INCOME TAX - DIRECT TAX CODE, 2010

FEEDBACK / COMMENTS

DIRECT TAXES CODE, 2010 - A PLUM CAKE OR A PEA-NUT?

Shri Govardhana Rao dated 03-09-2010

In my article titled "Tax code – Bitter for employees and Butter for rich" I had requested for removal of tax liability on -

1. Commutation of pension,
2. Retirement gratuity,
3. VRS emoluments,
4. Maturity value of GPF, LIC and PLI,
5. Value of LTC,
6. Amount of encashment of un-availed Earned Leave, and
7. Value of concessional Medical Treatment paid for or provided by the employers.

Also in my article "The Revised DTC - Ice Candy For Government Employees?" I had suggested that -

1. the EEE method of taxation should be continued without any stipulation for long term investments like GPF, PPF, RPF (Recongnised Provident Fund), Pension scheme approved by PFRDA, pure life insurance products and annuity schemes;
2. the Retirement Benefits like Gratuity, VRS benefit, Commutation of pension and encashment of leave should be exempted in full without any limit;
3. the Medical reimbursement at actual should be fully exempted;
4. the principal paid in respect of housing loan should be qualified as allowed deduction from income; and
5. the individual retail investors should be completely exempted from long term capital gains tax by increasing STT appropriately.

I am happy to inform that most of the request has been acceded by the Government.

Bill No. 110 of 2010 THE DIRECT TAXES CODE, 2010 which was tabled in the parliament on 28.08.2010 with respect to an individual tax payer such as a Government Servant is as summarized below:

A. As per section 6 of the code, income will include the contribution from the Government to the pension fund constituted for the new recruits. Also in respect of any other fund if the balance accrued exceeds certain limit (the Government will issue notification prescribing this limit after enactment) it has to be included in the total income.

B. As per section 23, following deductions can be made:
i. Tax on employment (i.e. Professional tax in Karnataka);
ii. TA/DA benefits;
iii. Any amount of contribution made by an employer, in the financial year, to the account of an employee under an approved pension fund notified by the Central Government, to the extent it does not exceed ten per cent. of the salary of the employee;
iv. Any amount of contribution by an employer, in the financial year, to an account of an employee in an approved provident fund, to the extent it does not exceed twelve per cent. of the salary of the employee; and
v. Any interest paid on said fund subject to a limit of interest rate to be fixed by Government.

C. As per section 59 (3) (d), any amount including bonus, if any, received or receivable under a life insurance policy from as insurer on maturity or otherwise can be claimed as deduction from residuary income if and only if -
i. the premium paid or payable for any of the years during the term of the policy does not exceed five per cent. of the capital sum assured; and
ii. the amount is received only upon completion of original period of contract of the insurance.

D. As per section 69 an amount of up to one lakh can be claimed as deduction for making contribution to approved fund. As per definition in section 314 (18) Approved Fund includes a provident fund, superannuation fund or gratuity fund approved by Government.

E. As per section 70, 71, 72 and 73 up to a maximum of Rs. 50,000/- can be claimed as deduction in respect of -
i. payment towards a life insurance (with a caveat that the premium paid in any year does not exceed 5% of S.A.);
ii. payment made to a health insurance; and
iii. tuition fee in respect of two children with a condition that tuition fee does not include payment to development fee or donations.

F. As per section 74 up to Rs. 1,50,000/- can be claimed as deduction towards interest paid on a housing loan.

G. As per section 75 interest paid on educational loan can be claimed as deduction for initial financial year and 7 financial years immediately succeeding the same (details of these conditions and institution to which interest is paid will be notified after enactment).

H. As per section 76 an amount up to Rs. 60,000/- in respect of senior citizen and Rs. 40,000/- in respect of others, amount paid for medical treatment of the prescribed disease (these diseases are yet to be notified although section itself prescribes many conditions), can be claimed as deduction.

I. Section 77 prescribes deduction of up to one lakh rupees to a person with disability and section 78 deals with deduction up to rupees one lakh for medical treatment and maintenance of a dependant person with disability.

J. Section 79 deals with deduction in respect of donations made during the year.

K. Similarly there are other sections for deduction towards rent paid when HRA is not received, political contributions, income of investment protection fund, royalty income of authors, royalty on patents.

L. As per First Schedule the rates of income-tax is as follows:

For Senior Citizens - Rates of income-tax:

In case of Lottery

M. As per Sixth Schedule followings income are not included in the total income:
i. The amount of accumulated balance in the account of an employee participating in an approved provident fund and any accretion thereto, to the extent provided in paragraph 8 of Part I of the Nineteenth Schedule.
ii. Any payment from an approved superannuation fund made—
(a) in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement; or
(b) on the death of a beneficiary.
iii. Any payment in commutation of pension received under any scheme of any employer, to the extent it does not exceed – (a) in a case where employee receives any gratuity, the commuted value of one third of the pension which he is normally entitled to receive; and (b) in any other case the commuted value of one-half of such pension.
iv. Payment received by the employee, from one or more employers, as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement, to the extent the aggregate of such amount does not exceed the limit as may be prescribed.
v. Any payment received by the employee, from one or more employers, by way of gratuity— (i) on his retirement; or (ii) on his becoming incapacitated prior to such retirement; or (iii) on termination of his employment; or (iv) any gratuity received by the family on the death of the employee, to the extent the aggregate of such amount does not exceed the limit as may be prescribed.
vi. Any sum received by any person from an insurer in respect of a life insurance policy upon death of the insured person.
vii. Any payment from New Pension System Trust to an employee having an account with the Trust under the New Pension Scheme notified by the Central Government.

The main drawback of the Bill is that -
1. there is no mention of deduction towards LTC availed by an employee. So the LTC benefit has to be included in the taxable income. My suggestion is to avail the LTC benefit immediately up to December for the prevailing block and avail LTC for the next block before June 2011 and claim the benefit, which will still be exempted since DTC will come into effect only from April 2012.
2. the medical reimbursement obtained also has to be included in taxable income. Although an amount of Rs.60,000 or Rs. 40,000 can be claimed as deduction in respect of treatment of specific disease as per section 76, these diseases are peculiar diseases like HIV, etc and are yet to be notified and one cannot take shelter under section 76 in respect of common diseases.
3. the limit for senior citizen is paltry Rs.2,50,000/- only. It should be increased to at least Rs.5,00,000/-. To become a senior citizen one should attain the age of 65 years. This needs to be bought down to 60 years.
4. the gratuity and commutation of pension are allowed to be tax free only upto a limit to be prescribed by the Government. The Government should have fully exempted these lump sum amounts since it is used for the welfare and well being of the Individual at their fag end of life.

I have prepared this document after going through 417 page document of Bill No. 110 of 2010 THE DIRECT TAXES CODE, 2010. Naturally there may be some misses. I would like the visitor and community to bring out any such mistake in my article.

One thing I am really surprised to know is that only around 6000 feedbacks have been received by FM. Though all the employees were requested to send their comments, I presume that it has not been done. If one and all had sent their comments, this number would have been huge so as to bring pressure on the Government to do the needful - more the pressure more the reforms.

So at least now may I request one and all to send your comments to the standing committee, your MPs, your Ministers and to all those who can pressurize the Government for making LTC, medical reimbursement, etc. to be FULLY TAX FREE.

Please click here to see the Direct Taxes Code 2010.

The views expressed in this article are those of the author and are not intended to represent the views of www.referencer.in

**********