Latest Income tax rules from April 2012
The following Income Tax will come
into effect starting April 1, 2012. Here we demystify what the impact of the DTC
will be
towards the personal taxation for salaried individuals.
Following on from its original proposal last year, the Government had issued a
revised
discussion paper in June 2010. In its original form the DTC was expected to bring
about far
reaching changes in the personal taxation slabs and available exemptions. Fast
forward to
today, and whats been tabled in Parliament appears to be a watered down version
of the
DTC.
The following are the newly announced tax slabs for individuals
For Individual (Men, Women & HUF)
The big change is that the same tax slabs will apply to men and women. Now both
are
eligible for Rs 2 lakhs tax free exemption, whereas previously it used to be up
to Rs 1.6 lakhs
for men and up to Rs 1.9 lakhs for women.
Tax Rate
DTC Parliamentary
Bill (Aug 2010)
Current Slab under
Income Tax Act
Original DTC
Nil
Upto Rs 2,00,000
Upto Rs 1,60,000
Upto Rs. 1,60,000
10%
From Rs 2,00,001 to
Rs 5,00,000
From Rs 1,60,001 to
Rs 5,00,000
From Rs 1,60,001 to
Rs 10,00,000
20%
From Rs 5,00,001 to
Rs 10,00,000
From Rs 5,00,001 to
Rs 8,00,000
From Rs 10,00,001 to
Rs 25,00,000
30%
Above Rs 10,00,000
Above Rs 8,00,000
Above Rs 25,00,000
For men or women earning up to Rs 8 lakhs the net annual tax saving under the
new DTC
bill is going to be a maximum of Rs 4,000.
For men or women earning between Rs 8 lakhs to Rs 10 lakhs the net annual tax
saving is
going to be a maximum of Rs 24,000.
For men or women earning above Rs 10 lakhs, there is no additional net annual
saving
available under the direct tax code other than the Rs 24,000 as mentioned in the
above
example as well.
For Senior Citizens
For those above 65 years of age, the tax exemption limit has been raised to Rs
2.5 lakhs from
Rs 2.4 lakhs, for a net new saving of Rs 1,000 per annum.
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Tax Rate
DTC Parliamentary Bill
(Aug 2010)
Current Slab under
Income Tax Act
Original DTC
Nil
Upto Rs 2,50,000
Upto Rs 2,40,000
Upto Rs. 2,40,000
10%
From Rs 2,50,001 to Rs
5,00,000
From Rs 2,40,001 to
Rs 5,00,000
From Rs 2,40,001 to
Rs 10,00,000
20%
From Rs 5,00,001 to Rs
10,00,000
From Rs 5,00,001 to
Rs 8,00,000
From Rs 10,00,001 to
Rs 25,00,000
30%
Above Rs 10,00,000
Above Rs 8,00,000
Above Rs 25,00,000
Tax Deductions
Currently, the Income Tax Act offers individuals an annual deduction of Rs 1
lakh under 80C
that can be used for instruments such as PPF (up to cap of Rs 70,000), PF, NPS
scheme,
ELSS, premium for pure life insurance or ULIP, principal repayment of home loan,
NSC,
fixed deposits with a maturity of five years, payment of tuition fees for full-time
education
for up to 2 children. In the current financial year (April 2010 through March
2011), one can
get an additional deduction of Rs 20,000 for investing in certain notified infrastructure
bonds
under 80CCF. Additionally, 80D gives a deduction of Rs 15,000 towards medical
insurance.
Under the DTC Bill, some of the above deductions have changed. What was previously
available as the 80C deduction of Rs 1 lakh is now available as a deduction
towards
investments only in retiral accounts such as PPF, PF, NPS, and in savings schemes
as
notified by the Government. These are all eligible for taxation under EEE treatment.
¬EEE
refers to the tax incidence - exempt at time of investment, exempt during accumulation,
and
exempt at withdrawal. These will be available for the tax year starting April
1, 2012.
Additionally, an aggregate deduction of Rs 50,000 is available for premium for
pure life
insurance, health insurance and tuition fees for two children.
As a result, the total deduction available is Rs 1.5 lakhs.
Please note that under the previous 80C deduction investments in ELSS and ULIPs
were
eligible for the Rs 1 lakh deduction, as was a deduction towards repayment of
principal for
an outstanding home loan. Under the DTC Bill all these three options are no
longer eligible
for a deduction.
To show you an actual example of the scope of savings, lets look at the hypothetical
case of
Mr Prakash, an individual tax payer aged 40. His salary income is Rs 18 lakhs
and he takes
advantage of investing in certain instruments that offer him a tax deduction.
The table below
compares Mr Prakash’s tax liability under the three scenarios: the DTC
Bill as introduced in
the Parliament, the Current Slabs under the Income Tax Act, and the Original
DTC when it
was first announced.
Particulars
DTC
Parliamentary
Bill (Aug 2010)
Current
Slab under
Income
Tax Act
Original
DTC
Mr. Prakash’s Salary Income for the Year
Rs
18,00,000
Rs
18,00,000
Rs
18,00,000
Investments in tax free instruments*
Rs
Rs
Rs
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1,50,000
1,50,000
1,50,000
Computation of Taxable Income
Salary Income
Rs
18,00,000
Rs
18,00,000
Rs
18,00,000
Less: Savings eligible for tax deduction*
Rs
1,50,000
Rs
1,00,000
Rs
1,50,000
Net Taxable Income
Rs
16,50,000
Rs
17,00,000
Rs
16,50,000
Computation of Tax Liability
Tax Liability on:
- Rs 0 to Rs 160,000
Nil
Nil
Nil
- Rs 160,001 to Rs 200,000
Nil
Rs 4,000
Rs 4,000
- Rs 200,001 to Rs 500,000
Rs 30,000
Rs 30,000
Rs 30,000
- Rs 500,001 to Rs 800,000
Rs 60,000
Rs 60,000
Rs 30,000
- Rs 800,001 to Rs 10,00,000
Rs 40,000
Rs 60,000
Rs 20,000
- Rs 10,00,001 and above
Rs 1,95,000
Rs 2,10,000
Rs 1,30,000
Total Income Tax
Rs 3,25,000
Rs 3,64,000 Rs 2,14,000
Add: Education Cess
Rs 9,750
Rs 10,920
Rs 6,420
Total Tax Liability
Rs 3,34,750
Rs 3,74,920 Rs 2,20,420
Note: The above example does not consider the additional tax benefit this current
financial
year for Rs 20,000 for investments in notified infrastructure bonds under 80CCF.
* Under the current Income Tax Act these are up to Rs 1 lakh under 80C, but
under the DTC
Bill they can total up to Rs 1.5 lakhs.
As you will see in the above table, the tax liability under the DTC Bill is
lower by
approximately Rs 40,000 compared to the current rules. However, these savings
could have
been far more if the DTC in its original form been implemented, as can be seen
if one
compares the total tax liability in the columns marked DTC Parliamentary Bill
vs. Original
DTC. For this reason we believe that the Bill has watered down some of the exemptions
and
the deductions.
Nevertheless, the following are the sources of the total Rs 40,000 of savings
for Mr Prakash
under the DTC Bill:
Source
Amount of Saving compared to Existing Income Tax Act
Additional Rs 50,000
deduction
Rs 15,000 (Rs 50,000 x 30% marginal tax rate = Rs 50,000, Mr
Prakash is in the highest tax bracket, and this is the additional
saving that he can get by the additional Rs 50,000 deduction
now available for tuition fees, pure life insurance and medical
allowance)
Tax saving up to Rs 2 lakhs
Rs 4,000
Tax saving between Rs 8
lakhs to Rs 10 lakhs
Rs 20,000
Education Cess
Rs 1,170
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