Your personal tax guide to the DTC bill

The Direct Tax Bill has proposed to introduce a new investment scheme to avail tax exemption. In
this scheme, an investor can invest up to Rs 50,000 in life insurance policies, health insurance and
children's tuition fees.

One can also invest up to Rs 1 lakh in a year in approved securities like employees provident fund
(EPF), public provident fund (PPF), pension fund and other approved securities.

At present, one can invest up to Rs 1.10 lakh in a host of instruments like EPF, PPF, pension plan,
insurance, equity-linked savings schemes (ELSS), Unit Linked Investment Plan (ULIP) and
children's tuition. Besides this, there is a separate category of Rs 10,000 to invest in infrastructure
bond and Rs 15,000 in health insurance. One can invest up to Rs 1,35,000 in various instruments.
The increase in the limit of investment from Rs 1.35 lakh to Rs 1.5 lakh will enable a big investor,
having more than Rs 10 lakh annual income, to save an additional Rs 4,500. His savings will go up
from Rs 40,500 to Rs 45,000.

1. Tax rates

i) Exemption limit

Provision of DTC Bill: Basic exemption limit is proposed at Rs 200,000 (Rs 250,000 for senior
citizens)
Existing tax provision: Basic exemption limit is Rs 160,000 (Rs 190,000 for women and Rs
240,000 for senior citizens)
Implications: (Beneficial) Increase in basic exemption limit is a welcome move, given high
inflation; preferential exemption for women removed.

ii) Slab rates

Provision of DTC Bill: Up to Rs 5 lakh — 10%; 5 to 10 lakh — 20%; Over 10 lakh — 30%
Existing tax provision: Up to Rs 5 lakh — 10%; 5 to 8 lakh — 20%; Over 8 lakh — 30%
Implications: (Beneficial) Increase in slabs will result in saving of Rs 24,000; Absence of
education cess will also help.

2. DTC continues EEE

I. Govt. PF/recognized PF/Public PF

Provision of DTC Bill: Employer’s contributions to PF up to 12% of salary exempt; Employee’s

contribution eligible for overall investment deduction limit of Rs 100,000; Amount received on
maturity not taxable, subject to conditions
Existing tax provision: Employer’s contribution to provident fund exempt up to 12% of salary;
Employee’s contribution eligible for deduction up to Rs 100,000; Accretions and withdrawals
exempt based on prescribed guidelines
Implications: (Beneficial) EEE continued in these popular schemes; Overall investment deduction
limit of Rs 100,000 applies for contributions to approved funds, viz PF, superannuation fund,
gratuity, pension and other notified funds.
II. Superannuation Fund

Provision of DTC Bill: Employer’s contribution to approved superannuation funds exempt;

Employee’s contribution eligible for overall investment deduction limit of Rs 100,000; Maturity
payments on retirement/ achieving certain age/incapacitation not taxable
Existing tax provision: Employer’s contribution up to Rs 100,000 per annum is exempt;
Withdrawal is exempt based on prescribed guidelines
Implications: (Beneficial) Continuance of EEE would mean no tax liability on end-payments;
Removal of present anomaly of part double taxation of employer’s contribution will help

III. Life insurance policies

Provision of DTC Bill: Premia eligible for overall additional deduction limit of Rs 50,000 (with
mediclaim & tuition fees); Premia paid on policies with premium > 5% of sum assured not
deductible; Maturity proceeds exempt, if the premium paid in any year < 5% of sum assured &
received on completion of original insurance period. Proceeds received on death are completely
exempt; Equity linked life insurance schemes subject to 5% tax on distribution
Existing tax provision: Premia deductible up to Rs 100,000; Sum received on life insurance
policy (including bonus) exempt if premium in any year is < 20% of sum assured
Implications: (Adverse) Overall additional deduction limit not only lowered to Rs 50,000, but is
also merged with mediclaim insurance and tuition fees; Amounts received during the term of the
insurance contract under cash back insurance policies would become taxable; Threshold of 5% of
sum assured seems to be too low — may affect even genuine policies; No grandfathering
provisions for presently issued policies; 5% distribution tax on equity linked insurance schemes
would lower the effective yield of such instruments

IV. Mediclaim insurance premium

Provision of DTC Bill: Premia paid for self/spouse/children/dependent parents eligible for overall
additional deduction limit of Rs 50,000
Existing tax provision: Premia paid for self/spouse/children are entitled for deduction of Rs
15,000, and additional deduction of Rs 15,000 (Rs 20,000 in case of senior citizens) for parents
Implications: (Mixed impact) Overall additional deduction limit although increased, is merged with
life insurance and tuition fees; Parents need to be dependent, if premium is to qualify as a
deduction

V. Investment avenues reduced substantially

Provision of DTC Bill: No deductions for avenues such as mutual fund investments (ELSS),
housing loan repayment (principal), etc
Existing tax provision: Such payments were eligible for Rs 100,000 deduction limit
Implications: (Adverse) these avenues will no longer be eligible for deduction

3. Salary components

i) House rent allowance

Provision of DTC Bill: HR exemption continued (subject to conditions)

Existing tax provision: Exemption is available (subject to conditions)
Implications: (Beneficial) This will ensure some parity between employees staying in own house
vis-ीी -vis those staying in rental house

ii) Leave encashment

Provision of DTC Bill: Exemption for Leave encashment on retirement up to limits to be specified
allowed
Existing tax provision: Exemption is available up to Rs 3 lakh in specified cases and fully exempt
in case of govt employees
Implications: (Beneficial) Employees would continue to avail of exemption

iii) Medical facilities/reimbursement

Provision of DTC Bill: Medical facilities not taxable (as present) and medical expense
reimbursements up to Rs 50,000 exempt
Existing tax provision: Medical treatment in specified hospitals not taxable, nor is payment of
medical insurance premium. More so, reimbursement of medical bills is exempt up to Rs 15,000.
Implications: (Beneficial) Continuation of exclusion of medical facilities out of perquisite net is a
very welcome move; Increase of medical expenses reimbursement limit to Rs 50,000 is also
commensurate to the increased medical costs

iv) Leave travel concession

Provision of DTC Bill: LTC exemption removed

Existing tax provision: LTC exempt in respect of travel expenses for self/family, subject to
certain conditions
Implications: (Not beneficial) LTC benefit (travel expenses) shall be taxable

4. Retirement benefits

1.) Gratuity, VRS, commutation of pension

Provision of DTC Bill: Terminal benefit such as gratuity, VRS, commuted pension are exempt,
subject to conditions
Existing tax provision: Exemption is available (gratuity up to Rs 10 lakh, VRS up to Rs 5 lakh
etc) in specified cases subject to conditions
Implications: (Beneficial) Continuance of exemption will mitigate hardship of tax burden on such
payments

5. House property income

i)Notional rent taxation stopped

Provision of DTC Bill: House property income taxable only where rent is actually
received/receivable
Existing tax provision: House property (other than self occupied) income taxed on deemed rent
basis, even if not actually let out
Implications: (Beneficial) Removes anomaly of tax levied on non-existing income

ii) Deduction for repairs

Provision of DTC Bill: 20% on gross rent allowable towards repairs, etc
Existing tax provision: Deduction of 30% of gross rent is allowed
Implications: (Adverse) Given increasing costs of maintenance of properties, this may not be
viewed favorably

iii) Interest on housing loan for self-occupied property

Provision of DTC Bill: Deduction of Rs 1.5 lakh (including pre-construction interest installment)
allowed
Existing tax provision: Interest deduction up to Rs 1.5 lakh is allowed in case of one house
property which is not let out by an individual
Implications: (Beneficial) The move to allow deduction of interest on housing loan is welcome.

6. Capital gains

i) Securities Transaction Tax (STT)

Provision of DTC Bill: DTC has proposed to continue levy of STT in same way as present
Existing tax provision: STT is leviable on sale/purchase transactions undertaken on recognized
stock exchanges and on redemption of equity oriented mutual funds

ii) Equity shares/equity oriented mutual fund units (STT paid)

Provision of DTC Bill: If held > 12 months, 100% gains are allowed as deduction, ie entire gains
not taxed; If held < 12 months, deduction of 50% of gains will be allowed
Existing tax provision: If held > 12 months, entire gains are not taxable; If held < 12 months,
tax payable on gains @ 15%
Implications: (Beneficial) Continuance of NIL tax on gains from sale of shares/equity oriented
units held for more than a year is a welcome move; 50% deduction mechanism would result in
lower tax impact (5%, 10% or 15%)

iii) All other investment assets

Provision of DTC Bill: Holding period for indexation/ exemption benefit is one year from end of
financial year post acquisition; Indexation and rollover benefit (subject to conditions) available with
reference to purchase price, or optionally, fair value as on 1 April 2000, if asset acquired before
that date
Existing tax provision: Holding period for classification as long term/indexation/exemption
benefits is 36 months; If long term, gains taxable @ 20%, subject to indexation benefit (inflation
indices starting 1981); If short term, gains taxable at applicable slab rates
Implications: (Beneficial) Holding period for indexation/exemption benefit is reduced to 12-24
months maximum; Unrealized gains up to 1 April 2000 would go untaxed completely