The New Direct Tax Code

8/7/2019 The New Direct Tax Code

1/6

The New Direct Tax Code (DTC) is said to replace the existing Income Tax Act of 1961 inIndia. It is expected to

be passed in the monsoon session of 2010 and is expected to be enforced from 2011 2012. During the budget 2010

presentation, thefinance minister Mr. Pranab Mukherjee reiterated his commitment to bringing into fore the new

direct tax code (DTC) into force from 1st of April, 2011, but same could not be fulfilled and now it will be applicable

from 1st April, 2012.DTC bill was tabled in parliament on 3oth August, 2010. There are big changes now in monsoon session and There

are now much less benefits as compared to what were in the original proposal. You can download the bill tabled inparliament from below link:

Direct Tax code bill(1.1 MiB, 2,700 hits)Here are some of the salient features and highlights of the DTC:

1. DTC removes most of the categories of exempted income. Unit Linked Insurance Plans (ULIPs), Equity

Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Long term infrastructures bonds,

house loan principal repayment, stamp duty and registration fees on purchase of house property will loose tax

benefits.

2.Tax saving based investment limit remains 100,000 but another 50,000 has been added just for pure life insurance

(Sum insured is atleast 20 times the premium paid) , health insurance, mediclaims policies and tuition fees of

children. But the one lakh investment can now only be done in provident fund, superannuation fund, gratuity fund

and new pension fund.

3. The tax rates and slabs have been modified. The proposed rates and slabs are as follows:

Annual Income Tax Slab

Up-to INR 200,000 (for senior citizens 250,000) Nil

Between INR 200,000 to 500,000 10%

Between INR 500,000 to 1,000,000 20%

Above INR 1,000,000 30%

Men and women are treated same now4. Exemption will remain same as 1.5 lakhs per year for interest on housing loan for self-occupied property.

5. Only half of Short-term capital gains will be taxed. e.g. if you gains 50,000, add 25,000 to your taxable

income.Long term capital gains (From equities and equity mutual funds, on which STT has been paid) are still exempted

from income tax.

6. As per changes on 15th June, 2010, Tax exemption at all three stages (EEE) savings, accretions and

withdrawalsto be allowed for provident funds (GPF, EPF and PPF), NPS (new pension scheme administered by

PFRDA), Retirement benefits (gratuity, leave encashment, etc), pure life insurance products & annuity schemes.Earlier DTC wanted to tax withdrawals.

7. Surcharge and education cess are abolished.

8. For incomes arising of House Property: Deductions for Rent and Maintenance would be reduced from 30% to

20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent.Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second

house was not put to rent. But, under the Direct Tax Code 2010 , such a concept has been abolished.

9. Tax exemption on LTA (leavetravel allowance) is abolished.

10. Tax exemption on Education loan to continue.11. Corporate tax reduced from 34% to 30% including education cess and surcharge.

12. Taxation of Capital gains from property sale : For sale within one year, gain is to be added to taxable salary.

For long term gain (after one year of purchase), instead of flat rate of 20% of gain after indexation benefit, new

1
http://www.pankajbatra.com/india/income-tax-calculator-india-2008-2009-2010/http://www.pankajbatra.com/category/india/http://www.pankajbatra.com/category/india/http://www.pankajbatra.com/category/finance/http://www.pankajbatra.com/category/finance/http://www.pankajbatra.com/download/38/http://www.pankajbatra.com/download/38/http://www.pankajbatra.com/india/news/sebi-bans-ulip-insurance-plans/http://www.pankajbatra.com/category/finance/mutual-funds-finance/http://www.pankajbatra.com/india/finance/best-tax-saving-mutual-funds/http://www.pankajbatra.com/category/finance/investment-finance/http://www.pankajbatra.com/category/life/http://www.pankajbatra.com/category/finance/income-tax-finance/http://www.pankajbatra.com/category/education/http://www.pankajbatra.com/category/travel/http://www.pankajbatra.com/category/travel/http://www.pankajbatra.com/category/corporate/http://www.pankajbatra.com/india/income-tax-calculator-india-2008-2009-2010/http://www.pankajbatra.com/category/india/http://www.pankajbatra.com/category/finance/http://www.pankajbatra.com/download/38/http://www.pankajbatra.com/india/news/sebi-bans-ulip-insurance-plans/http://www.pankajbatra.com/category/finance/mutual-funds-finance/http://www.pankajbatra.com/india/finance/best-tax-saving-mutual-funds/http://www.pankajbatra.com/category/finance/investment-finance/http://www.pankajbatra.com/category/life/http://www.pankajbatra.com/category/finance/income-tax-finance/http://www.pankajbatra.com/category/education/http://www.pankajbatra.com/category/travel/http://www.pankajbatra.com/category/corporate/


2/6

concept has been introduced. Now gain after indexation will be added to taxable income and taxed at per the tax

slab.

Base date for cost of acquisition has been changed to 1st April, 2000 instead of earlier 1st April, 1981.

14. Medical reimbursement : Max limit for medical reimbursements has been increased to 50,000 per year from

current 15,000 limit.15. Tax on dividends: Dividends will attract 5% tax.

15. Badnews for NRIs : As per the current laws, a NRI is liable to pay tax on global income if he is in India for aperiod more than 182 days in a financial year. But in new bill, this duration has been changed to just 60 days.

This is very unfair to Seafarers. To avoid any income tax, an Indian sailor employed with a foreign ship will have

to stay maximum for 60 days in India.

Capital Gain Taxation Short Term Capital Gain(STCG) Long Term Capital Gain (LTCG) And DTC (Direct Tax

Code)

Posted on January 17, 2011 by Don| Leave a commentIn one of our earlier blog-posts, we had discussed Capital Gain and Underlying Tax Benefits at length. Now that

DTC (Direct Tax Code) is going to be implemented, probably from Financial Year 2011-2012 onwards, some rules

regarding Capital Gain are set to be revised.

In the present Income Tax Regime, Capital Assets are classified as Short-Term Capital Gains (STCG) and Long-

Term Capital Gains(LTCG) on the basis of time period, it is held. The Assert-Holding Time-Period is taken as a

simple difference between Selling Date and Buying Date. But in DTC (Direct Tax Code), this Assert-Holding Time-

Period is going to be calculated differently. DTC(Direct Tax Code) proposes this Holding Period to be calculatedfrom the End of Financial Year in which asset was acquired. For example, if the Purchase Date is 20th July 09 and

Selling Date is 21st July 10, under the Current Taxation Regime, Holding Period is 1 year 1 day, but once DTC(Direct Tax Code) is in place, Holding Period will become only 3 months 20 days. You could see the difference.

What qualified as a Long Term Capital Gain (LTCG) before will now be counted as a Short Term Capital Gain

(STCG) !!

This modification to this act may also throw absurd results for two assets with merely one day difference. Say for

example, Ram acquired an asset on 28th March 2009 and sold it on 1st April 2010, while Shyam acquired an asset

on 1st April 2009 and is also selling it on same date i.e, 1st April 2010. In present Income Tax Act, both Ram as

well as Shyam will get an indexed benefit and their gains will be counted as a Long Term Capital Gain(LTCG) forlisted shares asset, simply because it is held for more than 1 year. Lets see what happens, once DTC (Direct Tax

Code) is in place. Ram will continue getting indexed benefit and his capital gain will be counted as a Long Term

Capital Gain(LTCG) where date of acquiring is counted from 31st March 2009 to 1st April 2010 and clearly it hascompleted one financial year. But Shyam wont get indexed benefit and for him gain will be a Short Term Capital

Gain (STCG) because the Asset Holding-Period is only one day (01 Apr 2010 31st Mar 2010). So he has to wait

till 1st April 2011 to complete 1 financial year, so that his gain will be counted as a Long Term Capital Gain

(LTCG). As you can see, only couple of days could be the difference between Short Term and Long Term Capital

Gains, resulting into you not getting the benefits of Long Term Capital Gains (LTCG).

In present Income Tax Regime, for the unlisted shares, which are acquired before 1981, the cost of acquisition is

calculated from 1 April 1981 whereas in DTC (Direct Tax Code) it is shifted to 1 April 2000 and indexation will

also be allowed from the same.

Presently, all assets other than listed equity shares and units of equity oriented funds are eligible for the benefits of

indexation. Presently, long term capital gains for such assets is calculated after deducting the indexed cost from the

net sale price and you have to pay tax at the rate of 20% of indexed capital gain. But in DTC (Direct Tax Code) thecapital gains after indexation are proposed to be included in your total income and taxed according to Income Tax

Slab, your Current Income falls into.

There are some very interesting resources on Web discussing the impact of DTC (Direct Tax Code) on Capital Gain

and Tax Structure, lying underneath. So if you could not get what you were looking for, you can always go for more

details at following places

2
http://www.pankajbatra.com/category/news/http://www.pankajbatra.com/category/news/http://www.pankajbatra.com/category/news/


3/6

Current Situation:

Short-term capital gains (STCG) arising on transfer of listed equity shares or units of equity oriented funds are beingtaxed at 15% and Long term capital gain (LTCG) arising on transfer of listed equity shares or units of equity

oriented funds are exempt from tax.Proposed in DTC:

Under DTC distinction between short-term investment asset and long-term investment asset on the basis of

the length of holding of the asset have been eliminated.

Income under the head Capital Gains will be considered as income from ordinary sources in case of all

taxpayers. It will be taxed at the rate applicable to respective taxpayer.

Currently for Non resident Income under the head Capital Gains is taxed at nil rates if held for more than 1

year.

Under DTC in case of non resident Income under the head Capital Gains will be considered as income from

ordinary sources and will be taxed at the rate of 30%Limitation of Capital Gain Tax as proposed in DTC

The withdrawal of the current scenario of charging 15 % for STCG and LTCG exempt regime will raise the

tax liability and may cause fluctuations in the capital market.

Also charging at the rate of 30 percent is very high as compared to nil rate. Foreign Institutional Investorsplay a significant role in the Indian capital market. Various countries, including emerging markets, offernon-residents a special tax regime to attract investments and promote depth of capital markets.

Proposed in Discussion Paper for DTC:

Income under the head Capital Gains will be considered as income from ordinary sources in case of

all taxpayers including non-residents. It will be taxed at the rate applicable to that taxpayer.

In case oflisted equity shares or units of an equity oriented fund held for period of more then 1 year

Capital Gain will be computed after allowing a deduction at a specified percentage of capital gains without

any indexation. This adjusted capital gain will be included in the total income of the taxpayer and will be

taxed at the applicable rate. The loss arising on transfer of such asset held for more than one year will also

be treated in similar fashion.

For instance: If the capital gain before deduction at the specified rate comes to Rs. 100, it would stand

reduced to Rs. 50 (if the specified deduction rate is 50 percent). The capital gain of Rs. 50 would then be

included in the taxpayers total income and taxed at the applicable rate. In this example, for a taxpayer inthe tax bracket of 10%, such gain will bear an effective tax at the rate of 5% and for taxpayers in tax

bracket of 20% or 30%, the effective tax rate would be 10% or 15% respectively.

In case ofCapital gains on other asset held for more than one year the base date for determining the

cost of acquisition will now be shifted from 1.4.1981 to 1.4.2000. As a result, all unrealized capital gains

on such assets between 1.4.1981 and 31.3.2000 will not be liable to tax. The capital gains will be computed

after allowing indexation on this raised base. The capital gains on such assets will be included in the totalincome of the taxpayer and will be taxed at the applicable rate.

The Capital gain arising from transfer of any investment asset held for less than one year from the

end of the financial year in which it is acquired will be computed without any specified deduction or

indexation. It will be included in the total income and will be charged to tax at the rate applicable to

taxpayer.

Direct Tax Code 2012 has changed the rule of computation of capital gains and most striking change is that now atax payer can choose the fair market value as on 01/04/2000 of an asset as cost of acquisition for computing

indexed cost of acquisition.Please read section 53 of DTC 2010 which is about cost of acquisition

53. (1) Unless otherwise provided, the cost of acquisition of an investment asset, shall be-

(a) the purchase price of the asset; or

3


4/6

(b) at the option of the person, the fair market value of the asset on the 1st day of April,

2000, if the asset was acquired by the person before such date.

How does that benefit you ?

Let us say you bought a property in 1989 for Rs 11 Lakhs and planning to sell it for Rs 1o million ( 1 crore) after

01/04/2012. If you compute the long term gains underIncome Tax Act 1961(present ACT) , the formula for findingthe indexed cost would be as under

The cost inflation index of 1999 is 172 and a prudent guess forCII for Fy 2012-11may be 850. It means that indexed

cost will merely increase to just twice . So at best the indexed cost will be Rs 55,00,000.

The long term gains will be Rs 1,00,00,000 - Rs 55,00,000 = Rs 45,00,000How things can change after 01/04/2012 ?

The Direct Tax Code 2012 provides that the assessee can choose to substitute cost of acqusition with the Fair Market

Value as on 01/04/2000 . So , a property bought before 01/0/04/2000 will have the benefit of substituting the cost of

acquisition to fir market price as on 01/04/2000 . Since the market price is always more than the official

indexation , the cost of acquisition can be claimed many fold which can actulay reduce the capita gains. That

Fair Market Price will become the base price on which indexation formula shall be applied.What measures should one take for maximum benefit?

Get yourimmovable property valued by a Registered Valuerfor market value as on 01/04/2000. In case you

sale , the Fair Market Value should be taken to compute long term gains. Who knows you will not only get to

save the tax , but may be there would arise loss which can be carried forward.

Two important points to notePlease note that the Direct Tax Code 2012 states that the rule to determine Fair Market Value shall be prescribedwhich means the Rule to determine shall be notified later on.

Second point to remember, if you incurred cost of improvement on your property before 01/04/2000 , you can evendetermine Fair Market Value of the cost of improvement as on 01/04/2000 and then indexation benefit is to be

taken.

It is already posted that Direct Tax Code 2010 has made even agriculture land sale as taxable . However,saving

grace is that section 55 of the DTC 2010 provides that in following conditions, gains onagriculture landis tax free

by claim of deduction provided u/s . The conditions are

1. The agriculture land which is sold was agricultural land during two years immediately preceding thefinancial year in which the asset is transferred;

2. The sold agriculture land was acquired at least one year before the beginning of the financial year in whichthe transfer of the said agriculture land took place.

3. Sale value of the agriculture land was invested in new agriculture land by the end of the financial year in

which the transfer of sold agriculture land or six months from the date of transfer of such sold agriculture

land, whicheveris later;

[ if you invest less, your deduction will be according to that only.Read this posting for knowing how the deduction

is computed

Under theIncome Tax Act, 1961 , if the residential house or any other longterm investmentswere sold and

residential house is purchased , in that case exemption from captal gains u/s 54 or 54F is allowable.

The Direct Tax Code 2010 has also similar provision u/s 55 which has provison for exemption on capital gains on

sale of asset. Here are important points

The exemption u/s 55 can be claimed only by Indivdual or HUF .

The asset has to be held for at least one year from the 1st April of the financial yearin which the asset issold.

The amount of exemption can not be more than capital gains. The capital gains should be computed as under:

(B+C+D)A x -

E

: Capital Gains on sale of assetB: the amount invested for purchase or construction of house within one year before the date of transfer of asset

sold.

4
http://taxworry.com/tag/income-tax-act-1961/http://taxworry.com/tag/income-tax-act-1961/http://taxworry.com/tag/immovable-property/http://taxworry.com/tag/immovable-property/http://taxworry.com/tag/registered-valuer/http://taxworry.com/tag/registered-valuer/http://taxworry.com/shocking-sale-of-agriculture-land-taxable-under-direct-tax-code-2010/http://taxworry.com/tag/saving-grace/http://taxworry.com/tag/saving-grace/http://taxworry.com/tag/saving-grace/http://taxworry.com/tag/agriculture-land/http://taxworry.com/tag/agriculture-land/http://taxworry.com/tag/agriculture-land/http://taxworry.com/tag/agricultural-land/http://taxworry.com/is-exemption-like-54-or-54f-available-in-direct-tax-code-2010/http://taxworry.com/is-exemption-like-54-or-54f-available-in-direct-tax-code-2010/http://taxworry.com/tag/income-tax-act/http://taxworry.com/tag/income-tax-act/http://taxworry.com/tag/income-tax-act/http://taxworry.com/tag/term-investments/http://taxworry.com/tag/term-investments/http://taxworry.com/tag/term-investments/http://taxworry.com/tag/income-tax-act-1961/http://taxworry.com/tag/immovable-property/http://taxworry.com/tag/registered-valuer/http://taxworry.com/shocking-sale-of-agriculture-land-taxable-under-direct-tax-code-2010/http://taxworry.com/tag/saving-grace/http://taxworry.com/tag/saving-grace/http://taxworry.com/tag/agriculture-land/http://taxworry.com/tag/agricultural-land/http://taxworry.com/is-exemption-like-54-or-54f-available-in-direct-tax-code-2010/http://taxworry.com/tag/income-tax-act/http://taxworry.com/tag/term-investments/


5/6

C: Amount of investment in new house by the end of financial year in which the transfer of the asset which is sold

or six months from the date of transfer of sold asset.

D = the amount deposited by the end of the financial year in which sale is effected or six months from the date of

transfer of sold asset , whichever is later .

E = the net consideration received as a result of the transfer of the original investment asset.

The new residential house should not be sold within one year from the end of financial year in which the asset onwhich capital gains arose was sold.

The exemption u/s 55 is not available if you own more than one house (other than the new residential house ) on the

date of sale of asset on which gains arose.Error! Hyperlink reference not valid.

No, unlike Income Tax Act 1961, the new Direct Tax Code 2010 , likely to be effective from 01/04/2012 , does not

prescribe any special tax rate. Now the long term or short term are part of total income and is taxed at the normal taxrate applicable to you. Note following points regarding taxation ofcapital gains.

1. Every asset which held for more than a year is long term. If less than one year, it is short term.

2. Long term gains on equity shares or mutual fund units on which STT is deducted are tax free as 100 %deduction

is allowed. For knowing more . read this.

3. Short term gains on equity shares or mutual fund units on which STT is deducted are taxed at 50 % of the STCG .

For knowing more . read this.

4. Loss on long term gains on quity shares or mutual fund units on which STT is deducted is not allowed to be

adjusted with any other income.5. Loss on short term gains on quity shares or mutual fund units on which STT is deducted is allowed to be adjusted

upto the extent of 50% with the head capital gains only and not with income under any other head . If not adjusted ,the loss can be carried forward.

6. Any other capital gains , whether Long Term or Short Term , is added to total income and shall be taxed at normal

tax rate applicable to that person.

As on now tax rate onshort term capital gainson shares or units which is subject to STT are taxed @ 15 % .

However under Direct Tax Code 2010 ,not only there is no specific tax rate for STCG , it is proposed that the STCG

on listed shares or units shall be taxed only to the extent of 50 % of gains computed. For example , let us say youbought a share of X ltd for Rs 100 and sold for 150 after six months. Since it is held for less than a year, Rs 50

(Rs150 100 ) shall be treated as short termcapital gains and only 50 % of Rs 50 i.e 25 shall be included in your

total income and shall be taxed at noraml rate along with other income.What happens if there is loss in case of short term asset sale?

Even in case there comes a loss in case of short term asset , 50% of such loss only can be treated as Short Term

Loss . It can be adjusted with any other capital gains of the current year and not with income from any other heads.

Balance if any shall be allowed to be carried forward.

51(2) In the case of transfer of an investment asset, being an equity share in a company or

a unit of an equity oriented fund and such transfer is chargeable to securities transaction

tax under Chapter VII of the Finance (No.2) Act, 2004,

(a)..

(b) where the asset is held for a period of one year or less,

(i) if the income computed after giving effect to sub-section (1) is a positive income, a

deduction amounting to fifty per cent. of the income so arrived at shall be allowed;

(ii) if the income computed after giving effect to sub-section (1) is a negative income,

fifty per cent. of the income so arrived at shall be reduced from such income.

5
http://taxworry.com/tag/investment-asset/http://taxworry.com/tag/investment-asset/http://taxworry.com/is-exemption-like-54-or-54f-available-in-direct-tax-code-2010/http://taxworry.com/is-exemption-like-54-or-54f-available-in-direct-tax-code-2010/http://taxworry.com/is-exemption-like-54-or-54f-available-in-direct-tax-code-2010/http://taxworry.com/tag/income-tax-act-1961/http://taxworry.com/tag/income-tax-act-1961/http://taxworry.com/tag/capital-gains/http://taxworry.com/tag/capital-gains/http://taxworry.com/tag/deduction/http://taxworry.com/tag/deduction/http://taxworry.com/is-long-term-gain-on-shares-or-units-tax-free-under-direct-tax-code/http://taxworry.com/only-50-of-short-term-capital-gains-on-shares-or-units-taxed/http://taxworry.com/tag/short-term-capital-gains/http://taxworry.com/tag/short-term-capital-gains/http://taxworry.com/tag/short-term-capital-gains/http://taxworry.com/tag/capital-gains/http://taxworry.com/tag/capital-gains/http://taxworry.com/tag/investment-asset/http://taxworry.com/tag/investment-asset/http://taxworry.com/tag/investment-asset/http://taxworry.com/is-exemption-like-54-or-54f-available-in-direct-tax-code-2010/http://taxworry.com/tag/income-tax-act-1961/http://taxworry.com/tag/capital-gains/http://taxworry.com/tag/deduction/http://taxworry.com/is-long-term-gain-on-shares-or-units-tax-free-under-direct-tax-code/http://taxworry.com/only-50-of-short-term-capital-gains-on-shares-or-units-taxed/http://taxworry.com/tag/short-term-capital-gains/http://taxworry.com/tag/capital-gains/http://taxworry.com/tag/investment-asset/


6/6

The good news is : Yes, thelong term capital gains on sale of shares of companies or mutual funds on which

securities transaction tax has been deducted is made tax free.

But , just note that instead of exemption being given like section 10(38) , now everyone who wants that tax not be

paid on shares sold or mutual fund units sold by redemption or through stock exchange , can claim deductioneuivalent to the income on such sale.

For example , let us say you held the shares for one year . You sold the shares through stock exchange. Let us say

indexed cost of shares were Rs 20 and you sold for Rs 100. In that case , you will have to compute the gains as

under

Sale consideration Rs 100

Less Cost (indexed) Rs 20

Gain Rs 80

Less

Deduction as per section 51(2) Rs 80

Income from capital gains Rs NIL

Why is such method of allowing same exemption in form of deduction?The purpose of allowing deduction not exemption , seems to me ,that Govt wants proper accounting of income inreturn itself. It wants that every tax payer must show the proper computationeven if such income is not subject to

tax while filing return of income . This will bring more transparency and control in terms of true reflection of ones

affair in return of income.Reference

Section 51 (2) of proposed Direct Tax Code 2010 is relevant

51. (2) In the case of transfer of an investment asset, being an equity share in a company

or a unit of an equity oriented fund and such transfer is chargeable to securities

transaction tax under Chapter VII of the Finance (No.2) Act, 2004,

(a) where the asset is held for a period of more than one year, ( i) if the income computed

after giving effect to sub-section (1) is a positive income, a deduction amounting tohundred per cent. of the income so arrived at shall be allowed;

6
http://taxworry.com/tag/long-term-capital-gains/http://taxworry.com/tag/long-term-capital-gains/http://taxworry.com/tag/proper-computation/http://taxworry.com/tag/proper-computation/http://taxworry.com/tag/investment-asset/http://taxworry.com/tag/investment-asset/http://taxworry.com/tag/long-term-capital-gains/http://taxworry.com/tag/proper-computation/http://taxworry.com/tag/investment-asset/

Documents

The New Direct Tax Code