The new Direct Tax Code (DTC) will come into effect on April 1st 2012. DTC is meant to replace the Income Tax Law 1961.
By the time the implementation of the DTC begins, we would have enough time to be excited and subsequently forget the impact of DTC on our income tax slab. This is first in a series of articles talking about the various impacts DTC will have on our savings , investments. and financial planning.
Let us look at the impact of new income tax slabs under direct tax code.
Let us first see a snap shot of the current income tax slab. For clarity, I have attached the tax slab details for Assessment Year 2010-2011 and 2011-2012. Note that a 2% primary/secondary education cess and a 1% higher secondary education cess is levied over and above the below mentioned tax rates.
Now, the DTC has bumped up the tax slab. The current taxation of 10% now covers a new tax slab of Rs 2-5 lakh, 20% covers the tax slab of Rs 5-10 lakh and 30% covers above Rs 10 lakh. See below table for more clarity.
This translates to :
- income tax of Rs 30,000/- for persons under 65 years of age and Rs 25,000 for senior citizens for income up-to Rs 5 lakh.
- income tax of Rs 1,30,000/- for persons under 65 years of age and Rs 1,25,000 for senior citizens for income up-to Rs 10 lakh.
What is significant is that the DTC bill does not differentiate between gender now, men and women will now be taxed at the same rate. The only line drawn is across age where in senior citizens are put in a favorable tax slab.
What savings does this lead to ? Let us take some salary ranges and check. In the example given below, the total tax liability under DTC and the present tax laws is shown.
For a salary of 5 lakhs, under the present income tax slab, the total tax liability for a male under 65 years of age is Rs 35,020 while under DTC this figure will be Rs 30,000/- –> this translates into a savings of Rs Rs 5,020.
For a senior citizen, the savings will be of Rs 1,780 for the same parameters. If you were to take a taxable salary of Rs 20 lakh as example, the total tax liability for a male of under 65 years under current laws will be Rs 467,620. The same figure under DTC will be Rs 430,000 – this is a savings of Rs 37,620 !
Note that there is no cess of 3% in the DTC. The savings calculations include the 3% education cess under present tax laws.
Here is how the savings will look like under DTC for the above six salary ranges :
The DTC tax slab leads to tax savings for all concerned.
Note that this article talks about the tax savings that arise due to the introduction of the new tax slabs in DTC. Readers should not interpret this to mean that the overall impact of DTC on a person’s tax liability will lead to savings.
It looks like the DTC bill is in shambles after the first version was out which promised more savings than what is currently proposed today. We have probably frittered away the chance to make significant changes to our tax rules. Till the current DTC is implemented, stay tuned to discussions and rantings galore.
Quality information. I did not know that the tax slabs for next year had changed ! Why not provide a calculator to show the savings ? It will help eevryone.
@Shilpi, Maybe one for the future !
thanks for this information. I do not agree that the savings are adequate enough at all. for a salary of 10 lakhs, you yourself say that the savings is Rs 28,000/-, is that enough ? I think this shoudl be called Dupe Taxing Citizens instead of Direct Tax Code !
@PG, Dupe Taxing Citizens !!!! Send it to Chidambaram and Pranab Mukherjee ! I likes 🙂
I don’t really like the new draft tax code. The earlier one was really good. I am not even sure that by the time 2012 comes, all tabled features will be available for use. This is what our gov. does.
@Dhruv, I agree, we have simply scuttled away a chance to revamp our tax rules. What a shame !
I would like to add few more to the lovely articulated piece above.In the above comparision the exemption bits are completely missing and that can actually create another mile of difference. Few more attributes to consider would be:
i) Tax exemption on LTA has been abolished under DTC (may be more taxes for some people).
ii) Deductions for Rent and Maintenance is reduced from 30% to 20% of the Gross Rent (meaning that landlords would pay more taxes).
iii) Change in capital gain tax structure(long and short are not so dinstinguishable any more)
iv) Tax saving investments is reduced to mere pension, pf and annuity type of investments (before a term deposit would be locked for only 5 years, which meant a more regular cash-flow, with the DTC the cash-flow would be only at retirement).
v) Increase in exemption limit for medical reimbursement from Rs 15,000 to Rs 50,000(this is fantastic, this will encourage mediclaim)
Reading through the bullet-points of the DTC, I personally feel that the DTC is a good leap forward to simplify the over-complicated Income Tax Act 1961.However, I don’t think that all would actually benefit from the DTC.There would be people who would be paying more taxes than before and some other doing the opposite (actually the probability of women paying more taxes is higher than their counter-parts, as the DTC does not distinguish women from men, which was the case to prior-DTC).
@D. Bahroos, Excellent inputs ! Actually, I intended to cover the points you have mentioned in a future article as a series on DTC. I agree with your last point – DTC is a milestone but could have been better than what has been tabled. About women paying taxes more then men, I need to go and check again. I suspect, the savings will be more in DTC but only marginal.
Thanks for the appreciation! I would be looking forward to your follow-up articles in the DTC series.
I wanted to add more to what I mentioned in my last paragraph of my previous comment.In my previous comment I mentioned that women would benefit less with DTC. The reason is mainly because in A.Y 2011-12, women do not have to pay tax on the “first 1.9L”, this would be increased by 10K to 2.0L as per the DTC guidelines i.e in DTC “women would not have to pay tax on the first 2.0L”,
I would like to continue based on an example. Lets consider that Sunita(a women) earns 8L taxable income in A.Y 2011-12.Let us assume that Sunita would still draw exactly the same salary in A.Y 2013-14(practically the salary should increase, but I would like to keep the salary same to show a true comparision of the priori-DTC and post-DTC A.Y.s.).
Simply going by the tax slabs for the two periods, Sunita would have to pay tax on 10K lesser salary.This means that Sunita would save Rs 1,000(10% tax slab) in post-DTC as compared to prior-DTC.
Now this post-DTC Rs 1,000 saving would easily be nullified if Sunita was enjoying tax-exempt LTA in the prior-DTC days (On average, a taxable salary of Rs 8L could easily have a annual LTA of Rs 15000).
Most of the working class purchase property by acquiring a home loan, considering that Sunita has taken a loan too for purchasing a property,then she would lose out in post-DTC days as her prinicpal portion of her EMI would not be tax-exempt anymore.
And even more, if Sunita has rented the property she purchased, as in post-DTC Sunita can deduct only 20% of the gross rent as maintanence charges as comapred to the 30% in the prior-DTC days.
To conclude, I am not cribbing that the DTC is going to leave lesser money with me. I visualize the DTC as planting new seeds. I hope that these seeds would produce sweeter fruits via better infrastructure and better facilities to our countrymen.
@D. Bahroos, Yes, you are absolutely bang on target. Very good analysis I must say.
The DTC has taken away some favorable tax exemptions no doubt and its going to hurt where it matters the most. I agree with your hope and vision of DTC being used intelligently for a better India – the CWG mess shows where our money gets to !
Direct tax code can generate more tax revenue as well as the whole process is made much simpler. The proposed DTC system can also put an end to the concentration of the industrial units in a particular area of low tax and incentives. The Direct Tax code system in effect can bring a new face to the Indian economy.
SAVING BARE V DASO???????
KI KI SAVING KAR SAKDE HAN.
PPF,NSC,ETC…………….
@LALIT, Tusi savings kayi tareeke di kar sakde ho but important sawal ae hai ki kis waste tusi savings karna chande ho.
For tax savings? retirement corpus? child education etc. Savings instrument twade end goal te depend karda hai.
What are you goals Lalit paaji?
@Vivek K, Ha ha ha, that was hilarious.
Thank Vivek for contributing to this blog. What do you do and where are you based at ?
@Radhey Sharma, I should be thanking you Radhey for giving a platform to share views and gain knowledge. I started off with Hemant’s blogs and learnt a lot there and now found your blog. I am really impressed with your blogs too, you guys rock!
I am based in Bangalore and by profession I am a Project Manager in IT department of MNC bank.
@Vivek K, Good luck Vivek.
@Radhey Sharma, Thanks Radhey.
All the best to you too. Keep up the good work you have been doing, its a blessing for novice investors.
KINI SAVING LIMIT HAI? ONE LAC OR INCREASED TO 1.5 OR 2 LAC
@LALIT, Lalit paaji, thoda hor intezar karo tusi. Pranab babu 16 Mar nu budget pesh kar rahe san. Sabnu clarification us de baad mil jayegi.
Its certain now that DTC will be postponed to next year. However there are talks to raise the income tax slab to 3 lacs.
Lets hope for the best.
Rakesh
@Rakesh, Where did you read/heard my friend that DTC will be postponed to next year?
@Vivek,
There is no official news on it yet, i have read it other financial blogs that since Govt. has not yet reached on a decision on DTC it is most likely to be postponed.
Rakesh
@Rakesh, I hope it doesnt get postponed. There have been so many speculations and talks around it. It can change investors strategy, lets get it out of the clouds and get it over with! 🙂
@Vivek K, I want it out as well, otherwise it will be a guessing game for another year !
I would be happy if they postpone it, at least we can invest in ELSS this year and claim tax benefit. ELSS is a single tax saving instrument now which gives good returns then other options, why would they want to take it out. Moreover the performance on NPS has been dismissal till date. Many government employees whom i spoke to are also not satisfied with it.
On the private front, not even 5 million people have joined, so that speaks about its performance.
Rakesh
@Rakesh, The reason govt is planning to take out ELSS and FMPs is because they want people to invest in NPS. As long as these two instruments are giving the benefits they are giving, people wont be inclined towards NPS.
I am a fan of FMPs with indexation and would love to have them give existing benefits.
ELSS is also a good tax saving instrument but unfortunately it has no room in my portfolio.
@Vivek K, You are right Vivek.
@Rakesh, I heard they are thinking about NPS and PPF only as two tax saving investments part from premiums for insurance policies. Time to revisit DTC again in an article !
@Radhey,
Unless the government does drastic changes to NPS it will not attract investors. They just can’t force everyone to take it. Already quite a few Govt. employees i spoke to our unhappy with it.
@Rakesh, What option would you have if govt gives tax exemption only on PPF and NPS deposits?
Btw why are govt employees unhappy with the scheme?
@Viviek,
In NPS presently there is a cap of 50% in Equity, why would a 25-35 year old want this cap, he would rather invest 90% in equity at his age.
AS for PPF i am investing in the same though minimal just to cover debt content. Govt. employees are unhappy due to the returns generated till date on NPS, Equity diversified investments have beaten
NPS fair and square till now, though things may change in future.
Rakesh
@Rakesh, If employees are already looking at returns then its the ignorance on their part. Are we all forgetting the basics of equity? It is an instrument for long term and NPS is hardly 3 years old. I think you should educate your friends on equity or ask them to visit this site 🙂
I dont think there is anything wrong in having a cap of 50% on equity. The age group of 25-35 can always invest more through MFs, this is simply a tax saving instrument with better returns. I think NPS is an advanced version of PPF by which govt is trying to ensure that people can generate more corpus for their retirement. Generally, people wont invest in equity directly because they think it is too risky but if it gets associated with govt schemes then it can generate some trust in peoples minds.
@Rakesh, Equity diversified investments will always beat NPS, I cannot think of a scenario when they will not over a long period of time.
@Vivek,
That’s what i meant, by it performance for the last 3 years. If they would have invested the same amount in good performing MF their returns would have been much much better.
The Govt. has not marketed NPS very well that’s why there are very few takers for it. Once it streamlines the process more people would opt for it. For now, i am not investing in NPS.
Rakesh
@Vivek,
Value research ran an article on “The Fixing of the NPS”
http://www.valueresearchonline.com/story/h2_storyview.asp?str=19371
Hope it becomes attractive and people buy it.
Radhey, Vivek, Rakesh,
Govt employees like me have a mandatory tier I account in which only 15% gets allocated in equities. The main problem with the NPS is the govt put the cart before the horse. If you want to launch a product the buyer must know all the features of the product. In this case no one knows how much annuity a person will get from the 40% corpus that has to be invested at age 60. So it is quite unclear/uncertain.
How much pension will the NPS gives is an important question which cannot be answered. Some NPS providers offer SIP calculators to estimate corpus. But corpus is not pension!
As shubra pointed out today (LIC) annuity rates are like 6/7%. How much will it be 20/30 years later? There are many employees who depend only on the NPS contribution for retirement. God help them.
Only now is the govt trying to get annuity providers. If a govt employee want to resign today. 80% of the corpus will be annuitized. But at what rate? No one knows.
Since it is mandatory for me I see it as a good (8%-10% YOY) debt option. Not much else can be done.
@Pattu,
Thanks for sharing your experience. I think in tier II account you can have equity allocation of 50%. As per the latest data only about 5 million people have invested in NPS till date. With DTC everyone will have to open an NPS account.
@Rakesh,
Yes in tier II govt employees equity also can have upto 50%. The govt is trying to shove the NPS down everyone’s throat by dropping ELSS etc.
@pattu, Thanks Pattu, it’s good to know the downside of this product. Since not many people have opened NPS account I wasn’t able to get any direct feedback.
I think if they make it mandatory as part of DTC, this would improve and people will have more clarity on the returns.