India’s Direct Taxes Code Bill, 2010 and Changes for Taxation of Individuals
The Direct Taxes Code Bill, 2009 (“DTC 2009”) was released by the government of India (“GOI”) for public comments, along with a discussion paper, on 12 August 2009. Since then, a number of inputs on the proposals had been received from numerous organizations and individuals.
After taking into consideration their inputs, the GOI introduced the Direct Taxes Code Bill, 2010 (“DTC 2010”) on 30 August 2010. The DTC 2010 is proposed to be made effective from 1 April 2012, and it aims to replace current direct tax laws, i.e., Income-tax Act, 1961 (the “IT Act”) and Wealth tax Act, 1957 (the “WT Act”).
The following paragraphs give an overview of the proposals in the DTC 2010 from an individual tax perspective. Income from Employment
• Employment income is proposed to be computed as the gross salary due, paid, or allowed less the aggregate of the specified deductions.
• Popular exemptions such as house rent allowance, leave encashment, and medical reimbursements have been retained.
• The exemption for medical reimbursements is increased to INR 50,000 from INR 15,000.
• Exemption for leave travel concession and tax on non-monetary perquisite borne by the employer is proposed to be eliminated.
• Exemption in respect of common retirement payment such as Voluntary Retirement Scheme, Gratuity and Commuted Pension has been retained.
• ‘Employer’ now is defined as a person who controls an individual under an express or implied contract of employment and is obliged to compensate him or her by way of salary only.
• Perquisite valuation rules to be notified by GOI.
• Employers / HR personnel may need to revisit their existing compensation structures once the perquisite valuation rules are notified by GOI.
Withholding Tax on Employment Income
• Withholding tax on salaries is now proposed to be a part of the overall consolidated withholding tax provisions on all payments.
• Tax is to be withheld on payment/credit whichever is earlier as compared to the IT Act where tax is to be withheld on the payment basis only.
Income from House Property
• Gross rent is to be calculated on the basis of actual rent received or receivable and not on a presumptive basis.
• Under the IT Act, if individuals own more than one house, the notional income from the second and subsequent house(s) (which are not let-out) is taxable. The above concept of taxing notional income is proposed to be eliminated in DTC 2010. Consequently, interest paid on a housing loan for such properties will also not be eligible for deduction.
• Widely-claimed deduction for Interest on a housing loan on self-occupied property up to INR 150,000 is proposed to be retained.
• Standard deduction for repairs and maintenance is to be 20 percent of the gross rent as against 30 percent under the IT Act.
Moderation of Tax Rates and Increase in Tax Slabs
• Basic threshold limit is proposed to be increased to INR 200,000 for all individuals including resident women and to INR 250,000 for resident senior citizens.
• Top rate of 30 percent applicable to income exceeding INR 1 million (vis-à-vis INR 0.8 million as per the IT Act).
• This is expected to result in marginal tax savings (i.e., increased net disposable income) for individuals.
Definition of Residency and Scope of Income
• The category of ‘Not Ordinarily Resident’ abolished and only two categories of taxpayers proposed viz. residents and nonresidents. The additional condition of 729 days is retained only to ascertain taxability of overseas income.
• A citizen of India (IC) or person of Indian origin (PIO) living outside India and visiting India will trigger residency by staying in India for more than 59 days, as compared with more than 181 days (subject to past stay in India) under the IT Act. This is provided he or she has a presence of 365 days or more in the previous four tax years.
• Accordingly, an IC or PIO living outside India, may have to closely monitor their visits to India to continue enjoying nonresident status and consequently non-taxability of income earned outside India.
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• If shares of owners of property are not definite and ascertainable, such persons are to be assessed as an association of persons in respect of such property.
• Assets are proposed to be classified as Investment Asset and Business Capital Asset.
• Transfer of Investment Asset will be subject to capital gains.
• Time limit, amount to be invested, etc., for roll-over exemptions are made more stringent.
• Investments in specified bonds are no longer eligible for exemption.
• Cost of Acquisition base is moved to 1 April 2000 from existing 1 April 1981.
Exempt-Exempt-Exempt (EEE) Regime for Taxability of Savings Schemes
• Most long-term retirement saving schemes retained in EEE regime.
• Receipts under a life insurance policy on death/maturity (subject to prescribed conditions) exempt from tax.
Receipts from life insurance policies on surrender of said policies before maturity and distributions from equity-linked insurance policies are exempt subject to prescribed conditions.
• Aggregate deduction of INR 100,000 is now allowed in respect of investment in approved funds such as Provident Fund, Superannuation Fund, Pension fund, or other specified fund as compared to host of other investment avenues currently available under the IT Act.
• The following key eligible investments/payments currently available for a consolidated deduction up to INR 100,000 are abolished:
- repayment of principal amount of housing loan;
- purchase of National Saving Certificate;
- investment in equity-oriented mutual fund;
- specified fixed deposit with the bank.
• An aggregate deduction has been stipulated of INR 50,000 towards life insurance premium, health insurance premium, and tuition fees for two children.
• An additional aggregate deduction of INR 20,000 for investments in specified infrastructure bonds is eliminated.
• Individuals may have to review their current investment patterns for claiming tax deductions in the future.
Other Miscellaneous Provisions
• Due date for filing the return of income is advanced to 30 June as compared to 31 July under the IT Act.
• Combined return of income and wealth tax is to be filed.
• Continuation of treaty supremacy over domestic law, except in certain specified circumstances.
• Every individual will be liable to pay wealth-tax at the rate of 1 percent on net wealth exceeding INR 10 million as against INR 3 million as per the WT Act.
• Even foreign citizens will pay wealth-tax on global wealth if resident of India, as against the existing WT Act, where resident individuals who are foreign citizens are exempt from wealth-tax on their assets situated outside India.
The existing exception to the wealth-tax for foreign citizens having assets outside India is proposed to removed. Now under the DTC 2010, foreign citizens may become resident in India in the second year only and will have to pay wealth-tax on their global assets.
• The specified assets for computing ‘net wealth’ have been retained in line with existing taxable assets, with additional items:
- archaeological collections, drawings, paintings, sculptures or any other work of art;
- wrist watches with a value in excess of INR 50,000;
- deposit in a bank located outside India;
- any interest in a foreign trust or any other body located outside India (whether incorporated or not) other than a foreign company;
- any equity or preference shares held by a resident in a Controlled Foreign Company;
- cash in-hand in excess of INR 200,000.
• Exemption currently available for ICs or PIOs repatriating back to India in respect of monies and value of assets brought into India within a specified time for seven years is done away with.
• Valuation Rules to be notified by GOI.
The DTC 2010 has been an effort on the part of GOI to simplify and consolidate direct tax laws prevailing in India. In its current shape, it’s principally in line with the IT Act with few modifications significantly impacting how individuals are taxed in India.
With the DTC 2010 going “live” from 1 April 2012, it leaves some time to analyze the potential impact in detail and wherever possible make appropriate plans for a taxpayer’s affairs in a manner consistent with the law.