New Direct Tax Code for 2011

On 26^th August 2010, the Finance Minister of India has proposed a set of New Direct Tax Codes, which when passes the parliament, will become the New Direct Tax Code, which would be effective from Financial Year 2011.

In his explanation to the parliament on the proposed Direct Tax Code the

Finance Minister explained that the aim is to eliminate distortions in the tax structure, introduce moderate levels of taxation, expand the tax base, improve tax compliance, and simplify the language and lower tax litigations. Initial analysis shows that most of these objectives are achievable by tweaking of some provisions. All that is fine, let us see what the provisions of the proposed tax structure are, and how it would affect the income tax payers across the spectrum.

Impact of Direct Tax Code for individuals

What do the major changes proposed in the Tax Code look like? Personal income tax, almost all salaried persons will agree, in our country is one of the highest in the world. More open and honest an employer is in terms of disclosing remunerations, worse it is for the employees because taxable income goes up. The present system thus rewards dishonesty and non-disclosure of income by way of lower tax. 

The Tax Code will try to address these issues by significantly lowering income tax and by disallowing all tax-free perks. It proposed exemption of income tax on specified savings up to Rs 3 lakh a year as against the present deduction limit of Rs 1 lac for all types of savings under 80C of the IT Act.

The catch, however, is that only a few of the long term investments like public provident fund, employer’s provident fund, insurance premium in pension (annuity) schemes, Post Office National Savings Scheme etc will now be eligible for tax exemptions.

The bill has also allowed tax deduction against the payment of interest on home loan up to Rs 1,50,000 in a year.

Amendments Proposed in Tax Slabs and Taxation Structure

According to the original proposal introduces in 2009, a taxpayer was supposed to pay at the rate of 10 per cent for income above Rs 1.60 lakh and up to Rs 10 lakh, at 20 per cent on income between Rs 10 lakh and Rs 25 lakh and at 30 per cent for income beyond Rs 25 lakh.

But the version approved by the Indian Cabinet exempts incomes up to Rs 2 lakh per annum (against the current Rs 1.6 lakh) from tax, proposes to tax incomes between Rs 2 lakh and Rs 5 lakh at 10%, between Rs 5 lakh and Rs 10 lakh at 20% and beyond Rs 10 lakh at 30%.

At present, Income tax slab for ay 11-12 or Income tax slab for fy 10-11 while the basic exemption limit remains at Rs 1.60 lakh a year, the limit for tax slabs are lower, one pays 10 per cent tax on income ranging between Rs 1.60 lakh and Rs 5 lakh, 20 per cent between Rs 5 lakh and Rs 8 lakh and 30 per cent beyond Rs 8 lakh.

Thus, the maximum saving from this new tax code will be Rs 4000 only for individuals having taxable income up to Rs 8 Lakh and maximum of Rs 24000 for income up to Rs 10 Lakh. Women will have an additional benefit of Rs 2000 and senior citizens Rs 1000 only on the above mentioned

The following is the comparison of income tax which we will be paying for this financial year and the next financial year when new direct tax code is implemented

Income tax slab for ay 11-12 and ay12-13 (new tax code) comparison
Income Tax Slabs for Resident Senior Citizens
S. No.	Tax percentage	ay 11-12 / fy 10-11	ay 12-13 / fy 11-12
1	No tax / exempt	Up to Rs 2,40,000	Up to Rs 2,50,000
2	10%	2,40,001 to 5,00,000	2,50,001 to 5,00,000
3	20%	5,00,001 to 8,00,000	5,00,001 to 10,00,000
4	30%	Above 8,00,000	Above 10,00,000
Income Tax Slabs for Resident Women (below 65 years)
S. No.	Tax percentage	ay 11-12 / fy 10-11	ay 12-13 / fy 11-12
1	No tax / exempt	Up to Rs 1,90,000	Up to Rs 2,50,000
2	10%	1,90,001 to 5,00,000	2,50,001 to 5,00,000
3	20%	5,00,001 to 8,00,00	5,00,001 to 10,00,00
4	30%	Above 8,00,000	Above 10,00,000
Income Tax Slabs for Others & Men
S. No.	Tax percentage	ay 11-12 / fy 10-11	ay 12-13 / fy 11-12
1	No tax / exempt	Up to Rs 1,60,000	Up to Rs 2,00,000
2	10%	1,60,001 to 5,00,000	2,00,001 to 5,00,000
3	20%	5,00,001 to 8,00,000	5,00,001 to 10,00,000
4	30%	Above 8,00,000	Above 10,00,000

On going through the above proposed amendments, proposed by the government, it looks pretty clear that it is nothing but a cosmetic change, and one can even go to the extent to say that the Direct Tax Code is more of a bane than a boon, since people earning at the higher end of the spectrum of the tax slab have never been the biggest contributors towards the exchequer, since they form a very small chunk of the Salaried Employee’s matrix.

In nutshell, the information about the proposed Direct Tax Code that has come out is more of mixed bag. We must wait for the fine print to be released in the days to come.