What to expect on personal taxation from the Direct Taxes Code

Parvatha Vardhini C  BL Research Bureau
Updated on August 20, 2019

The report of the task force on Direct Taxes Code (DTC) submitted to the Finance Minister on Monday is yet to be made public. But sources say that the panel may have suggested tweaks in personal tax slabs and an introduction of a new rate between 5 per cent and 20 per cent. While this brings cheer for the individual tax payers, it is worth recalling that a lot of a lot of changes mentioned in the earlier version of the DTC have already been introduced in varied forms over the years. What remained for the tax force were decisions on the instruments that qualify for 80C deduction as well as adjustment of tax slabs.

Changes over the years
The Direct Taxes Code Bill 2010 lapsed when the NDA 1.0 came to power in May 2014. The NDA set up a task force to review and rewrite the Income-Tax Act in end-2017, For individual tax-payers, a lot has changed since the DTC was first mooted. On personal taxation, the DTC Bill of 2010 spoke of an enhanced Section 80C deduction limit of ₹1.5 lakh, with ₹50,000 specifically set aside for expenses on life insurance premiums, children’s tuition fee and health insurance premiums. Besides, it proposed that life insurance premium paid is deductible only if it does not exceed 5 per cent of the capital sum assured, against the then existing 20 per cent cap. The idea was to provide a fillip to savings by separating investment from insurance and other expenses.

Following this, Budget 2012 moved the cap on eligible premium payment to 10 per cent of sum assured. This tilted the scales in favour of term insurance which provides pure life cover over fancy money-back /endowment /market-linked policies. The Sec 80C deduction limit was raised to ₹1.5 lakh in the July 2014 Budget. While deduction for expenses was not carved out separately, an additional ₹50,000 deduction (Budget 2015) was given solely for investment in the NPS, a long-term savings product. Budget 2017 announced a 5 per cent tax rate for the ₹2.5 -5 lakh income slab, lower than the earlier DTC proposal. Over the years, 80D deduction limits for health premiums have also been enhanced.

The earlier version of the DTC also called for a tax on long-term capital gains in equities. Budget 2018 implemented it by taxing long-term gains on equites above ₹1 lakh at 10 per cent. The NPS was virtually granted ‘Exempt-Exempt-Exempt’ tax status (a proposal in the erstwhile DTC) by word of mouth in end- 2018. This move was notified earlier this year.

What to expect now
What remained for the new task force were a few decisions on the personal taxes front — one, on whether short-term savings products such as ELSS, five-year tax saving deposits and NSC qualify for Sec 80C deduction.

Clearly incentivising only long-term investments such as the PPF and NPS, the earlier version of the DTC had removed 80C deduction for short-term products. Second, the standing committee report on the earlier DTC Bill, which submitted its report in 2012, recommended a return to higher basic exemption limits for women as well as the automatic adjustment of tax slabs for inflation by indexing them to the consumer price index. We will have to wait for the report to be put up in the public domain to see if these changes have been implemented.

Reference

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