Centre proposes new tax regime

Offers major relief to all tax payers

Centre proposes  new tax regime

The draft Direct Tax Code (DTC), which seeks to replace the Income Tax Act 1961 and bring all other direct taxes like Capital Gains Tax and Wealth Tax under its review, proposes drastic moderation in the tax rates for individual as well as business to enhance tax compliance and expand tax base.

These direct tax proposals will come into effect once Parliament accords its approval.  In a bid to promote savings DTC proposes exemption of Income Tax on savings up to Rs 3 lakh a year. Currently the deduction limit for all sorts of savings under 80 CC is Rs 1 lakh.  If approved, the new tax regime, will not only provide relief to middle income salaried class but also immensely benefit people earning salaries beyond Rs 10 lakh per year.   
The draft DTC, released by Finance Minister Pranab Mukherjee, proposes to exempt the general tax payer from paying Income Tax if his income is Rs 1.60 lakh in a year.
As per the proposal the general tax payer will pay just 10 per cent for income up to Rs 10 lakh, 20 per cent on income between Rs 10 lakh and Rs 25 lakh and 30 per cent beyond Rs 25 lakh. Currently he does not have to pay any tax on income up to Rs 1.60 lakh in a year. However, he pays 10 per cent on income ranging between Rs 1.60 lakh and Rs 3 lakh, 20 per cent between Rs 3 lakh and Rs 5 lakh and 30 per cent beyond Rs 5 lakh.  But there is a rider on calculation of salary for computation of Income Tax. The DTC proposes that all perquisites will be taken into account while calculating salary income.
Though the DTC proposes to enhance deductions on savings up to Rs 3 lakh it prescribes Exempt- Exempt-Taxation (EET) method of taxation for all savings. It means at the time of withdrawal of money, subscribers to savings instruments like (Public Provident Fund), Government Provident Fund (GPF) and Employees Provident Fund (EPF) will have to pay tax.

Accumulated balances
However, the DTC provides that the withdrawal of any amount of accumulated balances as on March 31, 2011 in the account of the individual in the GPF, PPF and EPF will not be subject to tax.

In other words, only new contributions  after the commencement of the DTC will be subject to the EET method of taxation. The DTC also proposes that retirement benefits will be exempted from tax if saved in Retirement Benefits Account. However, all withdrawals from the account would be taxed on the EET principle of taxation. Among several tax proposals for the corporate sector, it proposes effective corporate tax rate at 25 per cent while allowing all business losses to be carried forward for indefinite period. While rationalising taxation of capital gains, it proposes abolition of Securities Transaction Tax (STT). While proposing elimination of distinction between long term and short term capital gains recommends base year for calculation of capital gains shifted from April 1 1981 to April 1 2000.

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