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Revised Direct Tax Code
June, 17th 2010

After releasing the discussion paper on Direct Tax Code (DTC) in August 2009 for public feedback, a revised version of the same was released by the government on Tuesday. The revised DTC has covered some of the issues in the original that attracted widespread criticism.

The new Direct Tax Code is expected to change the income tax calculation of corporate as well as individual assessees. The discussion paper says, The indicative tax slabs and tax rates and monetary limits for exemption and deductions proposed in the direct tax code will be calibrated while finalizing the legislation. This may lead to higher tax rates than that proposed in the original draft. However, for individual assessees, the retention of exemption on savings and home loans has brought cheers.

Due to public outcry, the government has amended the DTC to the effect that withdrawals from pension funds, provident funds and life insurance schemes will not be taxed.

However, there are still some points that lack clarity. The DTC paper says, approved pure life insurance products and annuity schemes will also be subject to EEE (exempt, exempt, exempt) method of tax treatment. This leaves the fate of unit-linked insurance plans (ULIPs) in doubt.

The new wealth tax will cover financial assets such as stocks and mutual funds as well. This is bound to be tougher for individuals. The dividing line between long-term and short-term investment is blurring with the new DTC proposal. With no great distinction between capital gains tax for both, investors will lack the motivation to go in for long-term investments, which is against government policy.

The DTC bill is slated to come up in Parliament in the coming monsoon session. The DTC will come into effect from April 2011 and will replace the Income Tax Act of 1961.

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