The direct tax code is a bit of a mixed bag for individuals, particularly the salaried class. Prima facie, the tax liability will reduce significantly as the draft code proposes to tax incomes up to Rs 10 lakh at 10%, that between Rs 10 lakh and Rs 25 lakh at 20% and sum in excess of that at 30%.

Thus, an individual with taxable gross income of Rs 10 lakh will pay tax of Rs 84,000 as opposed to about Rs 2.11 lakh he pays this fiscal year.

Also, deductions allowed for investments in specified instrumentsmainly long-term savings and retirement savingswill go up to Rs 3 lakh from Rs 1 lakh. The bad news is that retirement savings will become taxable on withdrawal, as the draft code has proposed to usher in exempt-exempt-tax (EET) regime. M

ore significantly , the deduction of Rs 1.5 lakh allowed on interest paid on home loans appears set to be scrapped. There is no mention of such a deduction being allowed in the draft code.

It is also proposed that all perks are to be considered part of the gross salary for the purpose of taxation. The impact of that on tax liability of an individual will be known only when the rules are prescribed by the income-tax department at a later date, notes PricewaterhouseCoopers executive director Kaushik Mukherjee.

But one thing is certain. The tax treatment of the perks enjoyed by the government employee and the private sector employee will be the same. The objective according to the draft code: To improve both the horizontal and vertical equity of the tax system across employees in all sectors.

It has also proposed that benefits such as gratuity payment made to employees on change of jobs will be allowed tax exemption only if it is invested in a retirement fund.

If an employee fails to invest it in such a fund, such receipts will be taxed at the appropriate marginal rate of tax.

It is also proposed that all perks are to be considered part of the gross salary for the purpose of taxation. The impact of that on tax liability of an individual will be known only when the rules are prescribed by the income-tax department at a later date, notes PricewaterhouseCoopers executive director Kaushik Mukherjee.

But one thing is certain. The tax treatment of the perks enjoyed by the government employee and the private sector employee will be the same. The objective according to the draft code: To improve both the horizontal and vertical equity of the tax system across employees in all sectors.

It has also proposed that benefits such as gratuity payment made to employees on change of jobs will be allowed tax exemption only if it is invested in a retirement fund.

If an employee fails to invest it in such a fund, such receipts will be taxed at the appropriate marginal rate of tax.

The code provides for a grandfathering clause, meaning the withdrawal of any amount of accumulated balance as on March 31, 2011, in the account of an individual in the specified instruments such as provident funds will not be subject to tax.

It also provides that rollover of any amount received or withdrawn from one account of the permitted savings to any other account with the same or any other permitted savings scheme will not be treated as withdrawal. This means that such rollover will not be subject to tax.

The code has proposed to continue with other deductions such as medical insurance premium, medical treatment or maintenance of disabled dependent, treatment for specified diseases for self and dependents, for the handicapped, interest on loan taken for higher education, rent paid for residence, donations to certain non-profit organisations and specified institutions and tuition fees for children.

Other proposals include classifying income as those from ordinary source and from special source.

Income from ordinary source includes income from employment, house property, business and residuary sources, as well as capital gains.

Those from special sources include capital gains on equities and equity-oriented funds, income of any other nature.

Gross salary is to form part of the tax base on due or receipt basis, whichever is earlier and it will include value of perquisites and profits in lieu of salary.