1.6 lacs – 6.2 lacs)

Note: Your Tax Liability will be totally different and can vary a lot depending on the your condition and financial commitments. Don’t take this one example personally as its just for demonstration purpose.

Is New Tax Code Good or Bad

This is an important and good question. I will classify this tax code as a good one the biggest thing to note in this is that the tax slab is just 10% for income from 1.6 lacs to 10 lacs. There are many changes in the new tax code which may look bad and hurting but at the end you will gain from it because the tax charged will be just 10%.

So your taxable salary will go up because of some changes but your tax liability will actually reduce. It will not reduce too much though but surely it will be a reason to cheer up.

The biggest doubt is that over long term if my Maturity amount from Mutual Funds, Insurance policies and PPF will become taxable?

Then YES! But now you will save more to invest. So, even if we assume 20% tax charged at the end, we need to invest 25% more than we usually do to gain that will happen I believe… Anyways, this is now a debate topic and can be argued upon.

Download the Full Direct Tax Code Bill 2009, Click Here


This was just an analysis of the proposed DTC and how the changes can impact if it is approved. But for now, its just a proposal so don’t panic. Lot of debates and discussion will happen on this and this can take totally new direction or may be it does not happen at all and we continue with current tax system.

Comments Please as I would like to hear your views on New Tax code and how can it impact you. Do you think its a right thing to do and what are the issues involved with it? Did you like it?

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80 replies on this article “What is Direct Tax Code and How does it impact common person”

  1. Surendra says:

    Sir, Is there any update on DTC with new NDA government in place and if it is likely to be introduced will it be having any impact on PPF maturity (as earlier when the bill was introduced it was mentioned that PPF is going to become EET from EEE.

    Thanks Sir for your time..


  2. Rudrappa Akki says:

    I am a student in shimoga city, I can make a project on direct tax code in India,sir will you please send some questionnarie on direct tax code.

    1. Hi Rudrappa.. This article is all we have about NPS !

  3. haziali says:

    it is not so good because home loan is needed to un sufficint money cunstructer

    1. Not sure what you want to say ?

  4. Kaliprasad says:

    Nice Article, but when this DTC is implemented?
    Initially i was a bit worried about the Home Loan will not come under Tax exumption, but the article by Businees Pundit, if happens as it forecasts, it will be a good one.

    Do Post if there are further changes in this DTC.

    1. DTC is now expected next year for 2012-2013 ..

  5. Pramod says:

    the maturity amt. of the PPF, EPF and Insurance Policy will be taxable as per new draft is not so good, because the said amt. will be more and that is saving of middle class family.

    1. Pramod

      Thats changed in the new draft now . They will not be taxable

  6. Ranjith says:

    Hi Manish,

    Fantastic article , and informative discussions going on. I should have come across your site earlier. I have one query reg PPF taxation.

    Suppose I invest 1 lakh every year in PPF, in 15 years, it will go upto aprrox 30 lakhs, right. At that point, how much tax would be applicable on this amount as per DTC. Does to 30% tax apply only to the amount above 26lak ? Or is it done in some other way.


    1. Ranjith

      PPF is not taxable at all right now and even in DTC , so you dont have to worry on the taxation part for PPF at all .. everything you withdraw from PPF will be tax free


  7. Musaraf ali says:

    I have lic policy terms 20 yearr and ppt 6 years, this year in august is my last premium, under dtc will maturity amount will be taxed.

    1. Jagdish Asati says:

      It looks like, it is good for salaried people but not for investors/savers who want to build their portfolio over long term.

      Under the new code all assets will be classified into “business assets” and “investment assets”. The “business assets will be further classified into “business trading assets” and “business capital assets”. While income from transactions in all business assets will be treated as “income from business” the income from transactions from investment assets will be computed under “capital gains” some of the important changes will be (a) profit on sale of business capital assets and (b) profit on sale of an undertaking as slump sale will no longer be treated as “capital gain” (c) The income by way of interest ( other than in case of financial institutions, banks) will be treated as income from residuary sources. (d) Income from letting out of the buildings other than hotel, convention centre or cold storage, will be considered under “income from house property and not as business income.

  8. Rishab Dixit says:

    I think tht DTC will be a good implementation, but in Long term gains should also be abolished as STT or certian timeframe should be set for longterm gains.

    1. Rishab

      I dont think they are now going to take out the tax on gains 🙂


  9. Vineet Garg says:

    Hi Manish,
    Nice article, can you please update this article based on the changes made in draft of DTC made public by government in june this year…


  10. Prateek says:

    The calculation above is grossly incorrect as amt saved in pf,ppf, mf etc were not taxed earlier at maturity but they will be taxed now at maturity.
    So, for an amt of 25 lacs at maturity, u end up paying 4 lacs(1 +3) which is much greater considering the present system.

    DTC is taking more from common man than giving it …. thumbs down for it!

    1. Prateek

      If you see the new revised code , it does not tax EPF and PPF at maturity , but does for MF


  11. Vasantha Kumar KJ says:


    I am working in a PSU and suppose if I take a loan against my LIC policy or PF (Temporary Withdrawal) and repay it back in specified time, is that amount taxable ?
    All these years I have contributed to Voluantary PF, on maturity is this also taxable ?

    Please ,answer me.

    1. Vasantha

      No it wont be taxable , as its a loan and you are repaying it .


  12. TR Shah says:

    Hi Manish,
    I am a great fan of your site. Keep up the good work.
    I have the following query:

    The present draft of the DTC in its harshest form allows life insurance policy amounts at maturity/death to be tax free provided the 5% clause is met.
    This would mean that several LIC endowment policies (eg. Jeevan Saral) having a 20+ tenure would return tax free amounts on maturity.
    The DTC is to be relooked at & it is quite likely that there will be some further relaxation for life insurance.
    Don’t you think this would give LIC a disproportionate advantage over other saving schemes like PPF?
    Or is there is a hidden conspiracy somewhere just to increase LIC’s profits?

    1. TR Shah

      The only requirement is that in any given year the premium should not be more than 5% of the policy SA and the policy needs to run upto maturity , Else the proceeds at the end will be taxable. I cant comment on LIC advantage , it will be advantage for any inusrance companies , however I would say its something done by Govt and not insurance companies , so we cant say LIC is responsible for this .


  13. vijay says:

    what about long term capital gain,
    does it has any index calculation as before DTC

    1. Vijay Mostly the long term capital gains will be taxed in this way

      10% with indexation or 20% without indexation .


  14. TR Meena says:

    What will be the fate of agriculture market committee’s income after the DTC. At present the income of market committee’s are exempted from income tax.

    1. TR meena

      Not sure on this ..
      Anyone ?


  15. Samir says:

    Dear Sir,
    I’m confused on the PPF Taxation policy at the time of withdrawal in Direct Tax code.

    Exp : A person keeps Rs.70000/- every year in PPF for 15 years.

    At the time of maturity he might have kept : Rs.70000 x 15 Years = Rs.1050000/-

    However the cumulative total value along with Interest would be : Rs.2052700/-

    So I have following questions :
    =>Suppose that time the persons Annual Taxable income is 15 Lac.
    1) Will the entire withdrawal amount be included with his Taxable income Rs.15 Lac to calculate the tax ?
    2) Or only the interest part of PPF Rs.1002700/- would be included with his taxable income Rs.15 Lac. to calculate the tax ?
    3) Or only the interest part of PPF Rs.1002700/- would be taxable independently (TDS @Bank) at a flat rate ?
    4) Or the entire withdrawal amount Rs.2052700/- would be taxable independently (TDS @Bank) at a flat rate ?
    5) If bank would deduct the TDS in a flat rate from the PPF account at the time of withdrawal. What is that Flat rate in Direct tax code ?
    6) The person would get Tax benefit of Rs.70000/- every year or not ?
    7) How much all total he can get the tax benefit every year for these investment ? Is it Rs.300000/-

    Please help me to come out of confusion !

    1. Samir

      You should understand some points

      1- DTC is yet to come and is not final , even if it comes there will be changes to it , it wont come in its original form .
      2. For PPF DTC rules will be applicable only for the investments done after 2011 . \
      3. Tax is payable only on interest part , not on total .

      So if the interest part is 2 lac only that part will be added to salary and tax will be applicable on tax rates .


      1. Samir says:

        Hi Manish,
        Thanks for quick reply.

        Just for Clarification :
        Are you saying only the Interest part of the year of withdrwal ? (Rs.152052/- in 15th year)
        OR the total interest gained throughout the 15 years ? (i.e. Rs.1002700/- if a person keeps Rs.70000/- every year on 1st April) ?

        I know there would be changes in DTC, but just want to know the impact beforehand 🙂

  16. vivek says:


    1. manish says:


      you are talking about my article or the comment above 🙂 ?



    The new code attempts to change the methodology of taxation of business profits from the existing model where the taxable income is equal to business profits with specified adjustments even though this model does not provide for items of receipts which form part of business profit and deduction to be made there from. The discussion paper claims that the existing model give rise to frequent disputes about taxability of receipts and allowable deductions for various expenses. In order to avoid these legal disputes the New Code takes the second model of income-expense model where in the taxable income will be equal to gross income minus allowable deductions. The code itself enumerates the items of receipts and deductions to reduce the scope of litigation.
    Under the new code all assets will be classified into “business assets” and “investment assets”. The “business assets will be further classified into “business trading assets” and “business capital assets”. While income from transactions in all business assets will be treated as “income from business” the income from transactions from investment assets will be computed under “capital gains” some of the important changes will be (a) profit on sale of business capital assets and (b) profit on sale of an undertaking as slump sale will no longer be treated as “capital gain” (c) The income by way of interest ( other than in case of financial institutions, banks) will be treated as income from residuary sources. (d) Income from letting out of the buildings other than hotel, convention centre or cold storage, will be considered under “income from house property and not as business income.
    On the face of it appears that the new code is very favourable to companies as tax rates are reduced to 25% from the present level of 30%. And also eliminates wealth tax liability on corporate assesees. But when we take into account the provisions of MAT which is altogether on a new concept of being charged on the gross assets instead of book profit it become very harsh. While the first schedule of the new code provides that corporate tax rate will be 25% of its total income [profits] sec 2(3) of the code also provides that corporate tax liability will be higher of the two namely 25%of profit or MAT calculated at 2% of gross assets. [0.25% of gross assets in case of banking companies]. The code itself clarifies the procedure to compute gross assets which includes gross block of fixed assets plus capital work in process plus book value of other assets excluding loss and miscellaneous or preliminary expenses not yet written off less accumulated depreciation.
    The first blow to the companies will be where its profits are under strain or it is loss, still the companies have to pay tax of MAT which will be high. Secondly the MAT paid is not allowed to be carried forward and deducted from future tax liability as it is being allowed hitherto. Thus under new code MAT is not deferred tax liability but actual out flow of funds even if there is loss. Will it not affect the future growth of the companies when it has to shell out money for tax even when it is not making profit? Thirdly will it not add as additional burden to interest paid already on borrowed funds for acquiring these assets? As we know very well most of the companies use borrowed funds for financing long term assets as well as working capital finance from banks for their current assets. What will be their final cost of borrowing if they have to pay additional 2%tax on these borrowing also? Unless the companies are able to earn minimum 8% on their gross assets, they will be paying more on MAT than paying tax on profits. Further Advance tax is also payable on MAT which will be additional cash flow burden on the companies. Investors can analyse their own present investment in companies by looking into their annual reports and how the new MAT will affect their investments.
    From the above reading we need not go to an immediate conclusion that the NEW CODE has only adverse features or I was only looking at the dark side of the code. The new code is most beneficial when it comes to rates of taxation as it is long standing rates and not likely to be rigged every year. Similarly the test for residency is also simplified. The new code also provides exemption for Venture Capital Funds from tax liability just like Mutual Funds. But there is a doubt lingering whether this reading is correct or not since the grouping of VCF with SEBI recognised Mutual Funds is not clear. At the same time the new code should also clarify the tax provisions relating to income from investments in VCF just like exemptions available to investors in Mutual Funds.


    DIRECT TAX CODE BILL, 2009 was unveiled by our Hon. Finance Minister on 12th August 2009 and has been placed in the public domain for an analytical study and critical review of all its clauses. It seeks to consolidate and amend all the Laws relating to the Direct Taxes. It seeks to bring all Direct Taxes under one code for providing a single tax reporting system. It has been stated that the new code is drafted by taking into account the internationally accepted principles and their best practices to make it at par with world practises and not merely to replace the existing Income Tax Act of 1961.

    From the point of interest of our readers it has been decided to analyse the provisions of new code with respect to salaried persons, retired people and investors separately. In this process we have to compare the existing provisions of the present I.T.Act1961 to bring out the consequences of the new provisions. First we may consider the Income Tax Rates applicable for various income levels.

    At present, income up to Rs.1,60,000/- is basic income level which is not taxable for all Individuals and HUF who are not resident women and senior citizen. As for as resident women are concerned the basic exemption level is Rs.1,90,000/- and for senior citizens Rs.2,40,000. The new code retains the same level of basic exemption for respective categories of tax payers, but the subsequent tax slabs for all of them have been raised as follows:

    Type of Assessees. Basic exemption 10% Tax rate upto 20% Tax rate upto 30%Tax rate above Present Proposed Present Proposed Present Proposed Present Proposed
    Individuals/ HUF 1,60,000 1,60,000 3,00,000 10,00,000 5,00,000 25,00,000 5,00,000 25,00,000
    Resident women1,90,000 1,90,000. 3,00,000 10,00,000 5,00,000 25,00,000 5,00,000 25,00,000
    Senior Citizens 2,40,000 2,40,000 3,00,000 10,00,000 5,00,000 25,00,000 5,00,000 25,00,000

    Even though everyone may be happy with the above enhanced limits for each tax slabs, the reason why the enhancement has not been given for the basic exemption levels is intriguing. A person with his present income, present tax liability and the expected saving in tax liability are given below:[For the Financial year 2009-10, for a male below the age of 65years and without Educational cess.]

    Net Income level P.A. Present tax Tax as per new code saving in tax % of saving
    175000 1500 1500 0 0
    250000 9000 9000 0 0
    350000 24000 19000 5000 20.83
    450000 44000 29000 15000 34.10
    550000 69000 39000 30000 43.48
    750000 1,29,000 59000 70000 54.26
    950000 1,89,000 79000 1,10,000 58.20
    1100000 2,37,000 1,04,000 1,33,000 56.12
    1500000 3,54,000 1,84,000 1,70,000 48.02
    2500000 6,54,000 3,84,000 2,70,000 41.28
    3000000 8,04 000 5,34,000 2,70,000 33.58
    5000000 14,04,000 11,34,000 2,70,000 19.23

    From the above table it is clear that the tax rates prescribed by the new code will help saving in taxes only for higher income group and not for lower middle income group. It defeats all canons of taxation which always say that direct taxation is to be based on the principle of “what the traffic can bear” and the norms of taxation should be like “milking the cow and not sucking its blood”. While persons with income ranging from Rs.5,00,000 to Rs.10,00,000 save more than 50% in present tax burden, persons with income of less than Rs.3,00,000 save nothing due to rates. Not only this – they will be facing increased burden of taxes because of withdrawal of many deductions allowed to them from salary income like perquisites, Leave Travel Concessions, Medical Reimbursements etc. the effect of which we will be discussing in our next article. Even persons with income up to Rs.50,00,000 save on taxes nearly 20%. So the new code tax rates are more in favour of the rich then the middle income group.

    Our suggestion is that basic exemption should also be raised to Rs.3,00,000/- which is the present ceiling for 10% slab. By this every one will gain including those within 3,00,000/-slab up to the level of tax payable for Rs.3,00,000/-. Further the basic exemption should be linked to “Cost of living index” so that it can be increased every year based on the inflation levels. Most of the time the increase in salary is linked to inflation and it is essential that such an increase should be protected from tax burden. We are not against the rich getting more benefit from tax savings. But middle income group should also get similar benefit.
    In the previous chapter we studied the impact of proposed tax rates and concluded it is more in favour of the rich and not for middle income group. A similar view has also been expressed by group of Senior Income Tax Officials in which they have stated “under the garb of providing long term stability in the tax regime, the tax code in fact would widen the rich-poor gap and create more economic absurdities”[BS.21/09/09] In this chapter we propose to discuss the impact of the new code on the salaried persons who are the most efficient tax payers of this country
    Before we get into the intricacies of the New Code with reference to the salary income group, let us get the picture of how our income is to be taxed in future. Under the new code income will be computed under two heads namely “special source” or an “ordinary source”. The special sources of income are listed in the Fourth schedule and they are taxed at special rates mentioned in that schedule itself on the gross basis and no deduction will be allowed from these incomes.. This is known as presumptive taxation. We will discuss about this later. All other incomes will be grouped under “ordinary sources”
    The accruals and receipts relating to ordinary sources are further classified into following five heads:
    a. Income from employment (old name salary)
    b. Income from house property,
    c. Income from business (old name –income from business or profession)
    d. Capital gains,
    e. Income from residuary sources(old name – income from other sources)
    The “total income of the ordinary sources” will be added with the ‘total income from special sources’ to arrive at the ‘total income’ of the tax payer.
    Now we discuss about the computation of income from employment. “Income from employment” will be the gross salary less the “permissible deductions”. The income side of salary will include income by way of due or receipt basis whichever is earlier. It will include the value of perquisites and profits in lieu of salary.
    The ‘permissible deductions’, which plays a vital role in calculating the net taxable income, will be the following:
    a. Amount of professional taxes paid,
    b. Transport allowance to the extent prescribed’
    c. Prescribed special allowance or benefit to meet expenses wholly and exclusively in the performance of duties, to the extent actually incurred,
    d. Compensation under voluntary retirement scheme,
    e. Amount of gratuity received on retirement or death,
    f. Amount received on commutation of pension: and
    g. Pension received by gallantry awardees.
    So far so good and it sounds like existing provisions only; but the catch is only paragraph 7.4 which follows the above and read as “the deductions under d, e, and f above would be available only to the extent the amount is deposited in a “Retirement Benefit Account” or the “NEW PENSION SYSTEM TRUST”. The amount received from approved superannuation fund, which hither to exempted from income tax will henceforth will also be treated in the same manner”
    As per paragraph 7.5 of the code, the amount deposited in the tax saving schemes during the period of earning is restricted to only four avenues namely, approved provident funds[GPF,EPF,PPF], approved superannuation fund, life insurance schemes and New Pension System Trust only. The accretions to the deposits in these accounts remain untaxed till they are withdrawn. At the time of withdrawal they are taxed on receipt basis at the marginal rate applicable to the assessee in the year of withdrawal.
    Under paragraph 7.7 of the code, salary will now include, inter alia the following:-
    (a) value of rent free or concessional accommodation provided by the employer irrespective of the fact whether the employer is Government or any other person,and the value will be determined in the same manner as presently applicable to employees of private sector.(b) The value of any leave travel concession,(C) Leave encashment on retirement or otherwise, (d) medical reimbursement,(e) value of free or concessional medical treatment provided by the employer.
    From the above it is clear that no other deduction (for example HRA, LTA, Medical Allowance, food coupons etc) will be allowed and salary will be taxable without any other deductions. Now let us consider an example for bringing out the comparison between existing and new provisions.
    Mr.A who is retiring on 31-03-2012, has following income. Basic 2,00,000; conveyance allowance 9600 HRA 108000; LTA-18000; Med.All.-15000; Food Coupons-5000; Children Educational allowance –upto 2 children- per child 6000p.a. for school fees and 36000p.a.for hostel accommodation totalling 84000; Total Salary-439600; he pays a house rent at his place of work in Chennai- 120000p.a. He also own house in Madurai, recently built in which his parents and school going children are living for which he pays 15000 per month as EMI consisting of 160000 for interest and 20000 towards principal repayment. His retirement benefit will be (a) Gratuity 3,00,000 , (b)His contribution of SPF 350000; Employer’s contribution to SPF 300000; Super Annuation Scheme balance of 600000 which can be commuted up to one-third 200000; his leave encashment at retirement will be 2,00,000; his present tax liability and future under the code will be as follows.
    Particulars Under Present Act Rs. Under New Code Rs.
    Basic salary 2,00,000 2,00,000
    Conveyance allowance 9,600Exempted under sec10(16) 9,600 0 0
    House rent allowance 1,08,000
    Deduction u/s10(10)13A 90,000 18,000 1,08,000
    Leave travel concession 18,000 0 18,000
    Medical allowance 15,000 0 15,000
    Food coupons 5,000 0 5,000
    Children educational allowance 84,000
    Exempted portion for 2 child 9,600 74,400 84,000
    HOUSING LOAN 1,50,000 -1,50,000 0
    ( Withdrawn for daughter’s marriage) 0 3,00,000
    (withdrawn for daughter’s marriage) 0 6,50,000
    Commuted value of superannuation
    (to repay HL) 0 2,00,000
    Leave encashment at retirement
    (TO REPAY HL) 2,00,000 0 2,00,000
    Total taxable salary 1,42,200 17,80,000
    Total tax payable NIL 2,40,000
    The above example clarifies the impact of tax liability under new code. The important points are withdrawal of deduction for important expenses like House Rent, Children educational expenses, Leave Travel, Medical expenses etc. By withdrawing deduction for these legitimate and essential expenses, the middle income salaried persons will be worst affected by the new code. Every employee plans to fund for his children higher education or marriage through his retirement benefits. If this withdrawal is to be fully taxed two worst situation emerges- (a) Tax Rate on his other income also increases (b) these are his long term savings which suffer tax in a consolidated manner. When the employee save, the tax deduction he gets may be nil or even at lower rates. But when he receives the cumulative amount he is taxed at the highest marginal rate applicable to his total income. In what way it is justifiable? Why not the Government apply tax on regular income of these schemes taxable every year but allow the maturity proceeds free of tax? That is to follow ETE method than EET method. The latter method is more harmful to the tax payers. These rigours of taxation will be more felt in respect of all those employees who are on the verge of retirement immediately after the implementation of the new code. It will destroy all their future financial plans. They will be paying a substantial amount of their retirement benefits and maturity proceeds of their life long savings which they must have planned for their future financial needs.
    In this respect it is worthwhile to recall the observations of SENIOR income tax officials. Following are few extracts from their views as appeared in the Business Standard dated 21/09/09. “… the loss of tax revenue under new code may be 50,000crores per annum. Take the case of individuals, where extensive giveaways by widening the tax base has took place at the cost of taxing, superannuation benefits, leave encashment, leave travel, commuted pension, VRS compensation etc. With an estimated tax loss of Rs.55,000/-cr New Code is a disaster and that is precisely the reason why no estimates of the tax losses are provided in the code. According to the Economic Survey 2009, 60% of India’s population does not have income of even Rs.20/- PER DAY. In such a grave situation where 660 million mouths to feed, why should the Government forego Rs.1.2 Lakh from a person who is earning Rs.10lakhs.”
    This is not the only situation arising out of new code, in the next article we will discuss how small investors who invest less than Rs.10lakhs in equity shares or mutual funds are paying more dividend pay out tax than they will be paying if the same income is allowed to be taxed in their own hands directly. The system of Dividend Pay out tax is a cover up for patronising the richest promoter shareholders of the country at the cost of small investors of this country. Small investors are made to subsidise the tax burden of the richest.

    ….to be continued.

    1. CA.N.VENKATESWARAN. says:

      Investment may be grouped under realty (house property), investment in bank deposits, Post office Small Saving Schemes, investment in Mutual Funds, investment in direct equity and debt securities, gold or bullion. The income from speculative nature of business are not included here as they are not investment.
      Income from House Property:
      As per new code income from a house property, which is not used for the purpose of any business or profession by its owner will be taxed under the head “Income from house property”. The code suggests a new scheme for computation of income from house property. Accordingly,
      (a) Income from house property will be gross rent less specified deductions,
      (b) Gross rent will be higher of (i) actual contracted rent for the year and (ii) presumptive rent calculated @ 6% per annum of the ratable value fixed by the local authority. However where no ratable value has been fixed, 6% of the actual cost of investment in such property will be taken as rental value. Here lies the catch. It is but common experience till now that no house property gives a return of more than 3-4% in the immediate future of the investment in house property. Every one can calculate this with their own experience. However for example to day flat price per Sq.ft. is Rs.3000/- in suburbs of Chennai and a two bed room flat of 800sq.ft will cost Rs.25,00,000/-. If this flat is to be let out it may fetch a rent of Rs6,000/- per month or Rs72,000/- p.a. which works out to only 2.88%. May be at present the rent quoted here are more than actual. May be Government might have kept in mind the suburbs of NewDelhi like Noida or Gurguan and Navi Mumbai for rental rates but the sq.ft. rate of flat in those centres will be more than Rs.8000-10,000 and rental value there also will not be higher than 3-4%. Hence the presumptive calculation 6% on investment for rental value is nearly 100% higher than the actual realisable rent. Hence wherever the actual rent shown is less than 6% of investment cost, there is scope for department to claim that there is suppression of income. Hence the presumptive rent should be reduced to 2.5% from the code prescription of 6%.
      (c) The advance rent will be taxed only in the financial year to which it relates.
      (d) The gross rent of one self occupied property will be deemed to be nil, as at present.
      (e) The following deductions will be allowed from gross rental income calculated as above: (a) Municipal property and services taxes paid, (b) 20% of gross rent towards repair and maintenance (presently30%) (c) interest on housing loan
      (f) In the case of self occupied property where the gross rent is NIL, NO DEDUCTION for taxes and interest will be allowed.
      (g) The income from property shall include income from the letting of any building along with any machinery, plant or furniture etc. if the letting of building is in separable from others.
      Income from all transactions in all investment assets will be computed under the head “Capital gains”. Investment asset is defined as any capital asset other than business capital asset. The present distinction of short term and long term investment assets based on the length of holding of an asset will be eliminated. The capital gains arising out of transfer of personal effects and agricultural land beyond specified urban limits will continue to be exempted from tax under this head. If the capital asset is transferred after one year from the end of financial year in which it is acquired, it will be eligible for deduction of indexed cost to reduce inflationary gains. The cost of acquisition of assets for indexation has been shifted from 01/04/1981 to 01/04/200. The carry forward loss under this head will be allowed as deduction from gains before it is subjected to tax in the current year. If there is still an unabsorbed loss the same may be carried forward to next year. If the capital gain is available then it has to be added to the other heads of income and taxed at the appropriate marginal tax rate applicable to person’s total income. The transfer of capital asset under gift or will be exempted from capital gains. In respect of securities transactions, Securities Transaction Tax will be abolished.
      IN RESPECT OF SECURITIES: As there will be no security transaction tax all capital gains arising from transactions involving market transactions also be subject to capital gains tax. Hence all capital gains arising out of equity transactions will be subject to tax at normal rates applicable to investor. So also in case of redemption of equity mutual funds the capital gains will be taxed. Earlier the Courts have held that if the cost of acquisition is indeterminable then the gain from that transfer is exempted from capital gains tax. But New code has amended this provision by treating the cost of the asset as “nil” so that entire net sale proceeds will be taxed as capital gain. A similar provision has been made in respect of cost of improvement also.
      As per New Code, the deduction for new investment of sale proceeds of the transferred asset is available only in case o the following: (a) From one agricultural land to one or more agricultural lands; (b) From any investment asset transferred any time after one year from the end of the financial year in which the asset is acquired to a residential house, if the assessee does not own any residential house, other than the new house on the date of transfer of the original asset. (c) from any investment asset transferred any time after one year from the end of the financial year in which the asset is acquired, to deposit in an account maintained under the “Capital Gains Saving Scheme”. All withdrawals under whatever circumstances , from the Capital Gains Saving Scheme will be included to the income of the assessee under the head “Income from residuary sources” and accordingly taxed in the year of withdrawal.
      The loss under the head “Capital Gains” will not be allowed to be adjusted against any other head of income. The losses under this head will be allowed to be carried forward for any number of years for set off against the income under this head only
      The New Code do away with the difference between short term and long term capital gains and different structure of taxation of these gains. After the implementation of the New Code both short term and long term capital gains will be added to the other ordinary sources of income and taxed at the marginal rate applicable to the assessee. The only difference will be that if the asset was sold after holding it for ONE FULL FINANCIAL YEAR the assessee can claim deduction for the amount invested from such sale proceeds in ONE residential house provided that he does not own any other house on the date of transfer of the original asset. This deduction will be available irrespective of the fact that the asset sold is Fixed Asset or any Financial Asset. From this it is clear that when any asset is held for more than one full financial year, deduction can be claimed by investing the full or the part of the sale proceeds in a residential house if the assessee does not own any other house. Similarly if the transferred asset is held for more than one full financial year, he can defer payment of capital gains tax by saving the sale proceeds in “capital gains saving scheme. As and when withdrawals are made from this account , the withdrawals will be taxed in the year of withdrawal. Thus the new code also distinguishes between short term and long term capital gain but the only difference from the existing provisions is that for all assets uniform holding period of ONE FULL FINANCIAL YEAR is prescribed for special treatment
      From the above it is clear that for security transactions, nil tax for long term capital gain (held beyond 12months from the date of purchase) and special rate of 15% for short term capital gain will be dropped. But still the treatment of sale proceeds for tax purposes will differ if the asset is held for one full financial year. By using this avenue one can only defer the tax impact and plan it in such a way its impact is least. From this it is clear that the Government want to tax the sale proceeds of assets if it is immediately used for any other purpose but to permit to defer the tax impact if it is saved in special scheme. But this saving scheme may or may not offer return, even if it offers return it may be very low and even if it is low it will be taxed without any exemption at the time of withdrawal. Under such a situation how an investor can build his portfolio of securities and plan his future funding of major expenditures at an average compounding rate when his intermediary sales are to be either taxed or invested in a much lower return is a million dollar question? The whole world of long term financial planning is likely to go awry as the sale proceeds are to be taxed at each stage of rollover or churning. It may create a sense of insecurity in financial planning and people may give up planning. Or one has to plan taking into account the outflow on account of capital gains taxes at each stage of transaction also. To avoid such stringent provisions, we suggest a modified provision in which the sale proceeds may be permitted to be invested in special saving scheme and any withdrawal from it for the purpose of investment in the security may be exempted from tax. If this is not permitted every time when an investor re arrange his portfolio he has to pay tax on capital gain.
      Already the speculative instinct in the capital market has reduced the enthusiasm of investors for long term investment. Investors are losing patience and losing faith in long term investment. With the provisions of the new code adding further disincentives for long term investment, it will be difficult to gauge how the capital formation in the country will improve? If the capital formation in our country is affected, our economic growth will be affected. If the entire capital market functions only with speculative instinct it may tend to be a gambling den than contribute to the capital formation.

      The income under this head will comprise of any income which is not included in any other head of income discussed above. The scope of this head has been broadened by including the following incomes also:
      (a) Interest other than interest accruing to or received by permitted financial institutions
      (b) Amount received or retained on account of breach of contract unless included under business income;
      (c) The redemption or withdrawal of the principal amount from any investment that is eligible for deduction in computing the total income. However withdrawals or redemptions from pf or pure life insurance policies.
      (d) Any amount exceedin Rs.20,000/- taken as loan or deposit otherwise than by way of cheque or draft will be deemed to be income under this head,
      (e) Any sum received under a life insurance policy, including bonus if any, shall be exempted from tax provided it is a pure life insurance policy. The term pure life insurance means that premium payable for any of the years during the term of the policy does not exceed 5% of the sum assured. Consequently proceeds of all other policies including bonus will be included in the income under this head.
      While serial No11 of the Sixth Schedule of the New Code which deals with “income not to be included in the total income” give specific reference to accumulated balance outstanding as on 31-03-2011 in Employees Approved Provident Fund and any accretion there to, it is silent with respect to PPF and other insurance or superannuation schemes. Why this discrimination among existing Provident funds and other long term saving schemes? While the Government’s discussion paper on the new code [paragraph 12-7] state this exemption will be available to GPF, PPF,RPF and EPF the same is not to be found in the sixth schedule of the new code and it state only about EPF.
      The new code states under sec99 dealing with “Dividend Distribution Tax” states that every domestic company shall be liable for dividend distribution tax at the rate of15% from distributed profits. The question that arises is that all those small and medium investors who receive dividend may not have total income exceeding Rs.10Lacs including those dividends and hence they are liable to pay only 10% tax but their TDS from dividends will be at 15% and this dtds they can not claim also by filing the return as there will be no Form 16A. WHY SMALL INVESTORS SHOULD TAKE THE BURDEN OF ADDITIOANAL 50% TAX THAN THE LAW PRESCRIBES FOR THEIR INCOME LEVELS JUST BECAUSE THE GOVERNMENT FIND IT EASY TO COLLECT? WILL THIS ARGUMENT STAND IN COURT IF THE INVESTORS TAKE IT TO THEM? WHY SHOULD SMALL INVESTORS PAY EXTRA TAX TO SUBSIDISE TAX BURDEN OF SUPER RICH, PROMOTERSAND FIIs? IS IT THE PENALTY FOR SMALL INVESTORS TO INVEST IN EQUITIES? IS IT THAT ALL PUBLIC SHAREHOLDERS SHOULD NOT ENJOY THE BENEFIT OF DIVIDENDS AS REGULAR INCOME AND TAKE ADDITIONAL BURDEN OF DIVIDEND TAX BECAUSE THE PROMOTERS OF THE COMPANIES HAVE GIVEN THEM THE OPPORTUNITY TO INVEST IN THEIR COMPANIES? SHOULD THE SMALL AND MEDIUM INVESTORS ONLY LOOK FOR SHORT TERM CAPITAL GAIN AND PAY ONLY 10% TAX INSTEAD OF 15% DIVIDEND PAY OUT TAX? WILL SUCH A SITUATION CONTRIBUTE TO THE CAPITAL GROWTH IN THE ECONOMY? My humble answer to all these questions is to reduce the dividend pay out tax to 10% or better than that, exempt dividend up to Rs.1,00,000 per shareholder per company as exempt and tax the rest of the dividend as income under “Residual Sources” in the hands of all other individual and corporate shareholders other than banks, mutual funds, investment companies. Perhaps Government will get thousands of crores of rupees as tax on dividends which will reduce the gap between the rich and the poor and contribute to the wealth distribution rather than accumulation in few hands. This will add to the additional participation of the public investors in equity investment.
      The new code argues that incentives for savings have been rationalized to encourage net savings. Hence it has increased the limit of savings exempted from tax to Rs.3lacs as against the present limit of Rs.1lac. At the same time it has reduced the avenues for saving by excluding ELSS OF MFs, 5 year Term deposits of banks, NSCs, POTDs, Principal repaid on housing loans, etc. The eligible schemes under New Code for this purpose are Approved Provident funds, Approved superannuation funds, Insurance and New Pension System Trust. The accretions to the deposits made in these accounts by way of principal as well as interest will be exempted from tax as long as they are not withdrawn and any withdrawals will be taxed at marginal rate applicable in the year of withdrawal. The question that arises is that when investments are made in these accounts the assessee may enjoy a tax exemption at lesser rate{ NIL UP TO RS.1,60,000; 10% FROM 1,60,000 TO 10,00,000 AND 20% FROM 10,00,000 TO 25,00,000 income levels in the respective years] but may have to pay tax at higher rate when he withdraws in lump sum. Why government want to penalise its public for saving from their income. Or is the Government think that public should only save and never withdraw to enjoy their savings? By restricting the schemes to only four and that too where these institutions have to invest more than 80% in Government Securities does the Government wants to corner a major portion of savings and leave the private sector to cry for funds? Under such situation how private capital will be formed and how the economic growth can be achieved? If the principal amount that has been saved is to be taxed at the time of withdrawal why it should be called “incentive for savings”? What is the incentive for saving here except that you only defer your tax impact but at the same time increase the tax impact on a future date? Is it that the Government expect that all the tax savers should use their savings only after their retirement when their income is likely to come down? To day a person contributes to GPF or EPF or PPF from his monthly income and use those savings on a later day for the purpose of house building or children higher education, medical treatment or dependents marriage etc. In future how these bulk expenses are to be funded by individuals if a substantial portion of their periodical savings is to be spent on taxes? What ever deductions and exemptions already in the INCOME TAX ACT are included after certain careful study about the living conditions of the people and all these things should not be brushed aside in one sweep using EET. If the Government is so particular that it has to collect more revenue than it has to go by the established canons of taxation namely tax where the traffic can bear? Leaving that way and allowing the rich to get more concession and making the others to bear that additional burden also is not conducive to social justice.
      I hope someone will answer my above queries and answer how the new code will improve the delivery of social justice.
      The discussion paper has put one important point for discussion that as per Government’s view profit linked incentives are inherently inefficient and hence the Code substitutes the existing system of taxing the profits to a new system wherein a business entity will be allowed to recover all capital and revenue expenditure(except expenditure on land, goodwill and financial instrument )and it would be made liable to pay tax on profits made there after. The period consumed in in recovering all capital and revenue expenditure will be the tax holiday period. This new scheme will apply to the nine selective industries only which are all capital intensive. One of the important aspects that we may discuss here is Minimum Alternative Tax [MAT]
      According to the discussion paper the Code provides for MAT calculated with reference to the “value of gross assets” instead of present system of tax on book profits. The MAT will be calculated at2% of all the assets at cost less accumulated depreciation. (in case of banking companies0.25%) the question that is silent here is the cost is net cost of excluding all the borrowings for funding those assets or without the deduction o borrowing. If it is without the deduction of borrowing then MAT will be an additional burden in addition to interest cost as interest cost is allowable deduction for calculating MAT on existing profit method. Since under the code MAT will be a final tax and not to be adjusted against future actual tax liability no credit will be allowed for MAT paid in future. Hence it is an additional burden and not like advance payment of tax as in the present situation. Will it not add to the tax burden of the companies?

      to be continued

  19. greedyman says:

    How will DTC impact stock market

    1. manish says:

      after DTC , the Long term Capital Gain will go away and People will have to pay taxes after 1 yrs . This is the mail impact .

      Because of this , We might see a short tenure of Less interest in Stock market from some people and later we can see more buying and selling because the time frame of investors may change because of less reward by keeping it for more time.

      What are your views on changes ?


  20. Manish Chauhan says:


    Lets see … Most probably they will not apply the rule on amount which is paid before the tax code comes into effect .


  21. Ash says:

    I think taxing amounts received from Insurance policies (maturity, money back etc) is a terrible mistake. Even if govt wants to introduce EET to insurance, it should be applicable to policies issued after arpil 1, 2011 and not to insurance policies issued before that. Tons of individuals have invested in LIC policies etc in the past assuming that the maturity proceeds will be tax-free and now this. Will definitely be cause of court cases, if govt does not drop idea of taxing insurance proceeds.

  22. Manish Chauhan says:


    Dividends paid out on equity investment are fully tax exempt even after DTC comes in effect .


  23. Satish S says:

    Thanks for a very informative blog. I have some questions about tax implications for mutual fund investments – under the new DTC how will dividends on equity mutual funds be treated? Will the dividends remain tax free in the hands of investors or will they be taxed at marginal rate?

  24. Manish Chauhan says:


    I feel you are taking it very hard .. 🙂 calm down

    Not having Long term capital gains is a normal thing .. Most of the countries dont have LTCG concept , and those who have also have for limited products ..

    We had it for so many years , was a opportunity for those many years and taking it away is now looking like a bad thing once we have seen it already ..

    How ever I am not personally very happy with it . but even I wanted it to stay .

    Also the goal of new tax code is to simplyfying the tax computation system … which is a good measure actually .. Almost every one is now going to pay only 10% tax on income above 1.6% (upto 10 lacs) .. which is true for 95%+ of population .

    Its true that we will be paying tax on the accumulated amount on Insurance , PPF etc .. but then we will also have more income to save and invest because all these years our tax outgo will reduce .. You should also concentrate on good part and then see this situation in totality .

    I am sure you can find the positives in this new tax code ..

    also please note that the new tax code is in proposal state and yet it has to become a law .. so save your reaction for later time 🙂 .. I am sure we will have fruitful discussion in some months 🙂


  25. Amarnath Awargaonkar says:

    Dear Manish,
    Direct Tax code is good and bad.
    Good part are the slabs but bad part is abolishing LTCG and Taxing PPF LIC and other items.
    If govt. wants people to save for long periods LTCG must stay.
    If they want people to save then taxing PPF and LIC has to go.
    Salaried individuals are the ones who are going to loose the entrepreneurs will get away with all the goodies.
    I mean you save for your old age and govt then taxes the lump sum amount you get, not fair to trouble an old chap who was a disciplined investor all his life only to see that he has been taken for a ride by the frivolous govt policies.
    Amarnath Awargaonkar

  26. Manish Chauhan says:


    The Interest part of EMI on second home will be fully exempt from tax (not limit) even with Direct tax code . I am sure its good for them also .. Why do you say it would add extra tax burden ?


  27. Anonymous says:

    For people who are looking for first home for living this is going to be good tax code…people who are buying second home for tax exemption/investment this is no longer good , as it will add burden of EMI..so as Business Pandit has mentioned property prices should come down/stabilize further…but again Government should not kneel down in front of Builder Lobby..

  28. Manish Chauhan says:


    1. It should be a statement on this in some months .. not sure when

    2. INterest from LIC will be taxable for all the amount paid after 2011 , before that it will be non-taxable


  29. Tapan says:

    Can anyone kindly acknoweledge me in the followings?

    1> When can we know whether this proposed tax plan will be applicable or not.

    2> Will interest gain from LIC also be taxable after 2011.

  30. Manish Chauhan says:

    @Business pandit

    I visited your blog and it seems good to me . Just that your articles are need to provide the scenario in which you are talking about . I was little confused in the article where you are telling "why one does not need insurance" .

    there is never anything like Correct view , its just "view" . so you are free to put your points forwards .. its others who decide they need it or not .. for as far as you are concerned . you are good.


  31. Business Pandit says:

    Thanks for the appreciation and link.

    Interesting that you say I have guts. My views are unpopular so I never reveal my real name / location. Photo is an absolute no-no. I can deal with any questions as long as they are away from my body 🙂

  32. Manish Chauhan says:


    Your confusion is valid , its a bit complicated now .. PPF and other Insurance Policies have lockin period . So if someone's PPF is maturing at 2020 , he cant take any action from his side , in that govt will have to consider not taxing him for the amount before 2011 . But with any instrument like mutual funds (non-ELLS) , investor have the control to sell and get the gains …

    All we are talking about are possibilities on what can happen , because everything is still at discussion stage . A person who has mutual funds bought in 2008 and have acrrued a good amount of profit till 2011 , might sell and get his gains . What this person is saying may be true for "non-locking" instruments because we have control over it . With PPF and other lockin things , we cant do anything from our side .

    At the end , i am sure discussions will end up with rules which are logical 🙂


  33. Vishal says:

    You have a really unique take on the proposed capital gains law, I apologize for misunderstanding. It is possible that you interpretation is correct: after all it is law and logic is not applicable in many instances of law. But no one else seems to believe that existing investments before 2011 will continue to be free of capital gains even if held after 2011.

    It is like believing existing PPF accounts will remain EEE for the life of the account holder. Or that interest of existing home loan can remain tax deductible for the tenure of the home loan taken before 2011. I am again making the mistake of applying logic to law, but you see why it seems unlikely to me.

    On the other extreme, this guy (http://new.valueresearchonline.com/story/h2_storyview.asp?str=100689) believes that we will need to withdraw our investments just before April 2011 otherwise even the capital gains till then will be taxed. If this guy is correct, it might lead to enormous turmoil in the stock market in the last week of March 2011 and indices might show wild swings of the magnitude not seen in Indian history. So he is less likely to be correct than you.

  34. Manish Chauhan says:


    LTA and HRA will also become fully taxable with Direct code tax , you are correct about the taxability .

    But your example here is too extreme and not realistic , Why do you take 4 lacs of HRA with salary of 10 lacs ? One with 10 lacs of salary will have around 1.3-1.4 lacs of HRA and even if it is 4 lacs , the person wont be able to claim it all because of the HRA rules .

    So the only change which will happen with direct code tax is that it will beceome taxable , and it wont change things a lot , because you also save tax because of low tax rate .

    May be you want to give me some other example to prove your point , I would like to hear your side of view .


  35. Navneet Karnani says:

    About the tax calculation, I think you are a little off track. Notice that the new code does not mention LTA or HRA. Hence, if I draw a salary of 10lacs today and 4lacs out of this is HRA, I potentially pay tax only on 6 lacs. But, after the new code, I will pay on the full 10 lacs.

    This effectively negates the slab changes.

    Am I right on this ?

  36. Manish Chauhan says:

    @Karan Batra

    You may be true , At the end its a govt thing , and no one can say how much time it will take , just imagine how much time it will take to punish Babri Masjid accused ?


    yes, you are correct , the people with home loan will be hit , but not too that extent which you are imagining , You will have other modes of saving the tax through other means , also your tax rate will be just 10% which will save you tax ,so if at this moment one is saving Rs 100 , later he may be able to just Rs 30 or Rs 40 .

    @Business Pundit

    You have interesting insight about that topic , I quite liked it 🙂 . Linking it in this article 🙂 . Good work .. But my liking is a personal one , because i myself dont have a home loan 🙂 . Readers who already have Home loan and mad at Direct code tax, they will ask you questions , so be ready to answer them .. good luck .. Btw , you have a good perspective and have guts to say what you beleive in , much appreciated 🙂


  37. Manish Chauhan says:


    No Vishal , The basis of your calculation as problem , thats what i am try to explain , but may be i failed somehow .

    So LTCG will be only applicable to amount invested after 2011 , till 2011 all the money which was invested and earned will be free from tax as per the old laws , so a person who is retiring in 2011 , will not have to pay any tax even after he sell his investments after new tax law comes into effect .

    So if he retires at 2013 , then new tax laws will apply for only the amount he invested in 2011 and 2012 and not on any amount before that , because thats the logic , they invested there money based on old laws ..


    You are overlooking the positve side of Direct tax code , what do you have to say about the Tax slab , one will save a lot of tax because of that and on the other hand his tax liability will increase in other things, but the next effect may be on his side (mostly)

    @Anonymous 1

    Yes ELSS will still be covered in Sec 80C.

    @Anonymous 2

    Where do we invest in 2011 to get maximum benefit is a greedy question , Why dont you ask me "where should I invest in 2011 to acheive my financial goals in correct way" .. Even in 2011 , every investment product will be almost same , just that there tax calculation differs , it has happened with all the products ,do truly speaking the investmnet strategies should not change per se .

  38. Business Pandit says:

    Arun, removing tax break for home loans in fact good for you. It is one of the best proposals from the draft code. Read http://businesspandit.wordpress.com/2009/08/18/home-loan-tax-deduction-ismaybe-no-more/

  39. arung says:

    The provision that ends any special treatment for home loans is like hitting below the belt. How will a person who saves 1 lac and pays 1.5 lac as home loan interest make an additional saving of 2 lac and take benefit of the raised limit of 3 lac? Home is a basic need and Govt should encourage and promote people to build their houses. This provision is a complete no no.


  40. Karan Batra (CharteredClub) says:

    Even in 1995 , the same had happened.
    The govt had proposed a new Tax Law but nothing happened except debates in the parliament… eventually after 7 years only 4 provisions out of the whole act were passes and tehya ll were imbibed in the present Income Tax Act of 1961.

    The same will happen again

  41. Anonymous says:

    Hey Manish,

    As always great post. Where do we invest in 2011 to get maximum benfit then. Do reply.


  42. Anonymous says:


    Do you think in the new tax code funds invested in the ELSS are still come under section 80C.


  43. Ketan says:

    Brilliant idea to cheating people by sucking from retirement fund…like PF, PPF and LIC which is alrady in govt hand and none can hide.

    The problem is govt is not able to catch people who are not showing correct income, but this would not be the right solution to stop that.

    Here again looser is honest persons and service man.

    I would still give thumbs up to this cheating idea if GOV can make india debit free or provide infrastructure like china and unemployment allowance.

  44. Vishal says:

    Right, maybe I haven't been clear. Sure sell before 2011, but I am talking about the new capital gains after 2011.
    A person, retiring in 2011. Life savings in equity and balanced funds at the point of retirement=25 lakhs
    With the new direct tax code:
    annual returns (average) = 10%
    after taxes (10% capital gains) = 9%
    monthly income: 25 lakhs * .09 / 12.0 = 18750.0

    With old direct tax law:
    annual returns (average) = 10%
    after taxes (0% LTCG) = 10%
    monthly income: 25 lakhs * .10 / 12.0 = 20833

    Of course, the monthly income calculated above cannot be utilized fully in both the above cases to account for inflation later (assume 20 years retired life). Note that LTCG is his only source of income.

  45. Manish Chauhan says:


    There is come confusion here , Please give me the calculations . Apart from PF , if you are talking about Mutual funds , People are free to sell if before Mar 2011 and take advantage of current tax laws .

    please clear with me your calculations .


  46. Vishal says:

    It is not clear yet what happens to pre-existing investments (except for PF, which will be exempt). Even if only new investments are liable to LTCG, older guys are still at a disadvantage. While earning they paid 30% tax hoping to increase the amount by capital gains in stock market over time, with 0% LTCG. Now any capital gains after 2011 are taxed. Lower slab advantage is not there because they are not earning salary anymore.

    Simple arithmetic can show the disadvantage to older guys. Want me to do it for you?

  47. Anonymous says:

    oh my goodness? what a mess they r gonna make for a salaried guy like me who used to enjoy a complete exemption of INTEREST PAID ON HOUSE LOAN ,,,DO THEY WANT US TO INVEST MONEY IN ANEW PENSION SCHEME FROM WHERE THEY WOULD DIVERT MONEY IN TO MARKETS ONLY TO HAVE A BILLION SATYAM COMPUTER LIKE COMPANIES

  48. Manish Chauhan says:


    LTCG tax will not be applicable for the saving before it comes to effect ,So if Direct Code tax comes to effect on Mar 2011 . All the savings and earning till 2011 will be exempt from tax . Only on the amount which is invested after the code comes into effect will be under EET .

  49. Vishal says:

    LTCG is offset by lower tax slabs. But what about older guys, who paid 30% tax for whole lifes, expecting 0 LTCG. Now when they are near retirement, LTCG is being introduced. Double whammy for older guys, really.

    Also, with no LTCG saving was being encouraged. With LTCG, incentive for saving is a lot less.

  50. Manish Chauhan says:


    Here , the salary is not increasing , Just your income tax is decreasing and indirectly your saving is increasing , Now its a personal thing whether one saves that extra part or Spend it . I would save

    LTCG is a sad part for me also personally , but its ok at the end , because you get some positive things from other end .


    Yes , you are right .


  51. gauravi says:

    I think it would be a mixed bag because on the one hand if salary in the hand of people is increasing , other perquisites are being included in that same very salary

  52. Anonymous says:

    Vipin —

    More salary so u think ppl would save more??? I guess will spend more and then what ever is saved it will be further taxed which is not at all good … Long term Capital Gain is the biggest turn off in this proposal. Still more Debate needs to be done.

  53. Manish Chauhan says:


    LTCG and STCG will have no distinction most probably , most probably it will be added to income back and taxed accordingly , Right now its too diffuclt to give a judgement on this . Lets wait for more clarity


  54. संदीप वि.सबनीस says:

    nice blog..good articles…..salute to your hard-work….!!…

    New tax-structure looks good….What would be tax implications for debt MFs?

  55. Manish Chauhan says:


    Direct Tax code is just proposed and might or might not come into effect . Let is come and then decide your strategy , Dont do any thing now 🙂


    There is still the clarity required from govt . LTCG if introduced will impact at the time of Selling , but with new code , the disposable income will also increase , what do you think about that ?


    Yes , I may agree with you on this . Its more friendly with Salaried class especialy people getting high salary .


    LTCG being taxed is a trade off against excellent "tax slab" . Overall i feel it would benefit .


  56. Anonymous says:

    I'am concerned about my PPF account being taxable.LTCG do concern me , but still should be ok , as we can, may be control when we book profit

  57. Babu says:

    It looks like, it is good for salaried people but not for investors/savers who want to build their portfolio over long term.

    1. saurabh says:

      well buddy see the period consideration on long term gain is increased from 1 to 3 years

  58. Philip says:

    am worried about the long term capital gains going to be introduced and want more clarification on the double taxation treaty that India has with many countries. Some suggest that it could be scrapped.

  59. Gana says:

    I think it is good overall but do see lots of selling happening especially of long term stocks. May be sell everything now and it starts falling come March 2011 and buy again ?

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