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DTC 3.0: Seven personal taxation areas that need a change
September, 03rd 2012

The original bill was a path breaking reform, but was watered down in 2010. Here are some ways it can be improved now.

Any taxpayer who has just filed his return will tell you how easy the process has become. While filing the return has been simplified, computing the taxable income, calculating the tax and preparing the return are still mired in difficulties.

The average taxpayer easily loses his way in the maze of deductions of the Income Tax Act, 1961. Three years ago, the government raised hopes of sweeping changes with the Direct Taxes Code, but Pranab Mukherjee watered it down. Now Finance Minister P Chidambaram has promised to review the DTC once again. ET Wealth identifies seven areas in personal taxation that need to be changed.

Exemptions and deductions
Original proposal: Did away with most exemptions and deductions.

Revised DTC: Reinstated all the sections of the Income Tax Act.

What needs to be changed: Every month, millions of Indians fill out fictitious bills to claim tax-free reimbursements and allowances. The average private-sector employee gets 20-30% of his net take-home salary as tax-free reimbursement. Doing away with these exemptions and deductions will simplify the tax structure and plug tax leakages.

Tax slabs

Original proposal: No tax on income up to Rs 2 lakh; up to Rs 10 lakh taxed at 10%; up to Rs 25 lakh at 20%; and 30% tax on income beyond Rs 25 lakh.

Revised DTC: Brought down tax slabs. Basic exemption of Rs 2 lakh; up to Rs 5 lakh at 10%; up to Rs 10 lakh at 20%; and over Rs 10 lakh at 30%.

What needs to be changed: If exemptions and deductions are removed, the tax slabs must also be raised to cushion the taxpayers from the impact. The change will not hit the income tax collections because of the higher income in the tax net.

Tax-saving limits

Original proposal: Higher annual tax-saving limit of Rs 3 lakh for an individual.

Revised DTC: Retained the limit, but included in it the home loan benefit of Rs 1.5 lakh. It also set a sub-limit of Rs 50,000 for life and medical insurance.

What needs to be changed: It's a throwback to the Section 88 era, when the government decided how one should split tax-saving investments. The sub-limits should be removed and the allocation of Rs 3 lakh should be left to the taxpayer.

Real estate

Original proposal: Removed the tax benefits on home loans. Rent presumed at 6% of value. Standard deduction reduced to 20% of rental income.

Revised DTC: Reinstated home loan benefits and did away with 6% presumptive rent. No change in reduction of standard deduction.

What needs to be changed: Any change in tax benefits should be from prospective effect. It would be unfair for existing borrowers if the rules are changed midway. The presumptive 6% rent checks tax leakage and should be reinstated.

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