Budget 2020: Revisiting Direct Taxes Code – PPF, EPF, NPS tax benefits and more under DTC : 11-12-2019

Union Budget 2020: It’s more than ten years now since the work on revamping of the direct taxes in the country started. For the first time, the Direct Taxes Code Bill (DTC) was unveiled on August 12, 2009, by the then finance minister Pranab Mukherjee. Subsequently, revised DTC proposals in 2011 were put forward by the government. DTC was supposed to change the contours of the personal income tax in terms of how we earn income, do our tax planning and pay taxes. In the budget 2011-2012, it was stated that the Direct Taxes Code (DTC) was to be made effective from April 01, 2012, but even after several budgets Indian taxpayers still await the new tax laws to replace the Income Tax Act, 1961. Later in Nov 2017, the government had set up a Task Force to propose changes in the direct tax laws which has submitted the report to the government in August 2019. It remains to be seen if the upcoming Budget 2020 brings about any radical changes in the way you and me pay our taxes. The Budget 2020 date is likely to be February 3 being the first working day of the month.

Here, we look at some of the proposals of the DTC and the revised version of the DTC:

On income tax slabs

Currently, those who earn above Rs 10 lakh, the tax rate is 30 per cent. DTC proposed the following slabs:

  • No tax up to a certain basic exemption limit and then for income up to Rs 10 lakh – 10 per cent tax
  • Similarly, for income between Rs 10 lakh and Rs 25 lakh – 20 per cent tax
  • And, for income above Rs 25 lakh – 30 per cent tax.

On tax savings under DTC

While DTC removed several tax savers from the list of tax-saving investment, the limit itself was raised to Rs 3 lakh under section 66 of the proposed DTC bill. Currently, under section 80C, the limit stands at Rs 1.5 lakh per financial year.

But, the trade-off seemed too harsh for some investors. DTC proposed that to save tax one can invest only in permitted options such as Public Provident Fund (PPF), Employees’ Provident Fund, life insurance superannuation funds, and National Pension System (NPS), besides claiming for tuition fee expenses. This meant NSC, ELSS and a few other popular tax savers were to be kept out of the tax-saving benefits. The tax benefit on principal repayment on a home loan was also proposed to be removed.

Further, DTC had proposed that the maturity amount of the tax savers under section 66 will be taxed as per the individual’s income slab.

However, under the revised DTC proposals in 2011, the proposals were made to keep the proceeds of PPF, EPF, pure life insurance products and even NPS tax-free. The tax treatment on proceeds from endowments, money back and Ulips remained unclear.

On retrospective taxation

The revised DTC proposals made it clear that the tax-free status of existing investments will continue till their maturity, even after the implementation of the DTC.

On Heads of Income

Under the original DTC draft proposals, the five heads of income were further re-classified and for the purpose of determining total income for any financial year, income was categorised under the following two heads:

A. Income from Special Sources
B. Income from Ordinary Sources

The ‘Income from Ordinary Sources’ would further comprise of the following heads of income:

A. Income from employment.
B. Income from house property.
C. Income from business.
D. Capital gains.
E. Income from residuary sources.

In a nutshell, DTC aimed at removing a lot of exemptions but at the same time expanded the income slabs. This meant, even on higher income, one had to pay less tax. On the flip side, the exemptions were gone on several tax-saving investments.

Source : Financial Express

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