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Changes proposed in revised DTC
September, 06th 2010

The revised Direct Tax Code (DTC) released on June 15 has been approved by the cabinet. The new code is likely to be implemented from 2011. The code aims at simplifying the existing income tax laws. As far as realty is concerned, there are some changes proposed in the code.

Tax on rental income The code has kept the taxable basis as the actual rent received or receivable for the financial year. In the original draft, the DTC had proposed that gross rent should be calculated at a presumptive rate of six percent of either the market value, or the cost of construction or acquisition, whichever is higher.

Interest on home loan

The revised DTC intends to continue tax deduction on the interest paid on home loans up to Rs 1.5 lakhs for purchase or construction. In the original code released last year, it had been proposed to do away with the tax deduction on the interest paid on home loans. The restoration of this exemption facility spells relief to homebuyers, and will encourage them to buy residential properties.

Property not let out According to the code, it will be left out of tax calculations, and hence no deduction against tax or interest will be allowed. Any one house that has not been let out (treated as self-occupied) will be eligible for deduction on account of interest to the tune of Rs 1.5 lakhs.

Short-term capital gains

The code has revised the criteria for computing short-term capital gains. Any gain or loss made on the sale of an asset within a year of purchase will be taxed.

The gain or loss made will be factored in the income and taxed according to the income tax slabs of the assessee.

Under the existing tax laws, sale of asset before three years of purchase is considered short term.

Long-term capital gains

Any gain or loss made on the sale of an asset after one year of purchase is liable for long-term capital gains tax. Instead of indexation benefit, the code has introduced the concept of discounting based on which long-term capital gains will be calculated.

It has also revised the base date for determining the cost of acquisition. As such, from April 1, 2011, April 1, 2000 will be considered for calculating the discount rate and not April 1, 1981, which is used currently. This is good news for those who have invested in property years ago, as the unrealised capital gains on such assets between April 1981 and April 2000 will not be taxed.

Earlier, long-term gains were taxed at a flat rate of 20 percent after indexing it for inflation. However, now it will be added to your income after indexation and be taxed at the marginal tax rate - the rate will be dependent on the tax bracket one is in. In case one is in the 30 percent tax bracket, the gains will be taxed at 30 percent.

However, the most cheering feature is the retention of income tax exemption on interest up to Rs 1.5 lakhs a year on housing loans.

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