Know your taxes to save better- lead a happy life

   Filing tax returns is an essential task for  anyone whose income crosses the basic exemption limit. In order to minimize the  tax impact on your income, tax planning is essential and for the same, it is  essential to keep a track of the latest developments as it will help you plan  your investments wisely. The direct tax code which is in the proposal  stages will replace the Income Tax Act come April, 2011, and hence, it is key to  understand what the proposed changes are, and how it will impact you, the  salaried individual. Following is a synopsis of the various changes announced.

Tax slabs

   This is an area that has not been touched upon  in the revised discussion paper released on the July 15. However, the draft  version of the DTC announced in August 2009 has proposed the following changes

The threshold level of income exempt from tax  was proposed to be raised to Rs 2,00,000 from Rs. 1,60,000 currently

Income between Rs 5,00,000 and Rs 10 lakh (Rs 1 million) to attract 10% tax

Income between Rs 10 lakh (Rs 1 million) and Rs 25 lakh (Rs 2.5 million) to be  taxed at 20%

It remains to be seen what the final take of the Central Board of Direct taxes  would be to assess the impact.

Insurance

   Insurance maturity proceeds are currently tax  free in the hands of the individual. In the earlier draft of the DTC released in  August 2009, it was proposed that maturity benefits on insurance products should  be taxed. However, the recent version of the DTC has done  away with it, but has specifically mentioned that the tax benefit will be only  for ‘pure’ insurance plans. This implies that investment products such as ULIPs  and endowment plans will come under the EET regime and hence be taxed. However  the document does not specify what ‘pure’ insurance plans include, leaving some  sort of ambiguity.

   If implemented, it will be applicable to  products bought after April 1, 2011. This will reduce the popularity of  investment products which currently occupy a significant portion of business for  insurance companies.

Equities and equity oriented Mutual Funds Long term capital gains has been introduced with  long term gains to be added to the income and taxed at the marginal rate of  return post a deduction on the gains, the percentage of the deduction is yet to  be announced. The deduction will be tax free. Also the definition of long term  has been changed to at least one year after the financial year in which  investment has been made. So if any investment is made on June 10, 2010, for it  to qualify as long term, it has to be held at least till March 31, 2012. Short term capital gains is proposed to be added  to income and taxed at the marginal rate of tax depending on the income slab, as  against the current method of a flat rate of 15 per cent being charged. These changes if implemented will be beneficial  to short term investors in the lower income bracket while long term investors  stand to lose, as their gains which were once tax free, will now be taxed.

Housing

   Tax deduction on interest paid for self occupied  homes has been reinstated. This means individuals can continue to claim a tax  deduction up to Rs 1,50,000 on this front. Definition of short term gains has been revised  from 1 year to 3 years. The tax treatment for short term gains continue to  remain the same i.e. it will be added to your income and the marginal tax rate  will be charged. However, in case of long term gains, there is a  change where in gains will be added to the income after indexation against the  earlier method where a flat rate of 20% was charged. For rental income, gross rent will continue to  be calculated on an actual basis which will simplify things for individuals who  plan to let out their house.

Retirement products

· EEE treatment for retirement products has been  reinstated which means that withdrawal from Government Provident Fund, Public  Provident Fund, recognised Provident funds and the pension scheme offered by
PFRDA, will no longer be taxed. However, in order to ensure that the long term  saving objective is achieved; rules for contribution as well as withdrawal will  be made uniform. For an individual, building a corpus for a secure retirement,  there couldn’t be better news.

· Compensation received under the Voluntary  Retirement Scheme, amount of gratuity received on death or retirement and amount  received on encashment of leave at the time of superannuation will be exempt
from tax subject to specified monetary limits. 

   This is a big positive for  employees because they will have more money at their disposal. The discussion paper released is not  comprehensive in sense as there is no clarity on certain aspects such as tax  slabs, definition of pure life insurance products among other things. However,  if you go by the announcements proposed, if the same are implemented, it would  result in several noteworthy changes for individuals which will take effect  while filing returns for the financial year 2011-12.