The Direct Taxes Code (DTC)

The DTC, which seeks to replace the Income-Tax Act, 1961, is slated to come into force from April 2012 as against the original schedule to shift to DTC from April 2011. The Finance Minister, Pranab Mukherjee, proposes to mainly rationalise the income slabs so as to reduce the overall tax burden. The lower end of the taxpayers, who account for 90 per cent of the income-tax payers, will benefit the most. Major features of the DTC are as follows:
FOR INDIVIDUALS
 The Bill proposes to increase the exemption limit for individuals from Rs 1.6 lakhs to Rs 2 lakhs. Those with a taxable income of Rs 2-5 lakhs will be taxed at 10 per cent; those in the Rs 5-10 lakhs bracket will have to pay 20 per cent; while taxable income of over Rs 10 lakhs will attract a 30 per cent tax.
PERSONAL INCOME-TAX RATES
Rate Slab Now Slab Proposed in DTC
10% Rs 1.6 lakhs to 2 lakhs Rs 2 lakhs to 5 lakhs
20% Rs 5 lakhs to 8 lakhs Rs 5 lakhs to 10 lakhs
30% Above Rs 8 lakhs Above Rs 10 lakhs
 Tax exemption limit for senior citizens above 65 years to be marginally raised to 2.5 lakh per annum from Rs 2.4 lakh at present
 A further exemption of Rs 50,000 will be available for health and life insurance premiums and tuition fees.
 Medical reimbursements of up to Rs 50,000 a year will be exempt from tax, as against the ceiling of Rs 15,000 at present.
 Leave travel allowance (LTA) will continue to get the same tax treatment that is available at present. The norm is that an employee can claim two LTAs in a block of four years.
 Individual tax-payers will also get Rs 1.5 lakh of interest paid on home loans as deduction.
 The additional exemption limit so far available to women taxpayers will be withdrawn once DTC comes into effect.
 In case of bank fixed deposits, with a maturity of five years or more, the present deduction allowed under section 80C of the Income Tax Act will be dispensed with. At present, it is part of the overall investment ceiling of Rs 1 lakh where individuals can claim tax breaks.
 New Pension Scheme: The government has proposed EEE (exempt-exempt-exempt) method of taxation for New Pension Scheme -- exemption at all the three stages of deposit, appreciation and withdrawal. Earlier, Investments of up to '1 lakh in provident fund, public provident fund, and pension schemes will be exempt. Also there will be no tax when an individual withdraws his savings from provident funds, pension fund commutation and post retirement schemes.
Impact on Dividend income
 The DTC proposes to impose a five per cent dividend distribution tax (DDT) on mutual fund houses and life insurers on income distributed by them. This norm is applicable to mutual fund scheme and insurance policy that invest over 65 per cent of the total proceeds in equity shares, or equity-oriented mutual funds.
 Currently, there is no DDT applicable to equity fund schemes or insurers on income distribution to unit/policy holders. Debt-oriented mutual fund schemes pay 14.16 per cent for individuals on dividend distribution.
FOR COMPANIES
 Under DTC, companies will pay 30 per cent corporation tax, including cess and surcharge, instead of the present combined levy of 33.2 per cent. Besides, the tax rate for foreign companies will now be the same as domestic companies.
 Minimum Alternate Tax: The rate of Minimum Alternate Tax (applicable on companies that do not pay any tax despite making profits by availing of several exemptions available under the law) on book profits is being increased to 20 per cent from 19.93 per cent, including cess and surcharge.
Tax incentives for R&D
 Companies with research and development (R&D) facilities in pharmaceuticals and biotechnology will continue to enjoy major tax incentives. The DTC Bill allows a tax deduction of up to 200 per cent of expenditure incurred on creating and maintaining an in-house R&D facility.
 The DTC Bill has also given a 175 per cent tax deduction to contributions or donations made to research institutions, national laboratory or universities. For donations to institutions engaged in statistical research or research in social science, the amount of deduction is 150 per cent.
 The government has also approved 100 per cent depreciation on all assets other than land used for scientific research. The rate of depreciation for life saving medical equipment is 40 per cent.
 The R&D expenses include salary paid to an employee or purchase of material used in research within a period of three years immediately preceding the commencement of the research operations.