A NEW TAX REGIME WOULD GRET TAX PAYERS FROM 2012

With the introduction of Direct Tax Code a new tax regime would start from 2012. Uptill now new tax proposal were submitted to parliament every year at the time presentation of Budget. This would not be required now since that would be taken car of by Taxation Cod. The Direct Tax code is a valuable document of the country IPC or Cr. P. C. The government does not have to change it every year. It can be changed from time to time when circumstances changes.

The DTC has been introduced in parliament for debate and discussion. The Code aims at simplifying rules, improving efficiency and bringing about better compliance. It will replace the existing tax Act of 1957 effecting first April 2012.

DTC originally proposed to substantially raise the tax slab for individual taxpayers. While presenting the proposal in the parliament original proposed was revised yet it has given substantially gain to tax payers. The code stopped the differentiation between male and female taxpayers while proposing the rebate. The senior citizen have been given a minor relief of Rs 10,000/- more making the exemption limit of Rs2.50lakh.

The new tax law proposes to increase the income tax exemption limit from Rs 1.6 lakh to Rs 2 lakh. It also proposes three income tax slabs – 10 per cent on Rs 2-5 lakh annual income, 20 per cent on Rs 5-10 lakh and 30 per cent on annual income upwards Rs 10 lakh.( At present, income between Rs. 1.65 lakh and Rs 5 lakh is taxed at 10 per cent tax, income for Rs 5-8 lakh is taxed at 20 per cent and above Rs 8 lakh, the tax rate is 30 per cent).
DTC has linked the short-term capital gains tax to an investor’s annual income. A short-term capital gains tax of 5 per cent would be applicable for an investor in the income group of Rs 2-5 lakh, 10 per cent in the Rs 5-10 lakh bracket and 15 per cent for those with income over Rs 10 lakh.
Tax-free dividends on equity mutual funds would be a thing of past once theThe code proposes a 5 per cent dividend distribution tax on equity mutual funds and unit-linked insurance plans (ULIPs). At present, dividends on equity mutual funds are tax-free in the hands of investors.
The DTC also proposes a 15 per cent dividend distribution tax (DDT) on equities. However, it has excluded the dividend paid by a subsidiary company to its parent company from any tax liability. These exemptions make sense as dividend paid by a subsidiary to its parent company means the dividend stays within the group.
The most benefits that accrues from the proposal are (1) contribution of upto Rs one lakh in approved funds such as public provident funds would get tax deduction. ( The limit atpresent is Rs seventy thousand ) To enjoy deduction on insurance, the annual premium should not exceed 5 percent of the sum assured.(2) Pension funds have been made tax free and (3) long term capital gains tax would remain tax free. (4) the code proposes additional Rs 50,00 on investment in insurance including Health cover and tuition fees for children as exempt. However, DTC has maintained the status quo on securities transaction tax (STT) and long-term capital gains tax, that is, while STT stays, there would be no long-term capital gains tax on equity and equity related instruments. The original draft of DTC had proposed to do away with STT and levy long-term capital gains tax. One most important step taken in the code is to exemptHRA and LTA upto a prescribed limit. Income on House property will be taxed provided it is rented out actually. Till now it is taxed on notional basis.The proposl of introducing a fair market value in place of the actual rent recived has been done away with.
The threashold for payment of wealth tax has been enhanced to Rs One crore from rs Thirty lakh. The rate of wealth tax would remain one percent. This has been resented by High net worth people.
To us new tax code is welcome move. However tax exemption limt of Rs 2 LKH seemed to be meager because it would be implemented only after two years from now, by that time inflation would neutralize the benefit now given.
The new code proposes a 30 per cent corporate tax against the existing effective rate of 33.22 per cent on account of cess and surcharges. The DTC seeks to impose a minimum alternate tax (MAT) of 20 per cent of the book profit against the existing 18 per cent. The chambers are not very happy on this issue. Tough we can never have a tax code that would satisfy all, but surely the finance minister has tried to given enough reasons to cheer.
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Earlier, the Direct Tax Code was supposed to come into effect from April 1, 2011, but now it has been deferred by a year.

THE TIME TO INVEST IN TAX SAVING SCHEME

This is the right time for the salaried persons to invest in tax saving scheme, who have not thought of availing tax benefit, through saving and investment during the year. The government of India has given some concession to tax paying public in case they subscribe to certain specified schemes. This includes schemes launched by Government of India through bank and small saving schemes through post offices. The scheme introduced by private as well as public Mutual fund and Insurance companies are also allowed to provide 80 c benefit to income earners. The maximum investment, under the provision of 80 c of IT Act, could be made up to is Rs. One Lakh. This gives them tax concession up to Rupees Thirty thousand. In case benefit of health insurance is added the tax benefit becomes much more.


The month of December is coming to an end now and almost all salaried employees must be busy evaluating how to save taxes out of their earned income. Those who work in companies must be reminded by their account department to submit proof of their investment in specified scheme which they might have subscribed. Many employees started investing in systematic way and they would not have any difficulties in submitting the proof of their investment to avail tax benefit. But most of the employees do not subscribe to those schemes till last moment. Now is the time for those employees who want avail tax benefit through investment. Ofcourse now investment shall have to be in lump sum amount. Had they planned earlier it could have been much easier as they could have taken the benefit by installment payments. Now there is only three month more to complete the financial year and any investment to avail tax benefit shall have to be in lump sum amount only. The amount of investment for tax benefit for the year is maximum Rs One lakh. The investment for this purpose can be done through EPF, PPF, Insurance, SCSS, and Bank FD for five years and through post office instruments. Many of our readers have asked as to which investment instruments they should select to reap the best benefit.

This is a difficult questions to answer. Every salaried person may have their own priorities. All regular confirmed employees, whether in Government or in Private sector and public sector, would have EPF. Those who have taken loan for construction of home would also get tax concession. A portion of 80C would be covered by these contributions. So they might have to depend on other forms of instrument partly. But self employed persons like Doctors, Advocate, business women, artists ,who do not have PF shall have to depend on Post office instruments or on PPF and or ULIP, Life insurance or on Mutual funds. Our recommendations would be first to avail the benefit of 80c through PPF. It is completely safe, interest rate is high, and no income tax is required on earnings. But it has longer period to get back the money. In fact National saving certificate, Bank Fixed Deposit have shorter maturity period. The investment in PPF can be made only unto Rs.70,000/-.So for the balance Rs. 30,000/- investors would have to depend on other instruments. At this point of time the investment in ELSS of mutual fund or ULIP could be thought of. But one thing must be kept in mind that ULIP and ELSS are equity based so a risk element would always be there. No chicken hearted investors should invest in ELSS. Those who are young and brave they can invest in Mutual fund and reap higher benefit if they can remain invested for atleast five years. What about senior citizen who do not have salaried income but get higher pension and need to invest to make their income totally free from income tax? Senior citizen can invest in Senior Citizen saving Scheme. This is the best instrument for them. Why? Because SCSS provides highest interest in today’s market. It provides now 9% percent return per annum and that is the highest interest in the market. Those who have PPF could opt for it, for it gives interest free return. In case their account is more than fifteen years old then the money lying in the account could be taken out whenever they need. I do not recommend ELSS for senior citizen who is above 75 years. Younger persons can first subscribe to ELSS and keep it there for more than five years and reap good benefit. The maturity period of ELSS is three years.

No wonder, this is also the time when mutual fund houses and distributors aggressively push equity-linked savings schemes (ELSS) because one gets tax relief under section 80C for investing in these schemes. Returns from these schemes have been at par with the Sensex returns in the last three-five years. According to data from Value Research, a mutual fund rating agency, these schemes have returned almost 83 per cent in the last one year, as against 76 per cent by the Sensex. In the last three and five years, while these schemes have returned 9 and 21 per cent, the Sensex has returned 8 and 22 per cent, respectively.
The greatest benefit of ELSS is, if invested properly and for longer period, it provides market related returns. My recommendation would be to have a disciplined approach for availing tax benefit. Income earner should invest systematically from the beginning of the year a fixed amount for eleven month. This way it would not trouble them at the end of their year and they would be able to ride the volatility of the share market. It is true that ELSS gives better return in a longer term and can give dividend too without any income tax. This suggestion is for young investor only as long term investment may not suit the seniors.

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