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The taxpayer and the New Direct Tax code
Finance - Tax Planning

In the present tax code, if you have invested in long term savings products like PF, gratuity fund, pension fund etc, then you can claim a deduction of Rs 1lakh from being taxed. Now with the introduction of new tax code, you can claim a deduction of an additional Rs 50,000 for tuition fees of children, pure life insurance premium and health insurance premium. Also, if you invest in infrastructure bonds, deduction of an additional Rs 20,000 also can be claimed.

The revised draft of DTC has proposed some major changes for the taxpayers. However, the changes in the revised draft are far from being the bold changes envisaged in the earlier draft. The objective of the new tax code seems to be now of simplifying the tax process. This article lists down the amendments proposed in the revised draft and its impact on taxpayers.

Amendments

  • Under the new direct tax code, exemption for House rent allowance (HRA), Leave Travel Concession (LTC), medical allowance has been retained. However under the new tax code, LTC will be included as a part of your income. LTC was missing from the list of exemption which created perception that the incentive has been done away with. But it has been later clarified by a finance ministry official that the difference will only be on reporting mechanism.
  • The tax slabs will be changed with 10% tax on income of Rs 2-5 lakh, 20% tax on income of Rs 5-10 lakh and 30% thereafter. Marginal exemption of income tax for senior citizens and women has also been proposed.
  • Under the DTC Equity Linked Savings Scheme (ELSS), repayment of principal amount of the housing loan, term deposits with banks do not find any mention. Hence, you might not gain any tax incentive if you have invested in these schemes unless confirmed otherwise.
  • If you have made investments in equity market for less than a year and you want to book profits on the capital gains realized, the tax will now be linked to your individual tax slab. That is to say, the capital gain will be added to your income to calculate the final tax. It means the low-income tax payers who earlier were paying a flat 15% on short term capital gains will now pay less tax because of this amendment. The high-income taxpayer would continue to pay almost the same 15% tax on capital gains. Also, if you have a long term investment horizon, Capital gains will be fully exempted from being taxed. However, you will now have to pay tax @ 5% on equity fund dividends.
  • In the present tax code, if you have invested in long term savings products like PF, gratuity fund, pension fund etc, then you can claim a deduction of Rs 1lakh from being taxed. Now with the introduction of new tax code, you can claim a deduction of an additional Rs 50,000 for tuition fees of children, pure life insurance premium and health insurance premium. Also, if you invest in infrastructure bonds, deduction of an additional Rs 20,000 also can be claimed.
  • If you have taken a housing loan, after DTC gets implemented, you can still claim deductions of up to Rs 1.5 lakh per annum for the interest payments you make every year.
  • Under DTC, tax department will have more powers to impose a penalty. Currently, a penalty is levied for concealing the particulars of your income and if you are able to convince the Government that you didn’t intend to evade tax; you are let off without any penalty. But now under the new tax code, you will be levied penalty even for under-reporting. The penalty for tax evasion will now be however decreased to a maximum of 200% of the tax due from the current 300% of the tax due. Also, faulty books and wilful attempt to evade taxes will be levied a penalty of maximum Rs 3 lakh and Rs 5 lakh respectively.

So what is the way forward for taxpayers? Here are a few tips for taxpayers!

Tips for Taxpayers

  • If you are a long term investor in Mutual funds then opt for Systematic withdrawal plans (SWP) in a growth plan rather than choosing a dividend plan. This is because you will now have to pay tax @ 5% on equity fund dividends.
  • If you are planning to invest in bonds, you can consider the infrastructure bonds as it has tax benefits associated with it.
  • You can also consider investing in life insurance or health insurance products. The premium you pay will be exempted from being taxed.
  • A housing loan is also a good way to bring down your taxes as has always been the case.
 
 

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