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Direct Tax Code: Implications for housing, insurance and equities investors
June, 17th 2010

Direct Tax Code: Implications for housing, insurance and equities investors

At first sight the revised proposals under DTC give an impression that exemptions are back where they were. But a closer look at the details reveals that there is a twist in the tale. While it is a positive for housing, the same holds out a mixed bag for investors in insurance & equities.

The revised discussion paper on DTC has softened the blow on long-term equity investors. The earlier version of the code had proposed a long-term capital gains tax on sale of long-term investments.

If the proposals in the revised draft are implemented, a specified percentage will be deducted from long-term capital gains (instead of factoring in the indexation benefit) before adding the same to the individuals income for computing tax as per the applicable slab rate.

Deduction of specified percentage from long-term capital gains is a relief

Compared to the earlier draft, the proposal to deduct a specified percentage from long-term capital gains is a huge relief, says Vaibhav Sankla.

For instance, say you had purchased a stock for Rs 10 in 2000 and the indexed cost of acquisition rose to Rs 20, approximately and you sold the stock for Rs 100 making a gain of Rs 80 (100-20). Under the first draft, the entire Rs 80 will be subject to tax. However, under the revised draft, the long-term capital gain so computed could be just Rs 45, that is, 90 minus 45 (assuming 50% is the specified percentage).

Therefore, the newer version will reduce your tax outgo, since the long-term gain will come down from Rs 80 to Rs 45. If your slab rate is 10%, the effective tax rate on this gain will be 5%, as per the revised draft. The loss from sale of such assets will be scaled down in a similar manner, according to the revised discussion paper.

My view is that the percentage, which is yet to be specified, could be linked to the slab rate, so as to ensure that those with lower incomes benefit more. On the flipside, securities transaction tax (STT) has been reintroduced, which the first draft had sought to abolish, he says.

Chartered Accountants are likely to advise selling equity assets whenever opportunity to book profits

Adds Prerana Salaskar-Apte, chartered accountant and certified financial planner: It is likely that chartered accountants will advise their clients to sell equity assets whenever there is an opportunity to book profits, before the revised code comes into effect from April 1, 2011. At present, there are no taxes on long-term gains from equity.

Another change is that in the new regime, any equity asset that is held for a period of more than one year from the end of the financial year in which it is acquired will be termed a long-term investment while earlier any asset held for more than 12 months was considered long-term.

The revised draft has offered to provide for a transition regime for tax on long-term capital gains. However, the clarity on this count is yet to emerge. This apart, under the revised draft, non-residents will be treated at par with residents for taxation of such capital gains.

Insurance: Work your terms

At first look it appears that existing tax breaks will continue on life products under the revised Direct Tax Code. But a closer reading shows that this is not the case.

In the earlier code, it was proposed to tax maturity benefits of life insurance policies. Revised code reverts to existing exemptions but specifies that these are available only for pure insurance plans. Since no definition is provided for a pure insurance plan there is confusion.

If implemented, the changes in the tax system will be prospective in nature and products that are bought after April 1, 2011, will be subject to the proposed tax system.

At present maturity proceeds of a life insurance policy are tax-free in the hands of the individual. Life insurance has been, therefore, popular as an investment vehicle because of this three stage tax exemption (tax breaks for investing, tax benefits on gains by the fund and tax free maturity benefits).

 
 
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