The new tax code - what goes and what remains?
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Chawanni Advice
Aug 18, 2009, 2:29:26 PM8/18/09
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As you may be already aware the government has released a new tax code
which it proposes to bring into effect from April 1st, 2011. Its stated
goal is to reduce complexity and simplify the tax-process.
If they really wanted to simplify the process, then one of my suggestions to them would be to make the financial year same as the calendar year. I fail to understand why do we need to have FY 2008-09, why it can't be just FY 2008 , FY 2009 and so on like in few other countries. This was established by the British, and we have kept on following the same.
Let me first start with what has been taken away from you:
1. No more tax-free allowances like HRA ( house rent allowance ) , LTA ( leave travel allowance ) and medical allowance. All allowances and perks will be considered as part of your salary income. Gratuity is also taxable. Transport Allowance and travel allowance continue to be tax-free upto the limits prescribed.
2. Section 66 replaces section 80C. Only four kinds of tax-saving instruments are allowed:
- Pension fund
- Provident fund
- Life Insurance
- Superannuation fund
All withdrawals from the above funds are taxed even at retirement.
The only silver lining is that the accumulated balance in provident fund accounts upto March 31st, 2011 would continue to be tax-free.
ELSS mutual funds, NSC and 5-year fixed deposits would no longer be tax-savings instruments if the new tax code comes into effect.
3. Capital gains are fully-taxed. Gains can be indexed to the cost of inflation if the holding period is more than one year. This means that the tax-free long term capital gains offered by equity mutual would be history.
4. Dividends from equity mutual funds would also be taxable in the hands of the investors. Although DNA reports that the mutual fund dividends will continue to be tax-free under the new tax code, but as per my understanding the dividend received from mutual fund will be taxable because:
- Dividend is tax-free only if dividend distribution tax (DDT) has been paid.
- Equity mutual funds are not required to pay DDT ( only companies are required as per section 99 ), hence mutual fund dividends would be taxable.
5. No tax-benefit for interest on home-loan
Although, the govt has taken away so many benefits from you, they have also increased the tax slabs which means that for an income upto Rs. 10 Lacs you may pay a tax of 10% only ( will this also have education cess? ). The tax-savings limit has also been increased to Rs. 3 lakhs from the present Rs. 1 lakh, but where will you invest so much money since so many tax-savings instruments have been withdrawn. The only option is to spend it on health insurance or on your child's education. But if you are not married then how do you save tax? lock up your money in a EET plan?
The limit for wealth tax has also been increased to Rs. 50 crore but this will also include mutual fund & equity investments ( this means that Gold ETFs would also be counted as wealth ).
Overall, I feel the new tax code will not increase/decrease your annual tax outflow but it will affect the way in which you save. With many tax-savings instruments (like NSC) being withdrawn and the remaining ones being made EET ( exempt-exempt-tax ), the focus is reallly on building long term savings.
Some tips which I believe would be useful in the new tax-regime:
1. Since long-term capital gains are being removed, book all your long-term gains on March 31st, 2011. Then re-purchase the same on or after April 1, 2011. This way you can book tax-free profits if you have been holding a stock/equity mutual fund for long time.
2. The amounts deposited upto March 31st, 2011 in PPF are tax-free ( as also the interest earned on such amount ) and you still have two financial years, hence accumulate as much as you can in your PPF ( maximum deposit in a single year can be Rs. 70,000/- ). The interest earned on any such amount will continue to be tax-free. But this strategy may back-fire as the interest rates for PPF are controlled by the govt. and it may decide to set the PPF interest rate very low in order to discourage deposits in PPF.
3. In case you are afraid that the insurance companies do not offer good enough interest rates on annuity plans, you can decide to invest in a pension fund which is run by a mutual fund like UTI Retirement Benefit Pension Fund. In such a pension fund the amount is accumulated upto the retirement age and then you can start a SWP ( systematic withdrawal plan ) in order to receive your pension. Hence you are no longer dependent on the annuity rates offered by the insurance companies. Tax-benefits as applicable to other pension funds also apply here.
The original article can be found here:
http://chawanni.blogspot.com/2009/08/new-tax-code-what-goes-and-what-remains.html
If they really wanted to simplify the process, then one of my suggestions to them would be to make the financial year same as the calendar year. I fail to understand why do we need to have FY 2008-09, why it can't be just FY 2008 , FY 2009 and so on like in few other countries. This was established by the British, and we have kept on following the same.
Let me first start with what has been taken away from you:
1. No more tax-free allowances like HRA ( house rent allowance ) , LTA ( leave travel allowance ) and medical allowance. All allowances and perks will be considered as part of your salary income. Gratuity is also taxable. Transport Allowance and travel allowance continue to be tax-free upto the limits prescribed.
2. Section 66 replaces section 80C. Only four kinds of tax-saving instruments are allowed:
- Pension fund
- Provident fund
- Life Insurance
- Superannuation fund
All withdrawals from the above funds are taxed even at retirement.
The only silver lining is that the accumulated balance in provident fund accounts upto March 31st, 2011 would continue to be tax-free.
ELSS mutual funds, NSC and 5-year fixed deposits would no longer be tax-savings instruments if the new tax code comes into effect.
3. Capital gains are fully-taxed. Gains can be indexed to the cost of inflation if the holding period is more than one year. This means that the tax-free long term capital gains offered by equity mutual would be history.
4. Dividends from equity mutual funds would also be taxable in the hands of the investors. Although DNA reports that the mutual fund dividends will continue to be tax-free under the new tax code, but as per my understanding the dividend received from mutual fund will be taxable because:
- Dividend is tax-free only if dividend distribution tax (DDT) has been paid.
- Equity mutual funds are not required to pay DDT ( only companies are required as per section 99 ), hence mutual fund dividends would be taxable.
5. No tax-benefit for interest on home-loan
Although, the govt has taken away so many benefits from you, they have also increased the tax slabs which means that for an income upto Rs. 10 Lacs you may pay a tax of 10% only ( will this also have education cess? ). The tax-savings limit has also been increased to Rs. 3 lakhs from the present Rs. 1 lakh, but where will you invest so much money since so many tax-savings instruments have been withdrawn. The only option is to spend it on health insurance or on your child's education. But if you are not married then how do you save tax? lock up your money in a EET plan?
The limit for wealth tax has also been increased to Rs. 50 crore but this will also include mutual fund & equity investments ( this means that Gold ETFs would also be counted as wealth ).
Overall, I feel the new tax code will not increase/decrease your annual tax outflow but it will affect the way in which you save. With many tax-savings instruments (like NSC) being withdrawn and the remaining ones being made EET ( exempt-exempt-tax ), the focus is reallly on building long term savings.
Some tips which I believe would be useful in the new tax-regime:
1. Since long-term capital gains are being removed, book all your long-term gains on March 31st, 2011. Then re-purchase the same on or after April 1, 2011. This way you can book tax-free profits if you have been holding a stock/equity mutual fund for long time.
2. The amounts deposited upto March 31st, 2011 in PPF are tax-free ( as also the interest earned on such amount ) and you still have two financial years, hence accumulate as much as you can in your PPF ( maximum deposit in a single year can be Rs. 70,000/- ). The interest earned on any such amount will continue to be tax-free. But this strategy may back-fire as the interest rates for PPF are controlled by the govt. and it may decide to set the PPF interest rate very low in order to discourage deposits in PPF.
3. In case you are afraid that the insurance companies do not offer good enough interest rates on annuity plans, you can decide to invest in a pension fund which is run by a mutual fund like UTI Retirement Benefit Pension Fund. In such a pension fund the amount is accumulated upto the retirement age and then you can start a SWP ( systematic withdrawal plan ) in order to receive your pension. Hence you are no longer dependent on the annuity rates offered by the insurance companies. Tax-benefits as applicable to other pension funds also apply here.
The original article can be found here:
http://chawanni.blogspot.com/2009/08/new-tax-code-what-goes-and-what-remains.html
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