Your tax life is about to face a huge churn. From April 1, 2011, finance minister Pranab Mukherjee has proposed to simplify the income-tax regime by reducing the tax rates on incomes above Rs1.6 lakh per annum (Rs1.9 lakh for women, and Rs2.4 lakh for senior citizens), but the reduced rates will come with few of the current exemptions.

Tax rates will be 10% for incomes from Rs1.6 lakh to Rs10 lakh, 20% for incomes upto Rs25 lakh, and 30% for earnings above Rs25 lakh per annum. But this reduction will come at the cost of many current exemptions that taxpayers have got used to. Gone is the Rs1.5 lakh tax deduction on interest paid on housing loans, gone are the exemptions for house rent and leave travel allowance, and gone are the deductions on investments in tax-saving mutual funds and fixed deposits.

Gone, too, is the special treatment for short-term and long-term capital gains, currently at 15% and zero. From 2011, all gains will be taxed at your marginal rate. A minor benefit retained: capital losses can be set off against capital gains. Some cheer for stock investors: the securities transaction tax will be abolished.

How do you benefit? You get an omnibus Rs3 lakh as deductible amount to cover investments in provident funds, superannuation funds, the new pension scheme, and life insurance premia.

Expenditure on two children's education can also be covered within this Rs 3 lakh limit. The bad news is that this exemption comes with a tail-sting called EET (exempt-exempt-tax). Returns on investments that are deductible will be taxed at maturity. Only earnings after March 31, 2011, will be EETen up this way.

Senior citizens get the best benefits, with medical expense exemptions upto Rs 60,000 per annum, less insurance claims reimbursed. Others get Rs 40,000 a year. Interest on education loans can also be deducted from incomes without any limits. Currently, the limit is Rs 40,000 per annum.

The changes, which form part of Mukherjee's draft Direct Tax Code proposals, will replace the 48-year-old Income Tax Act, 1961. The code is up for discussion and can be accessed on www.finmin.nic.in.

The direct tax code aims to simplify your tax life, but this may not necessarily reduce your taxes at various levels. What you save in tax rates, you may lose through lack of deductions. The code proposes to do away with any differentiation between tax rates on various forms of income. Take the case of capital gains on the sale of shares. Short term capital gains on shares are currently taxed at 15%. There are no taxes on long term capital gains. The code does away with this distinction. Any capital gain made during the course of the year will be added to your salary and taxed.

And, please note. In return for simplifying your tax life, you have to file your returns a month earlier than usual: June 30 is the new deadline.