What is Direct Tax Code (DTC 2012): Highlights and Impact

The New Direct Tax Code (DTC) is said to replace the existing Income Tax Act of 1961 in India. DTC bill was tabled in parliament on 3oth August, 2010. There are big changes now in monsoon session and There are now much less benefits as compared to what were in the original proposal.

During the budget 2010 presentation, the finance minister Mr. Pranab Mukherjee reiterated his commitment to bringing into fore the new direct tax code (DTC) into force from 1st of April, 2011, but same could not be fulfilled.

Again, as per budget presented on 16th March, 2012, Implementation of Direct tax code has again been deferred and won’t be applicable from 1st April, 2012. Also check out changes in taxation in 2012 budget.

Highlights of Direct Tax code

1. Removal of most of the tax saving schemes: DTC removes most of the categories of exempted income. Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will loose tax benefits.

2. New tax saving schemes: Tax saving based investment limit remains 100,000 but another 50,000 has been added just for pure life insurance (Sum insured is atleast 20 times the premium paid) , health insurance, mediclaims policies and tuition fees of children. But the one lakh investment can now only be done in provident fund, superannuation fund, gratuity fund and new pension scheme (NPS).

3. Tax slabs: The income tax rates and slabs have been modified. The proposed rates and slabs are as follows:

Annual Income	Tax Slab
Up-to INR  200,000 (for senior citizens 250,000)	Nil
Between INR 200,000 to 500,000	10%
Between INR 500,000 to 1,000,000	20%
Above INR 1,000,000	30%

Men and women are treated same now

4. Home loan interest: Exemption will remain same as 1.5 lakhs per year for interest on housing loan for self-occupied property.

5. Short and long term gains: Only half of Short-term capital gains will be taxed. e.g. if you gains 50,000, add 25,000 to your taxable income.
Long term capital gains (From equities and equity mutual funds, on which STT has been paid) are still exempted from income tax.

6. EEE and EET: As per changes on 15th June, 2010, Tax exemption at all three stages (EEE) —savings, accretions and withdrawals—to be allowed for provident funds (GPF, EPF and PPF), NPS (new pension scheme administered by PFRDA), Retirement benefits (gratuity, leave encashment, etc), pure life insurance products & annuity schemes. Earlier DTC wanted to tax withdrawals.

7. Education Cess: Surcharge and education cess are abolished.

8.  Income arising from House Property: Deductions for Rent and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent.

Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second house was not put to rent. But, under the Direct Tax Code 2010 , such a concept has been  abolished.

9. LTA (Leave travel allowance): Tax exemption on LTA  is abolished.

10. Education loan: Tax exemption on Education loan to continue.

11. Corporate tax: Corporate tax reduced from 34% to 30% including education cess and surcharge.


12. Taxation of Capital gains from property sale: For sale within one year, gain is to be added to taxable salary.
For long term gain (after one year of purchase), instead of flat rate of 20% of gain after indexation benefit, new concept has been introduced. Now gain after indexation will be added to taxable income and taxed at per the tax slab.
Base date for cost of acquisition has been changed to 1st April, 2000 instead of earlier 1st April, 1981.

14. Medical reimbursement : Max limit for medical reimbursements has been increased to 50,000 per year from current 15,000 limit.

15. Tax on dividends: Equity mutual fund will attract 5% dividend distribution tax (DDT). DDT has been removed from debt and non-equity based mutual funds but now dividends on non-equity funds will be taxable in investor’s hand as per his slab rates. There will also be a TDS 0f 10% (20% in case of NRI and companies)  if dividend is more than 10,000 Rs for non-equity funds.

15. News for NRIs : As per the current laws, a NRI is liable to pay tax on global income if he is in India for a period more than 182 days in a financial year. But in new bill, this duration has been changed to just 60 days.

An NRI will be deemed as resident only if he has also resided in India for 365 days or more in the preceding four financial years, together with 60 days in any of these fiscal years.  Even if an NRI becomes a resident in any financial year, his global income does not immediately become liable to tax in India. Global income would become taxable only if the person also stayed in India for nine out of 10 precedent years, or 730 days in the preceding seven years.

This is very unfair to Seafarers. To avoid any income tax, an Indian sailor employed with a foreign ship will have to stay maximum for 60 days in India.

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Rajiv Gandhi Equity Saving Scheme: The Factsheet

With equity-linked saving scheme (ELSS) or tax-saving mutual fund (MF) schemes on their way out effective April 2013 if the proposed direct taxes code (DTC) kicks in then, Budget 2012 has provided some sort of an alternative. However, unlike ELSS that is a mutual fund, the new option will solicit direct investments in equities.

The scheme

Called the Rajiv Gandhi Equity Saving Scheme (RGESS), those investors whose annual income is less than Rs. 10 lakh can invest in it. You will be able to invest in this scheme up to Rs. 50,000 and get a deduction of 50% of the investment. So if you invest Rs. 50,000 (maximum amount you can invest), you can claim a tax deduction of Rs. 25,000 (50% of Rs. 50,000).



This will translate to a maximum benefit of Rs. 5,000 (investors whose annual income is a maximum of Rs. 10 lakh falls under the 20% income-tax bracket). Those whose annual income is Rs. 10 lakh or more will not be able to invest in RGESS. Just like ELSS, your money will be locked in for three years.

Benefits from RGESS are limited though, if compared with ELSS. ELSS is available for all investors and offers deduction up to Rs. 1 lakh under section 80C. Also, your entire amount invested, subject to a maximum of Rs. 1 lakh, gives you tax deduction benefits.

For FY13 though, both ELSS and RGESS will be at your disposal, provided the capital market regulator, the Securities and Exchange Board of India (Sebi), releases guidelines and allows these schemes to launch. “Since the DTC has been postponed by a year, this year will be a sort of bonus for retail investors; both RGESS and ELSS will be available,” says Rajiv Deep Bajaj, vice-chairman and managing director, Bajaj Capital Ltd, one of India’s largest retail distributors of MFs and financial products.

MFs or direct equities?

Budget 2012 is silent on how this scheme would operate. In his Budget speech, the finance minister said this scheme would be available for investments made “directly in equities”, but went to add that “the scheme will have a lock-in period of three years”. In simple words, it is unclear that RGESS is available only if you buy equity shares directly or whether MFs will also be launch such “schemes”. “The effort to increase retail participation in equity markets is a long-term positive. However, we believe that this should be extended to equity funds as well. Small investors are better off accessing the equity markets through funds with a good track record rather than directly, which requires expertise and resources,” says Harshendu Bindal, president, Franklin Templeton Asset Management (India) Ltd.

Apart from just mentioning or introducing this scheme, Budget 2012 doesn’t elaborate much on RGESS. If you take the finance minister’s words literally, MFs will not be allowed to launch RGESS. The Budget speech uses the words “direct equities”, which means that you will need to buy equity shares directly to be able to get this tax deduction benefit.

However a person from the finance ministry with direct knowledge of the matter hints that RGESS would avoid the mutual fund route. “ELSS is meant for indirect participation in the stock market, with no involvement of the asset holder. RGESS aims at encouraging direct participation in the stock market”, said the person. The source added that RGESS would help “in development of equity culture”.

Defining ‘first-time’ investors

Although Budget 2012 remains silent on how it aims to identify “first-time investor”—the group of investors that RGESS will target, once launched—the person quoted earlier tells us that those who do no yet have a depository (demat) account would be the target investors for RGESS. “It is roughly estimated that there are around 15 million Permanent Account Number (PAN) holders with income between Rs. 2 lakh and Rs. 10 lakh, that do not have a demat account at present. These income tax payers would be the universe from which beneficiaries of the scheme would be drawn”, says the finance ministry person. “Once they define ‘new retail investor’, one needs to also prove that the investor is a new retail investor,” says Hiresh Wadhwani, partner and national director (finance services), Ernst and Young.

What to do?

Wait for further clarification. Since RGESS is an investment scheme that warrants stock market investments, Sebi will regulate it and issue guidelines. Also, clarity is needed on how the government will ensure that your equity investments are locked-in for three years and whether premature redemptions will be allowed under special circumstances or not.

ELSS schemes don’t allow premature redemptions. For now, continue investing in ELSS if you’re seeking tax deduction limits since ELSS will continue for one more year.

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