Jagoinvestor

July 25, 2010

Changes in New Direct Tax Code (DTC)

The Government has come out with new revised Direct Tax Code (pdf) and there are many changes which might look good to investors finally. Most of the people were not happy with the old tax code as it made some products taxable like PPF , Endowment Plans etc, which investors were totally worried about. Now Govt has made some changes earlier which looked extreme to investors and they were not happy about it, however still there are some things which will pinch investors. Old Direct Code tax was challenged and the govt reconsidered the Old Direct Tax Code and has finally come up with this new revised set of rules which I will list down here.

Pure Life Insurance Products/Pension Products/PPF/EPF/NPS

Finally, under New Tax Code:  PPF, EPF, NPS, Pure Insurance products and Pension Products have come under EEE regime, which means that the amount you contribute, & any return or interest generated and the final maturity is exempt from tax. The major change in the revised Direct Tax code is that at the time of maturity of these products, you don’t have to pay tax on the amount you get. In the old Code the maturity was taxable.

Endowment/Moneyback and ULIP’s

These products are under EET regime, so the money you get at the end will be TAXABLE.  (More)

Real Estate

Existing and prospective real estate buyers have some thing to cheer about. In the Revised Tax code, Interest will still be exempted upto 1.5 lacs, but principal would not be getting any place in sec 80C , which is again not a big problem as generally 80C gets filled up with EPF, Insurance, children’s tuition and other products for most people.  (Returns from Real Estate)

Another big change which is there is that now on a rented flat, the gross rent for taxation would be actual rent received. Earlier, if you had not let out your flat and it was vacant, you still had to pay tax on the notional rent (the old draft it was said that it can be upto 6% of the value of the property.) But now, with revised tax code you don’t have to pay any tax if you don’t get any rent from your rented (and second house) house  Would be nice to see your views on controversy of Buying vs Renting

Existing Investments

Incase you have any existing Investments, which enjoyed EEE method of taxation, they would be treated the same way for their full tenure.

Capital Gains on Equity

There are some big changes here. For sure your equity investments in shares and Equity mutual funds are going to be taxed now 🙂 But in a different way. The old tax code suggested that short-term capital gains on Equity should be added to the income and taxed at applicable tax rates and long-term gains (above 1 yrs) should get Indexation benefits and then they should be added to your income for taxation purpose.

However the new revised tax code has changed this and a new concept of “Deductions” is in . As per this rule , for any long-term capital gains, you will get certain specified deductions which will be some percentage of your profits, and then after deducting these, the rest will be added to your income and then taxed at applicable rates. The indexation concept is now gone . The short-term capital gains still gets added to income and then taxed . The short-term capital gains will actually be now beneficial to people who earn 10 lacs of less , as earlier they had to pay 15% tax , but now as they have to pay 10% tax as per the new slab , the tax on short-term capital gain part will be 10% only .There is no enough clarity on the deductions percentage as of now. (Using looses to reduce your tax)

One another major change is the definition of the holding period. As of now, it will be 1 yr from the end of the financial year when you bought your shares which means that if you bought your shares or mutual funds on 5th of Apr 2010 , then the end of that financial year would be 31st Mar 2011 and then 1 yr from that 31st Mar 2011 would be 31st Mar 2012 , so effectively your Holding period can range from 1 yrs to 2 yrs depending on when you buy the shares, so the short-term capital gain would be if you sell it before your holding period and long-term capital gains would be if you sell it after your holding period .

Capital Gains on Gold , Debt Funds , Real Estate

The long-term gains on these assets would now be after 1 yrs 🙂 . Earlier it was 3 yrs. The long-term capital gains would qualify for Indexation as it was applicable earlier and short-term capital gains will directly be added to income and taxed . Earlier the base date for indexation values was taken from 1 Apr 1981, however now the base date shifts to Apr 1, 2000. This will now reflect the inflationary changes in these asset classes in a better way.

What happens to the properties very old like 30-40 yrs ? Some thing new has come up !! , your original indexed cost price wont be considered , but the price on Apr 1 , 2000 would be Applicable, as per my understanding .

Interesting : So what about those who have invested in Equity after Mar 31 , 2010 ? If they sell it before 31st Mar 2011 , they will pay short term capital gains of as high as 30% or 20% (depending on which slab you come in this year) , OR the other option is to hold it and sell it later so that New Direct Code applies to you and you pay just 10% on the profits considering you taxable income is less than 10 lacs . Watch the video below on this issue .



Still , there are some areas where there is no clarity on what will happen , Please share your views on how this new tax code impacts you ? what are your views on this ?

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VIGNESH
VIGNESH
12 years ago

Hi

1. I am goi to invest in ELSS for some 60000 for this financial year. while redeeming after 3 yrs this will it be taxable or as i have invested before dtc implementation is it tax free ??

2. now only started sip in some five funds . I am a long term investor for the next 25 yrs. what would be the effect while redeeming the mutual funds after some 7 yrs?

pls tell me

anant bodas
anant bodas
13 years ago

anay clarity on whether lss funds will given exemption or the tax break is going to be more than three years

amarawargaonkar
amarawargaonkar
13 years ago

Manish,
In case of SIP’s what should you go opt for, growth option, dividend option or dividend reinvest option (in wake of the changes in DTC code).
regards.
amarawargaonkar

Praful
Praful
13 years ago

What if I have Tax saving mutual funds invested thru SIP for long periods say for 30 yrs.
How the DTC will affect my returns after 30 yrs, and do i need to pay tax while investing, after the DTC come in picture?

g.s.chowdhary
g.s.chowdhary
13 years ago

in case of HRA received from employer.
Now what is the tax implecation of HRA rec and rent paid

Balbir
Balbir
13 years ago

Hi Manish,

I wanted to know if dividend by company is taxable. Suppose I buy 100 share of a company and I get 1 Rs per share as the dividend then do I need to pay tax on 1*100=100 Rs?

Thank you,
Balbir

yogesh
yogesh
14 years ago

Hi Manish,

Gone through that post..

So mainly changes are in captial gain ..short term investment period is reduce to 1 yrfrm 3 yr ..So take away is to do investment for long term period..
So that we need to pay less tax..right ?

I am still not clear from when new DTC rule be applicable..Is it applicable for all investment starting from 1st April 2010 or starting from 1st April 2011.

Srinivas
Srinivas
Reply to  yogesh
14 years ago

@yogesh,
the definition of long term capital gain and short term capital gain is not modified. short term is still less than 1 year and long term is above 1 year. only tax treatment is different.

DTC rule is applicable for the investments after April 1, 2011. Whatever you invest today, it enjoys the existing rule even if it matures in DTC period.

Morever, I found one change from TOI article here,
http://timesofindia.indiatimes.com/business/india-business/Direct-Taxes-Code-Bill-Youll-save-tax-but-not-much/articleshow/6442402.cms

Life insurance + health insurance + tuition fees maximum limit under tax saving is limited to Rs. 50,000.

Manish did you observe this?

Srinivas
Srinivas
Reply to  Srinivas
14 years ago

first of all I don’t understand why separate tax slab for women?
and that too in DTC, women and senior citizens are offered same tax slab.

If any one knows reason why govt giving different tax slab for women. please share..

vijaya
vijaya
Reply to  Srinivas
14 years ago

Simple.. They represent big Bank i.e., Vote Bank , It is just Sentimental, Emotional touch -in the name of weaker sex -to garner ‘ Votes ‘ , (another reason also they could influence their near &dear one’s -to connvert Vote bank at a larger extent.) ‘Humbly’ feels beyond that Nothing specific , as Politicians have to run their show.Its Reality.

yogesh
yogesh
Reply to  Jagoinvestor
14 years ago

Thanks srinivas .

Hi Manish,

Is it possible to put some information in post like what are advantage in current taxation system which can be availed before 1st april 2011 as after DTC it won’t be available.

Is there any better thing which we will going to lose in new DTC?

Regards
Yogesh

yogesh
yogesh
14 years ago

Some good points..
1.
As of now, it is proposed to provide the EEE (Exempt-Exempt-Exempt) method of taxation for Government Provident Fund (GPF), Public Provident Fund (PPF) and Recognised Provident Funds (RPF) …”, the revised DTC released by the Finance Ministry said.

2.
revised proposal has also made it clear that tax incentives on housing loans will continue.

Srinivas
Srinivas
Reply to  Jagoinvestor
14 years ago

Last year, FM projected DTC as a simple and revolution in Indian tax system after Independence. But finally it resulted in a same old story. They only know how to loot tax payers money in the name of common man, common wealth games…… -:(

yogesh
yogesh
Reply to  Srinivas
14 years ago

Hi Manish,
I don’t have full information so can’t say whether changes are good or not.

But there looks some relief to common people like

1)No tax for income upto 2 lachs
2)For senior citizen its 2.5 lachs
3)people who were in income range of 5-10lach has to give 20%..there may be some discount here ..

Which point went in reverse directions ?In short can have some summary..I want to know in respect to investment ..like which were EEE and now changed to EET or so on..

I read DTC will be applicable from April 2011 so if we make
any investment now(till mar 2011) then will it still be applicable as per old/current income tax rule for future..Plz clear the doubs..

Regards
Yogesh

ranjan
ranjan
14 years ago

why dividend reinvestment would be better option than growth under DTC?

ranjan
ranjan
14 years ago

Under DTC i.e in 2011-12, if I do not withdraw from my equity mutual funds,growth option, shall I have to pay LTCG based on the profit accumulated?

amarawargaonkar
amarawargaonkar
14 years ago

Dear manish,
In case of SIP in equity related MF what should be the choice to invest – Growth, dividend or dividend reinvest option. I am asking this as LTCG and STCG have been changed in the revised DTC.
Thanks.

rckaushal
rckaushal
Reply to  Jagoinvestor
14 years ago

From the discussions above, it is learnt that the investments made in MFs upto 31 March, 2011 will be subject to EEE in terms of LTCG. This is clear.

Can somebody please explain as to how and who will keep account of these investments [whether made before or after 31 Mar’11]? It appears to be difficult for fund houses also to keep track and monitoring investments!!!

Going by the discussions, one should invest maximum upto 31 Mar’11 so that the tax could be saved. Am I correct?

rckaushal
rckaushal
Reply to  Jagoinvestor
14 years ago

Thanks Manish Sir,

Will the DTC affect THOSE investments which were made before 31 Mar’11?

My interpretation is that since the investments in question were made before implementation of the DTC – their proceeds should be applicable to the Pre-DTC tax laws – means LTCG tax free. Please enlighten.

Thanks in advance

Ninad
Ninad
14 years ago

“Incase you have any existing Investments, which enjoyed EEE method of taxation, they would be treated the same way for their full tenure.”

So a SIP for 10years in ELSS if started today, will be EEE till I sell all the units?

Ujjwal
Ujjwal
Reply to  Ninad
14 years ago

No the investment made till the new Tax regime is in place will be eligible for EEE. That is any ELSS investment done till 31st March 2011 will be eligible for this. Any investment from the next financial year will not be eligible.

yogesh
yogesh
14 years ago

hi manish & all,

currently i have SIP Can i still enojoy tax exemption under 80C ?

Another thing pricipal of home laon is removed from exemption will be it going
to affect land/apartment prices?

Murali
Murali
14 years ago

Why should LT gains be taxed? I feel this move is quite short-sighted.

There should be an incentive for staying invested, building a good retirement / other purpose portfolio and the new DTC should promote it. I feel that maybe instead of 1 year it could be made as 3 years. Also ST / LT gains should not be added to the income…tax them at say 10%…this will improve compliance, generate additional revenue, promote more retail participation in the market etc.

Murali
Murali
Reply to  Jagoinvestor
14 years ago

🙂
I should become some sort of special advisor to the Fin Min!

pravin
pravin
14 years ago

is the 80c section limit still 1 lakh .was it not supposed to be 3lac?. if NPS has no 100% equity option, it is a serious pain,especially if the limit is 3 lac. there is no flexibility.and arent all the equity funds in NPS index funds?.with no history or tracking error knowledge,it will be a gamble to go for any of these funds.

Bhagwad Jal Park
Bhagwad Jal Park
Reply to  pravin
14 years ago

I too am looking for something like NPS, but with 100% equity allocation.

Priyanka
Priyanka
14 years ago

Hi Manish,

First of all thanks for the great information and appreciate your blog which always helps to increase our financial literacy.

I want to know that what will be new DTC impact in terms of capital Gain on Mutual fund investments done by woman who is coming under Exemption Limit i.e. 1.9 lac.

Thanks,
Priyanka

Ujjwal
Ujjwal
Reply to  Jagoinvestor
14 years ago

Actually your short term gain will be added to your income. So if your income is 1.8 lacs and you have a short term gain of 20K then you will come inside the tax bracket. But you can claim tax breaks under 80C.

S S
S S
14 years ago

ELSS is not mentioned anywhere that means it is under capital gains now, which is taxable? Does that also means there’s practically no difference between elss and other equity schemes? Good thing is NPS’s inclusion in EEE, which is the only equity related scheme with tax benefits. An year back same NPS appeared like some unattractive document.

prabeesh
prabeesh
Reply to  Jagoinvestor
14 years ago

i think i am in a mess then i have started a 2 ELSS of 2K each ie 4K a month.

The tenture investment period is from 0ct/10 to 0ct/11..and locking of 3 years

so after 3 years ,,when i get the maturity amount it will be taxable 🙁

Also i favour the opinion of transfer of fund from one mutual fund another without tax..in this new DTC it will consume everytime 10% if i am in that slab which along with inflation ideally eats out all you earned ..

rakesh
rakesh
14 years ago

Manish,

Thanks for a very detailed explanation.
I feel they should increase the cap on medical expenses from 15k to 30k, 15k is peanuts in today’s world. Also increase the educational allowance for each child from Rs. 100 to Rs. 500 per month.

Rakesh

Srinivas
Srinivas
Reply to  Jagoinvestor
14 years ago

First of all it is good that you don’t exhaust 15K limit…that means family members are healthy. But this varies from person to person…age of parents, their diseases….
I know one friend, his mother takes tablet which cost 700 Rs. He will exhaust his 15K quota within 3 months of starting of financial year.

rakesh
rakesh
Reply to  Jagoinvestor
14 years ago

Manish,

I agree with Srinivas, in my case its 80-90%. Now a days vaccination for kids are so expensive that you end up spending Rs. 1500-2000 for one visit. Also doctors fees are gone up.

Rakesh

Krishna
Krishna
14 years ago

Manish,

What abou the endowment and money back policies which are already in force ?. Does that come under EEE or EET ? Can you clarify please.

Krishna

Srinivas
Srinivas
Reply to  Krishna
14 years ago

Any withdrawl after April 1, 2011 in these policies come under EET.