Direct Tax Code: What does it mean to tax savers?

(Source: www.investmentyogi.com)

The Direct Tax Code (or DTC) has recently been proposed by the Government of India, to bring about a change in the whole taxation system of the country. The new tax code aims to make the system more efficient and easy for tax payers, with simplified rules and regulations. It is a step towards replacing the four decade old Income Tax Act of India.

The new DTC would impact both individuals as well as corporate with changes in taxation slabs, Public Provident Funds, insurance policies, home loans, mutual funds and shares.

Drafts of the DTC

The first draft: The Finance Minister floated the first draft of the DTC in August 2009 and kept it open for public comments. Here is a peek on a few of the proposals made in the first draft:

• Proposal to exempt tax if income is Rs 1.6 lakhs in a year. The tax slabs further would be 10 per cent from Rs 1.6 lakhs to Rs 10 lakhs, 20 per cent between Rs 10 lakhs and Rs 25 lakhs, and 30 per cent above Rs 25 lakhs
• Deduction levels for savings raised to Rs 3,00,000
• Wealth tax to be levied on wealth over Rs 50 crore
• Proposal of a uniform corporate tax rate of 25 per cent
• Securities transaction tax abolished

The revised draft of the DTC

Further to the 1,600 comments received, the second draft of the DTC was floated recently. It brought certain changes in retirement schemes, home loans and capital gains, to name a few.

DTC revised draft: What it offers investors

The second draft of the DTC is much simpler and offers investors a whole deal of exemptions, unlike the first draft. The revised draft was aimed towards promoting long term savings.

Capital gains tax

Equity: Investments in shares and equity based mutual funds would now be taxed using a new concept of 'Deduction' instead of the earlier Indexation method.

Certain deductions will be applied to long term capital gains of one year and above. This would be a percentage of the profits earned.  After the deductions are made, the balance amount would be added to the income and then taxed at applicable rates. Currently there is not much clarity on the percentage of deduction. Also, the holding period of shares, as of now, will be one year, from the end of the financial year, when the shares were bought.

For short term capital gains of less than one year, the entire amount will be included as a part of the income and taxed at applicable rates.

Debt, gold and real estate: Capital gains of less than a year, from gold, gold ETFs, debt and real estate investments would be added to the  taxable income, and normal slabs would apply. For all capital gains of more than a year old, gains will be added to the taxable income after adjusting for indexation benefit.

The base date for indexation values would however now be shifted to April 1, 2000 instead of the earlier April 1, 1981.

Life insurance policy, pension or annuity plans and provident funds

All pure life insurance policies, pension or annuity plans, PPF and EPF would come under 'EEE' and not 'EET' structure. This means that it would be completely tax free.

Understanding 'EEE' and 'EET'

EEE: Amount invested or contributed would be 'Exempt', the returns or the interest generated would be 'Exempt' and lastly the final maturity amount would also be 'Exempt' from tax.

EET: Amount invested or contributed would be 'Exempt', the returns or interest would be 'Exempt', but the final maturity amount would be 'Taxed'.

This proposal of EEE status for all retirement products would prove beneficial to pensioners and senior citizens. The first draft of the DTC included such schemes under 'EET' Status.

ULIP's and endowment plans

The DTC includes ULIPs and endowment plans under EET. The money received on maturity from such plans would now be taxed.

Tax on rental income: Tax would be applicable only on the actual rent received for the house. So, if there is no rental income earned, no tax is to be paid.

Earlier, it was proposed that tax was to be paid even if your house was not rented, by considering a notional rental amount.

Home loans: The interest on home loans would be exempt up to Rs 1.5 lakhs. However, the principal portion would now not be covered under section 80C. The first draft had proposed to remove all tax benefits on home loans, both on the principal and the interest. This has now been changed, bringing a relief for all home loan borrowers.

The crux of the DTC is to introduce moderate levels of taxation, expand the tax base and check tax evasion. There is however some areas which still require clarity.

The actual bill is still to be introduced in the parliament, and by this time we may probably see further amendments. It is expected to come into being by April 2011.

Personal finance management tips for women .....

Women need to handle their finances differently from men. Mainly because of the differences in the earning patterns and priorities that women set for themselves their finances should be managed in a different manner.

The basic goals of personal finance remain the same, i.e.,

• Ability to meet daily expenses and lead a quality life
• Provide for emergencies and unplanned expenses and
• Savings for life after retirement

However, the way in which men and women achieve these goals is different. While men earn money uninterruptedly throughout their working lives, women often need to take a break, especially when they have children.

Other reasons like orthodox family backgrounds, change in location after marriage, change in spouse's job location, household responsibilities etc can also require women to put their career on the back burner. We have the much debated case of Mrs. Sudha Murthy- wife of Mr. Narayana Murthy [ Images ], founder of Infosys [ Get Quote ].

The couple was instrumental in building the Infosys dream. As the business started taking shape, the couple decided that one person was required to take care of their home and family. Mrs. Murthy gladly stepped aside to be the homemaker and let her husband fulfill his dream. Cases of women going abroad on a dependent visa with their husbands are not uncommon.

So, if a woman earning Rs. 50,000 per month takes a 5 year break from her job because she wants to be at home with her child, her earnings and thus savings take a hit of Rs 30 lakh (Rs 3 million). We have not yet considered any increment in her salary.

If we consider that her salary increments by 20 per cent each year, her loss of earnings will come to Rs. 44.65 lakh (Rs 4.47 million).  That's a big number. Also, when she resumes work, she may have to compromise on the job profile, position and hence salary. Therefore, the percentage of savings should be higher for women during their working life.

Besides, the life expectancy for women is higher than men. So, the amount of retirement savings for women should also be higher. Statistics show that, on an average, women live 5 years longer than men, earn 25 per cent less during their life time and work 11 years less in their careers.

Importance of having an individual personal plan separate from your spouse

It is important that women have a separate personal finance plan from her family, be her parents or her husband. With changing times the need for separate finances has increased. The rise in divorce rates is alarming. The surety of life is also lower with increase in accidents and stress related ailments. If a woman handles her own finances she is well prepared to handle money matters individually if the need arises. Knowledge of different investment avenues, savings and expenses is important to run a family. A separate personal finance portfolio will prepare a woman to face financial challenges.  Also, she will not have to bear a monetary loss in the event of a divorce.

Finance products and benefits that cater to the needs of women

There are many products that are created for women. For example, insurance companies have special policies for women. The country's banking system has several products launched for the female audiences. Our tax system also relaxes the tax bar for women. Income up to an amount of Rs 1,90,000 is not taxable for women. This limit is Rs 1,60,000 for men. Here are a few products catering to the needs of women:-

Product Name	Features	Provider name
Jeevan Bharti Insurance policy	The policy does not lapse in the event of failure to make premium payments for a few years. It covers critical illnesses related to women	LIC [ Get Quote ] of India [ Images ]
Smart Privilege Account	The bank offers automatic insurance coverage for critical illness related to women. The debit card linked o the account fetches discounts on certain products from Lakme Beauty Salon, Dominos etc	UTI Bank [ Get Quote ]
HDFC [ Get Quote ] Women's Advantage debit card	The card offers various advantages like discount on locker fees, insurance packages, free bill payment services etc	HDFC Bank
Home Loans	The bank offers low interest rates to women – 0.25 per cent lower rate than prevailing interest rate.	Punjab National Bank [ Get Quote ]

A personal finance plan for women should include the following:

•      Regular Income – even when women take a break from their careers, it is a good idea to earn income from working a few hours a day. Taking tuitions, teaching a hobby etc are common ways to earn a regular income even when one is not working full time.
•      Keep an emergency fund. Do not touch it unless it is a real emergency.
•      Save and invest as much as you can. Invest in 'high return' investments. Some part of the savings should go in to stocks and mutual funds as they have a high earning potential. Look for women oriented products.
•     Time your investments for known expenses likes children's education or marriages
•     Demarcate clear boundaries with your spouse for routine expenses. It will be easier to determine personal monthly expenses and hence monthly savings.
•     Track your savings and investments regularly.
•     Have a financial plan. Save as much as you can at an early age when you have limited responsibility.

Assuming you plan to save 50 per cent of your income every month and wish to invest in different investment products, you could compartmentalise your investment into various risk categories:

Life Insurance policy 1	10 per cent of savings
Life Insurance policy 2	10 per cent of savings
Health Insurance policy	5 per cent of savings
Fixed Deposits, NSCs, PF, PPF, Emergency funds	45 per cent of savings
Stocks and mutual funds	20 per cent of savings
Gold and other jewellery	10 per cent of savings

You can change the portfolio as per your risk appetite. Life Insurance is a must. However, it is advisable that you set aside the money for making premium payments even when you are not working.

Health insurance plans: New kind of tax benefits

With the tax planning and investment season coming to an end this month, many are running around to get the best of the plans available in the market. Most of the limit available under Section 80C would have been over by now.

Are there other ways to get tax benefits from taking up useful investments/expenses? Yes, there is always the health insurance plans.

Health Insurance Premium: Expense or Investment?

Health insurance premium is technically an expense, as it does not buy any assets. However, it does buy one something more precious than any physical or financial asset - 'Peace of Mind'. We can have the confidence that in case of a medical emergency, there is the insurance plan to take care of the expenses - to a larger extent if not to the fullest extent.

Looking at health insurance from the point of view of stress free living, it is an investment.

Tax Benefit from Health Insurance Plans

Health insurance plans get benefit under section 80D in the form of deduction from taxable income upto Rs.15,000/- for non-senior citizens and upto Rs.20,000/- if senior citizens are covered. But many a times for a normal household with parents under the age of 45 and 2 children, the premiums may not come upto the levels at which one can maximise the Section 80D benefits.

New Plans in the Market

Several companies have come up with plans to meet the needs of those who to have health insurance and also make use of the Section 80D benefit to the full. Companies like ICICI [ Get Quote ] Prudential Life Insurance, ICICI Lombard General Insurance and Star Health Insurance have come up with health insurance plans where the premium is fixed at Rs.15,000 or nearby values. The benefits from the plans in terms of medical cover and number of people covered can be determined as per the requirements of the insured.

All these plans also give cash-back facility for out-patient treatment. Normal health plans do not cover out-patient treatment except for some special surgeries. The out-patient claim per year is fixed based on the number of people covered and also the overall medical cover for the family.

These are useful plans to consider.

Higher Insurance Covers

Companies like United India [ Images ] Insurance and Star Health Insurance have come up with plans one can take very high covers for health (above Rs.5,00,000). These companies are offering such plans as extensions to existing plans from their own companies or any other company.  Supposing Ramesh has a cover for Rs.3,00,000  from a company and has had the plan for the past 2 years, he will not want to shift from that company, as he will get cover for any pre-existing disease form the 3rd year onwards, also he would have got no-claim benefits.

Supposing he wants to increase the cover to Rs.10 lakh now, his original company may not have a plan to give such high covers. This is the place that the new plans come in, they will provide cover to Ramesh for any claim above Rs 3,00,000 till Rs.10 lakh (1 million).

The premiums for these plans are relatively less compared to the base health insurance plans.

Section 80D

Till last year there was not much choice for tax savers to maximise the benefits under Section 80D. This year a number of companies are offering innovative plans specifically for this purpose. It is no doubt that these plans will be useful in the long run. Hope the tax savers find the money to spend on these plans. These are expenses to get an asset called 'Peace of Mind'!

5 things to do to avoid the tax blues ... !!

It's a typical day in March when you see people running helter skelter to invest to save on taxes. And more often than not, they end up investing in products that are either not right for them or not worth investing at all.
You can, however, start saving on your personal income tax during the year, and make additional strategic moves as the year-end approaches. Here are some basic tips for saving on your taxes:

1. Invest and claim your deductions


Section 80C: There are various sections which offer you tax breaks, the most popular one being this one as you can claim up to Rs 1 lakh under this section and it offers you a wide variety of investment options. The options include Employee Provident Fund (EPF), Public Provident Fund (PPF) up to Rs 70,000 per annum, National Savings Certificate (NSC), 5-year bank fixed deposits, life insurance policies, equity-linked savings schemes (ELSS), unit linked insurance plans (ULIPs), school fees, and home loan principal repayment.
Section 80D: If you have taken a medical insurance plan for yourself, your spouse, dependant parents and dependant children, you can claim deduction up to Rs 15,000 (Rs 15,000 additionally for your parents' medical insurance is also available) under Section 80D for the premiums paid. The limit now has been enhanced to Rs 20,000 for senior citizens on the condition that the premium is paid via cheque.
Section 80DD: Expenses on the medical treatment of a dependent who is a person with a disability also qualifies for tax benefits under Section 80DD.
In this case, deductions up to Rs 50,000 can be claimed.
A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000. However, to claim any deduction under this section, certification by a medical authority is mandatory.

2. Interest component of your home loan

The interest component of your home loan is allowed as a deduction under the head 'income from house property' under Section 24(b) up to a limit of Rs 1.5 lakh a year in case of self-occupied house.
One condition being that your house must have been financed by a housing loan taken after April 1, 1999.
It is also essential that the acquisition or the construction of the property is completed within three years from the end of the financial year in which the loan is taken.
The claim can be made even on loans taken for repair, renewal or reconstruction of an existing property.

3. Take a loss

If you've done well with your investments and are looking at significant short term capital gains, prior to year-end is the time to offset some of those short term gains by selling some of the losing investments.
If the stock is good, you could sell it on 31st March, say on March 31, 2010, and buy it back in the next financial year, say April 1, 2010; here of course there is the risk of price fluctuation.
Remember that you can carry forward short term losses from previous years' losses for the next 8 years.

4. Do some charitable donations

While donations should not be made simply for tax purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax.
You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act.
The rate of deduction is either 50 or 100 per cent, depending on the choice of the charity fund. There is no restriction on the amount of charity.
However, donations must be made only to specified trusts and also only donations of up to 10 per cent of your total income qualify for such a deduction. Remember to get receipts.

5. Spreading your income

Normally, if you invest in your wife's or child's name, the income generated from such investments will be clubbed with your income and taxed accordingly. However, if you transfer money through a deed to a child who is over 18 years of age and invest in his name, then the income generated from such investment will not be clubbed with your income.
Instead, that will be clubbed with the income of your child/wife and taxed accordingly.
Cash gifts received from specified relatives are exempt from income tax and there is no upper limit.
Similarly, cash gifts of any amount and from anyone received during your child birth, marriage or any other specified event are totally tax-free. However, any cash received from a non-relative where the value is in excess of Rs 50,000 in a particular year will be considered as income in the hands of the recipient.
You should make sure that you have a record and valid receipts for all tax savings investments made in your name. You do not want to be running around at the last minute collecting all the documents required for tax filing.