REVISED DISCUSSION PAPER ON
THE DIRECT TAXES CODEJUNE 2010
Central Board of Direct TaxesDepartment of RevenueMinistry of Finance
CHAPTER II
TAX TREATMENT OF SAVINGS – EXEMPT EXEMPT TAX (EET)VIS-A-VIS EXEMPT EXEMPT
EXEMPT (EEE) BASIS
Central Board of Direct TaxesDepartment of RevenueMinistry of Finance
CHAPTER II
TAX TREATMENT OF SAVINGS – EXEMPT EXEMPT TAX (EET)VIS-A-VIS EXEMPT EXEMPT
EXEMPT (EEE) BASIS
1. Chapter-XII of the Discussion Paper on the Direct Taxes Code (DTC) deals
with tax incentives for savings. It proposes the "Exempt-Exempt-Taxation‟
(EET) method of taxation for savings. Under this method, the contributions
towards certain savings are deductible from income (this represents the
first 'E' under the EET method), the accumulation/accretions are exempt
(free from any tax incidence) till such time as they remain invested (this
represents the second "E‟ under the EET method) and all withdrawals at any
time are subject to tax at the applicable marginal rate of tax (this
represents the "T‟ under the EET method).
with tax incentives for savings. It proposes the "Exempt-Exempt-Taxation‟
(EET) method of taxation for savings. Under this method, the contributions
towards certain savings are deductible from income (this represents the
first 'E' under the EET method), the accumulation/accretions are exempt
(free from any tax incidence) till such time as they remain invested (this
represents the second "E‟ under the EET method) and all withdrawals at any
time are subject to tax at the applicable marginal rate of tax (this
represents the "T‟ under the EET method).
1.1 Based on the EET principle, the Code provides for deduction in respect
of aggregate contributions upto a limit of three hundred thousand rupees
(both by the employee and the employer) to any account maintained with any
permitted savings intermediary, during the financial year. This account will
have to be maintained with any permitted savings intermediary in accordance
with the scheme framed and prescribed by the Central Government. The
permitted savings intermediaries will be approved provident funds, approved
superannuation funds, life insurer and New Pension System Trust.
The accretions to the deposits will remain untaxed till such time as they
are allowed to accumulate in the account. Any withdrawal made, or amount
received, under whatever circumstances, from this account will be included
in the income of the assessee under the head 'income from residuary
sources', in the year of such withdrawal or receipt. It will accordingly be
subject to tax at the applicable personal marginal rate of tax.
of aggregate contributions upto a limit of three hundred thousand rupees
(both by the employee and the employer) to any account maintained with any
permitted savings intermediary, during the financial year. This account will
have to be maintained with any permitted savings intermediary in accordance
with the scheme framed and prescribed by the Central Government. The
permitted savings intermediaries will be approved provident funds, approved
superannuation funds, life insurer and New Pension System Trust.
The accretions to the deposits will remain untaxed till such time as they
are allowed to accumulate in the account. Any withdrawal made, or amount
received, under whatever circumstances, from this account will be included
in the income of the assessee under the head 'income from residuary
sources', in the year of such withdrawal or receipt. It will accordingly be
subject to tax at the applicable personal marginal rate of tax.
1.2 Taxation on EET basis is proposed to be prospective. The DTC provides
that the withdrawal of any amount of accumulated balance as on the 31st day
of March, 2011 in the account of the individual in a Government
Provident Fund (GPF), Public Provident Fund (PPF), Recognised Provident
Funds (RPFs) and the Employees Provident Fund (EPF) will not be subject to
tax. Therefore, only new contributions as well as accretions
on or after the commencement of the DTC, will be subject to the EET method
of taxation.
that the withdrawal of any amount of accumulated balance as on the 31st day
of March, 2011 in the account of the individual in a Government
Provident Fund (GPF), Public Provident Fund (PPF), Recognised Provident
Funds (RPFs) and the Employees Provident Fund (EPF) will not be subject to
tax. Therefore, only new contributions as well as accretions
on or after the commencement of the DTC, will be subject to the EET method
of taxation.
1.3 The permitted savings intermediaries would be approved by the Pension
Fund Regulatory and Development Authority (PFRDA). These intermediaries
will, in turn, invest the amounts deposited with them in government
securities, term deposits of banks, unit-linked insurance plans, annuity
plans, bonds and securities of public sector companies, banks and financial
institutions, bonds of other companies enjoying prescribed investment grade
rating, equity linked schemes of mutual funds, debt oriented mutual funds,
equity and debt instruments. The choice of instruments will, in some
schemes, be with the investor and in some others with the trustees of the
schemes. The pattern of investment by the latter will be as prescribed. The
rollover of any amount received, or withdrawn, from one account with the
permitted savings intermediary to any other account with the same or any
other permitted savings intermediary will not be treated as withdrawal and,
accordingly, will not be subject to tax.
Fund Regulatory and Development Authority (PFRDA). These intermediaries
will, in turn, invest the amounts deposited with them in government
securities, term deposits of banks, unit-linked insurance plans, annuity
plans, bonds and securities of public sector companies, banks and financial
institutions, bonds of other companies enjoying prescribed investment grade
rating, equity linked schemes of mutual funds, debt oriented mutual funds,
equity and debt instruments. The choice of instruments will, in some
schemes, be with the investor and in some others with the trustees of the
schemes. The pattern of investment by the latter will be as prescribed. The
rollover of any amount received, or withdrawn, from one account with the
permitted savings intermediary to any other account with the same or any
other permitted savings intermediary will not be treated as withdrawal and,
accordingly, will not be subject to tax.
2. A large number of representations have been made with regard to the
proposed EET system. It has been stated that most countries that follow the
EET method of taxation of savings also have a social security system in
place for all their citizens. The EET savings accounts which operate for
individuals in these countries are over and above the mandatory social
service payments received by them. It has been represented that in India, in
the absence of a universal social security system, the proposed EET method
of taxation of permitted savings would be harsh. Tax payers require some
flexibility in making withdrawals in lump sum without being subjected to
tax. People may need lump sum funds on retirement for various family
obligations. Requests have therefore been made for continuation of Exempt
Exempt Exempt (EEE) method of tax treatment of investments. Alternatively,
the application of EET should be restricted to new savings instruments after
the date from which the DTC comes into effect, and it should not apply to
existing saving instruments.
proposed EET system. It has been stated that most countries that follow the
EET method of taxation of savings also have a social security system in
place for all their citizens. The EET savings accounts which operate for
individuals in these countries are over and above the mandatory social
service payments received by them. It has been represented that in India, in
the absence of a universal social security system, the proposed EET method
of taxation of permitted savings would be harsh. Tax payers require some
flexibility in making withdrawals in lump sum without being subjected to
tax. People may need lump sum funds on retirement for various family
obligations. Requests have therefore been made for continuation of Exempt
Exempt Exempt (EEE) method of tax treatment of investments. Alternatively,
the application of EET should be restricted to new savings instruments after
the date from which the DTC comes into effect, and it should not apply to
existing saving instruments.
3. Universal social security benefits for tax payers may not be feasible in
the near future. Also, switching over to a complete EET method of taxation
for all savings instruments would entail many administrative, logistical and
technological challenges. It would require a vast network of permitted
savings intermediaries, a central record keeping authority and a central
agency to service around more than three crore accounts and deduct tax at
the time of withdrawals. The segregation of taxable and non-taxable amounts
at the time of withdrawal and rollover from one account to another would
introduce complexities and create practical difficulties.
the near future. Also, switching over to a complete EET method of taxation
for all savings instruments would entail many administrative, logistical and
technological challenges. It would require a vast network of permitted
savings intermediaries, a central record keeping authority and a central
agency to service around more than three crore accounts and deduct tax at
the time of withdrawals. The segregation of taxable and non-taxable amounts
at the time of withdrawal and rollover from one account to another would
introduce complexities and create practical difficulties.
3.1 Therefore, as of now, it is proposed to provide the EEE method of
taxation for Government Provident Fund (GPF), Public Provident Fund
(PPF) and Recognised Provident Funds (RPFs) and the pension scheme
administered by Pension Fund Regulatory and Development Authority.
Approved pure life insurance products and annuity schemes will also be
subject to EEE method of tax treatment. In order to achieve the objective of
long term savings, the rules for contribution as well as withdrawal will be
harmonised and made uniform so that such savings are actually made and
utilised by the taxpayer for the long term. Investments made, before the
date of commencement of the DTC, in instruments which enjoy EEE method of
taxation under the current law, would continue to be eligible for EEE method
of tax treatment for the full duration of the financial instrument.
taxation for Government Provident Fund (GPF), Public Provident Fund
(PPF) and Recognised Provident Funds (RPFs) and the pension scheme
administered by Pension Fund Regulatory and Development Authority.
Approved pure life insurance products and annuity schemes will also be
subject to EEE method of tax treatment. In order to achieve the objective of
long term savings, the rules for contribution as well as withdrawal will be
harmonised and made uniform so that such savings are actually made and
utilised by the taxpayer for the long term. Investments made, before the
date of commencement of the DTC, in instruments which enjoy EEE method of
taxation under the current law, would continue to be eligible for EEE method
of tax treatment for the full duration of the financial instrument.
CHAPTER IV
TAXATION OF INCOME FROM HOUSE PROPERTY
TAXATION OF INCOME FROM HOUSE PROPERTY
1. Chapter VIII of the Discussion Paper on the draft Direct Taxes Code (DTC)
deals with the computation of income from house property. “Income from house
property” is one of the five heads under which accruals or receipts relating
to ordinary sources of income are to be classified. The Discussion Paper
states that income from house property, which is not occupied for the
purpose of any business or profession by its owner, is to be taxed under
this head. The Discussion Paper proposes a new scheme for computation of
income from house property in the draft DTC, the salient features of which
are:
deals with the computation of income from house property. “Income from house
property” is one of the five heads under which accruals or receipts relating
to ordinary sources of income are to be classified. The Discussion Paper
states that income from house property, which is not occupied for the
purpose of any business or profession by its owner, is to be taxed under
this head. The Discussion Paper proposes a new scheme for computation of
income from house property in the draft DTC, the salient features of which
are:
(a) Income from house property shall be the gross rent less specified
deductions.
deductions.
(b) Gross rent will be higher of
(i) the amount of contractual rent for the financial year; and
(ii) the presumptive rent calculated at six per cent per annum of the
ratable value fixed by the local authority. However, in a case where no
ratable value has been fixed, six per cent shall be calculated with
reference to the cost of construction or acquisition of the property. If the
property is acquired during the financial year, the presumptive rent shall
be calculated for the proportionate period of that financial year.
ratable value fixed by the local authority. However, in a case where no
ratable value has been fixed, six per cent shall be calculated with
reference to the cost of construction or acquisition of the property. If the
property is acquired during the financial year, the presumptive rent shall
be calculated for the proportionate period of that financial year.
(c) The advance rent will be taxed only in the financial year to which it
relates.
relates.
(d) The gross rent of one self-occupied property will be deemed to be nil,
as at present. In addition, the gross rent of any one palace in the
occupation of a ruler will also be deemed to be nil, as at present.
as at present. In addition, the gross rent of any one palace in the
occupation of a ruler will also be deemed to be nil, as at present.
(e) The following deductions will be admissible against the gross rent:- (i)
Amount of taxes levied by a local authority and tax on services, if actually
paid. (ii) Twenty per cent of the gross rent towards repairs and maintenance
as against thirty per cent at present. (iii) Amount of any interest payable
on capital borrowed for the purposes of acquiring, constructing, repairing,
renewing or re-constructing the property.
Amount of taxes levied by a local authority and tax on services, if actually
paid. (ii) Twenty per cent of the gross rent towards repairs and maintenance
as against thirty per cent at present. (iii) Amount of any interest payable
on capital borrowed for the purposes of acquiring, constructing, repairing,
renewing or re-constructing the property.
(f) In the case of a self-occupied property where the gross rent is deemed
to be nil, no deduction for taxes or interest will be allowed.
to be nil, no deduction for taxes or interest will be allowed.
(g) The income from property shall include income from the letting of any
buildings along with any machinery, plant, furniture or any other facility
if the letting of such building is inseparable from the letting of the
machinery, plant, furniture or facility.
buildings along with any machinery, plant, furniture or any other facility
if the letting of such building is inseparable from the letting of the
machinery, plant, furniture or facility.
2. The most frequent feedback on computation of income from house property
has been the determination of notional rent on presumptive basis (at the
rate of 6%) with reference to the cost of construction/ acquisition. The
input is that this is inequitable as it discriminates against recent owners
as such cost is a function of inflation. The other major issue which has
been raised is that, in order to incentivize investment in housing, the
deduction for interest on capital borrowed for acquisition or construction
of a self occupied house property, up to a ceiling of Rs. 1.5 lakhs, as
available in the existing provisions of the Income-tax Act, 1961 should be
retained.
has been the determination of notional rent on presumptive basis (at the
rate of 6%) with reference to the cost of construction/ acquisition. The
input is that this is inequitable as it discriminates against recent owners
as such cost is a function of inflation. The other major issue which has
been raised is that, in order to incentivize investment in housing, the
deduction for interest on capital borrowed for acquisition or construction
of a self occupied house property, up to a ceiling of Rs. 1.5 lakhs, as
available in the existing provisions of the Income-tax Act, 1961 should be
retained.
3. The determination of notional rent for computing income from house
property has been a cause for much litigation. Internationally also, in most
jurisdictions, income from house property is taxed on the basis of rent from
letting out of property.
property has been a cause for much litigation. Internationally also, in most
jurisdictions, income from house property is taxed on the basis of rent from
letting out of property.
3.1 Taking the above factors into account, the following modifications are
proposed: (a) In case of let out house property, gross rent will be the
amount of rent received or receivable for the financial year. (b) Gross rent
will not be computed at a presumptive rate of six per cent of the rateable
value or cost of construction/acquisition. (c) In case of house property
which is not let out, the gross rent will be nil. As the gross rent will be
taken as nil, no deduction for taxes or interest etc., will be allowed.
However, in case of any one house property, which has not been let out, an
individual or HUF will be eligible for deduction on account of interest on
capital borrowed for acquisition or construction of such house property
(subject to a ceiling of Rs. 1.5 lakh) from the gross total income. The
overall limit of deduction for savings will be calibrated accordingly.
proposed: (a) In case of let out house property, gross rent will be the
amount of rent received or receivable for the financial year. (b) Gross rent
will not be computed at a presumptive rate of six per cent of the rateable
value or cost of construction/acquisition. (c) In case of house property
which is not let out, the gross rent will be nil. As the gross rent will be
taken as nil, no deduction for taxes or interest etc., will be allowed.
However, in case of any one house property, which has not been let out, an
individual or HUF will be eligible for deduction on account of interest on
capital borrowed for acquisition or construction of such house property
(subject to a ceiling of Rs. 1.5 lakh) from the gross total income. The
overall limit of deduction for savings will be calibrated accordingly.
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