Direct Tax Code-

Personal Tax Implications

Ernst & Young Webcast

Held on 9 August 2010 at 03:00 p.m. IST

Contents
► Background

► Residential Status

► Income from Employment

► Income from House Property

► Capital Gains

► Tax Incentives

► Wealth Tax

► Rates of Personal Tax

Background
Background
► 12th August 2009 : Direct Tax Code (‘DTC’) Bill, 2009 and Discussion Paper released

► Inputs received from large number of organizations and individuals

► News reports: Over 10,000 responses from stakeholders
► Key areas of concern identified

► 15 June 2010: Revised Discussion Paper (‘RDP’) released

► RDP addresses 11 major issues arising from draft DTC
► Responses solicited upto 30 June 2010
► Other issues to be considered while finalizing the DTC Bill

► DTC proposed to be effective from 1 April 2011

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Residential Status
Residential Status
Particulars Existing provisions Proposed provisions Impact

► Residential ► The residential status ► An individual will be ► The way residential status
Status is classified as: resident in India if his is determined is revamped
► Ordinarily stay in India is:
Resident
► 182 days or
► Non Resident
more during
► Not Ordinarily
Resident the Financial
Year (‘FY’), or
► 60 days or
more in that FY
and 365 days
in last four FYs.

► DTC has done away ► The term ‘Not Ordinarily

with the concept of Resident’ has been done
Not Ordinarily away with but the concept
Resident still remains.

9 August 2010 Direct Tax Code- Personal Tax Implications

Residential Status
Residential Status
► Under the DTC, the concept of residential status and the taxability of income
has been revamped.
► The term ‘Not Ordinarily Resident’ has been done away with but the concept
remains.
► Resident would normally be taxable on his worldwide income except in
specified circumstances.
► Income accrued, deemed to accrue or received outside India is not
considered taxable in the year the individual ceases to be a Non Resident
and the immediately succeeding year provided the individual was a Non
Resident in 9 immediately preceding years.
► The current 730 days for Ordinary Resident test has been done away with
which protected the first time expatriates into India from becoming Ordinary
Residents upto 3-4 years of assignment.

9 August 2010 7 Direct Tax Code- Personal Tax Implications

Residential Status
Example
► If John, a US citizen comes to India for the first time in FY 2011-12 and his
presence in India is as under:

FY 2011-12 2012-13 2013-14 2014-15

No. of days 200 200 200 200
in India

► Under the Act, he retains the status of ‘Not Ordinarily Resident’ in all these
years since his presence in India for last seven years does not exceed 729
days.
► However, under DTC, he will lose the exemption from FY 2013-14
onwards since he will not fulfill the condition of being Non Resident for nine
out of ten immediately preceding FYs. He will be subject to worldwide
taxation from FY 2013-14.

9 August 2010 8 Direct Tax Code- Personal Tax Implications

Income from Employment
Concept of Economic Employer
► It is a welcome move that the concept of economic employer has been recognized and
‘employer’ has been defined in the DTC.

► Under DTC, ‘employer' has been defined to mean:

► an entity which controls and directs the individual under express or implied employment
contract and
► is obligated to pay compensation to such individual.

► However, this definition is rigid and is likely to create challenges when looking at cross
border movement of employees as envisaged in the following situations:
► Where a group company may second its employee to work under the control and
direction of another group company without cross-charge/ partial cross-charge of salary.
► Where payroll is maintained with more than one entity while the individual works for and
under the control and direction of only one entity.
► Where deputation is for a fixed period under which the individual works under the
directions of the entity to which he is deputed and which is also obligated to bear the
salary costs, but the individual remains on the payroll of the parent entity (the legal
employer) and is supposed to repatriate to his parent job post-deputation.

9 August 2010 10 Direct Tax Code- Personal Tax Implications

Income from Employment
► Income from employment is to be computed as ‘Gross Salary’ reduced by aggregate of
permissible deductions.

► Gross Salary includes:

► Value of perquisites
► Profits in lieu of salary
► Leave travel concession
► Medical reimbursement
► Free or concessional medical treatment paid for, or provided by the employer

► Permissible deductions include:

► Professional tax
► Transport allowance
► Prescribed special allowances or benefit granted to meet official expenses to the
extent of expenses actually incurred

9 August 2010 11 Direct Tax Code- Personal Tax Implications

Income from Employment
► Perquisites defined as:
► Value of any accommodation
► Payment for life insurance or annuity
► Employer’s contribution to Approved Superannuation Fund, Approved Provident
Fund or New Pension Scheme above the prescribed limits
► Value of sweat equity shares
► Discharge of any obligation of the employee
► Any other amenity, facility etc.

► DTC proposes to exempt the following, subject to the specified limits:

► Gratuity received
► Amount received under Voluntary Retirement Scheme
► Commuted pension linked to gratuity
► Leave encashment

9 August 2010 12 Direct Tax Code- Personal Tax Implications

Income from Employment
Rules for valuation to be prescribed for:

Component Existing provisions

► Medical reimbursements ► Exempt upto Rs.15,000 p.a.

► Motor car ► Taxed at notional value of Rs.1800 p.m. / Rs.2400 p.m.

(plus Rs.800 p.m. for driver) if the motor car is used for
both official and personal purposes and expenses for
running and maintenance are met or reimbursed by the
employer (motor car owned by the employer)

► Domestic Servant ► Actual cost

► Gas/electricity/ water ► Actual cost

► Educational facilities ► Actual cost except when educational institution is

maintained by the employer

9 August 2010 13 Direct Tax Code- Personal Tax Implications

Income from Employment
Existing provisions Proposed provisions

► House Rent Allowance (‘HRA)’ is exempt ► No deduction from gross salary in respect
under provisions of the Income tax Act, of such allowance
1961 (‘Act’) to the extent prescribed under
Income tax Rules, 1961 (‘Rules’)

► Transport Allowance granted to meet ► Amount received from employer for journey
expenditure for the purpose of commuting by the person between his residence and
between the place of residence and place office or any other place of work, is
of duty is exempt upto Rs. 800 per month deductible from gross salary to the extent
prescribed.

Special Allowances are exempt under Section

10(14) of the Act read with Rule 2BB :
Rule 2BB(1)
► Prescribed allowances to meet official ► Deductible from gross salary, as
expenses to the extent actually incurred. prescribed, to the extent actually incurred.

9 August 2010 14 Direct Tax Code- Personal Tax Implications

Income from Employment
Existing provisions Proposed provisions

Rule 2BB(2)
► Prescribed allowances to meet personal ► Only transport allowance will be deductible
expenses at place of employment or from gross salary, to the extent prescribed
residence

► Prescribed allowance to compensate for ► Taxable

increased cost of living
► Personal allowance (prescribed) for ► Taxable
performing duties of special nature, related
to place of posting or residence

9 August 2010 15 Direct Tax Code- Personal Tax Implications

Issues
► No exemption was proposed for HRA under DTC. Initial discussion paper, is
understood to have slipped on HRA but RDP has also not addressed this.
► What does this means for an individual staying in rented accommodation?
► May result in inequity vis-à-vis value of company leased accommodation.
► RDP clarified that perquisite value of rent free accommodation would not be based
on market value.

► Leave Travel Concession has been proposed to be made fully taxable.

► Special allowance or benefit granted to meet expenses wholly and exclusively incurred
in the performance of duties to the extent actually incurred, as may be prescribed is
deductible from the taxable income. This provision is similar to Section 10(14) of the
Act.
► Whether the employees will need to submit proof of expenditure / documentation
for per diems paid for official tour to claim deduction from tax since the character of
tax benefit is now changing from ‘exemption’ to ‘deduction’?

9 August 2010 16 Direct Tax Code- Personal Tax Implications

Issues
► Will the Supreme Court’s decision in case of Larsen & Toubro hold relevance which
says that the employer is under no statutory obligation to collect evidence to show
that employees had actually utilized the leave travel concession / conveyance
allowance?
► Whether the employer would be required to report the amount of allowance which
is deductible?
► Impact will be clear once rules are prescribed.

► Tax borne by the employer on non monetary perquisites presently exempt u/s
10(10CC) of the Act has been done away with under DTC.

► Taxation of employee share plans need to be more comprehensively stated, taking into
consideration the cross border movement of employees and various types of plans.
Clarity is required on the pro-ration of gains arising to non-resident globally mobile
employees.

9 August 2010 17 Direct Tax Code- Personal Tax Implications

Retirement Benefits
Particulars Existing provisions Proposed provisions Impact

► Gratuity ► Exempt up to Rs.10 lakh ► DTC proposed to ► No impact

provide for exemption
in respect of gratuity
received, subject to
monetary limits. The
present exemption
limit of Rs.10 lakhs is
expected to continue.

► VRS ► Exempt up to Rs.5 lakh ► DTC proposed to ► No impact

Compensation provide for exemption
in respect of VRS
compensation
received, subject to
monetary limits. The
present exemption
limit of Rs.5 lakhs is
expected to continue.

9 August 2010 18 Direct Tax Code- Personal Tax Implications

Retirement Benefits
Particulars Existing provisions Proposed provisions Impact

► Pension ► Pension commuted ► DTC proposed to ► To be analyzed once

exempt up to certain limit provide exemption in limits are prescribed
respect of commuted
pension linked to
gratuity received,
subject to monetary
limits.

► Uncomuted pension fully ► No change ► No impact

taxable

The Retirement Benefits Account Scheme which was proposed to be introduced in original
draft of DTC has been withdrawn in RDP.

9 August 2010 19 Direct Tax Code- Personal Tax Implications

Income from House Property
Income from House Property
Particulars Existing provisions Proposed provisions Impact

Tax base ► Annual value is the ► Gross Rent is the basis for ► Concept of Fair Market
basis for taxation taxation Value done away with to
simplify and reduce
► Rent realized and ► Gross Rent will be litigation
Fair Market Value contractual rent i.e. the
form the basis for amount of rent received or ► RDP removed
determining Annual receivable for the FY calculation of gross rent
Value at a presumptive rate of
6%

Standard ► 30% of Annual ► 20% of Gross Rent ► May increase the tax
deduction Value liability

Interest on ► Allowed upto Rs. ► Deduction upto Rs. 150,000 ► RDP restored deduction
borrowed 150,000 for self available for self occupied of Rs.150,000 on
capital occupied property. property account of interest on
► Allowed without limit borrowed capital for self
for let-out ► Allowed without limit for let- occupied property
properties. out property

9 August 2010 21 Direct Tax Code- Personal Tax Implications

Income from House Property
Particulars Existing provisions Proposed provisions Impact

Deduction for ► Allowable in 5 ► Not allowed ► Such interest may be

interest paid on installments sunk cost
loan during the
pre-construction
or pre-
acquisition
period

Deduction for ► Ambiguous ► Specific provision

service tax included

Doing away with taxation of house property income on deemed rent basis is a welcome
move and is in line with international best practices.

9 August 2010 22 Direct Tax Code- Personal Tax Implications

Case Study - Let out House Property
(all figures in Rs.)
Income from House Property Existing provisions Proposed provisions

Rent received/ receivable 1,00,000 1,00,000

Less: Municipal Tax 10,000 10,000

Less: Standard Deduction 27,000 (ie.30% of 90,000) 20,000 (ie.20% of 100,000)

Less: 1/5 of pre- construction 3,000 0

period interest

Less: Interest paid on loan 8,000 8,000

during the financial year

Income from House property 52,000 62,000

9 August 2010 23 Direct Tax Code- Personal Tax Implications

Capital Gains
Capital Gains
Particulars Existing Proposed provisions Impact
provisions

Distinction between ► Distinct tax ► Prima-facie no ► All capital gains will be

short-term and long- treatment and distinction taxed at normal rates
term capital asset rate except LTCG on sale of
listed equity shares or
units of equity oriented
fund which will be taxed
after giving specified
deduction

Base date for ► 1 April 1981 ► 1 April 2000 ► Appreciation upto 1

indexation and April 2000 will not get
substitution of FMV to taxed. Increased cost
determine cost of of acquisition and thus
acquisition reduced taxes.

Set-off and carry ► Subject to ► All capital gains can be ► Will reduce overall tax
forward of short term restrictions set-off against each liability as LTCL can be
and long term capital other and resultant loss set off against STCG
gains can be carried forward

9 August 2010 25 Direct Tax Code- Personal Tax Implications

Capital Gains
Particulars Existing Proposed provisions Impact
provisions

Capital assets eligible ► Any capital ► Any capital asset other

for indexation asset held for than listed equity
more than 36 shares or units of
months (12 equity oriented fund
months in transferred after one
certain cases) year from the end of FY
immediately in which it is acquired
preceding date
of its transfer

Sale of listed equity ► LTCG arising on ► For shares/units held ► Will increase the overall
shares or units of equity sale of shares for at least one year tax liability
oriented fund or units held for from the end of FY,
more than 12 gain will be computed
months are after allowing deduction
exempt from tax at a specified
u/s 10(38) of percentage
the Act

9 August 2010 26 Direct Tax Code- Personal Tax Implications

Capital Gains
Particulars Existing Provisions Proposed provisions Impact

► STCG arising on ► For shares/units held ► Will increase the tax

shares or units for less than one year liability for higher
(STT paid) held for from the end FY, gain income groups as
12 months or less shall be computed STCG will be taxed at
are taxed at special without any specified 30% instead of 15%.
rate of 15% deduction

9 August 2010 27 Direct Tax Code- Personal Tax Implications

Case Study - Capital gain on sale of long term
listed shares
(all figures are in Rs.)
On transfer of listed shares/ units Existing provisions Proposed provisions
of equity oriented mutual fund

Sale Consideration 1,000 1,000

Less: Expenses on transfer 100 100

Less: Cost of acquisition 600 600

of listed shares / units of equity
oriented mutual fund for Rs. 600 on
April 1, 2008

Capital Gain 300 300

Less: Deduction @ 60% 0 180

Tax liability 0 [exempt u/s 10(38) of 36

the Act ] [@ 30% of (300-180)]
Substantial increase in tax liability as exemption similar to existing provisions is not available under
DTC

9 August 2010 28 Direct Tax Code- Personal Tax Implications

Case Study - Capital gain on sale of short term
listed shares
(all figures are in Rs.)

On transfer of listed shares/ Existing provisions Proposed provisions

units of equity oriented mutual
fund

Sale Consideration 1,000 1,000

Less: Expenses on transfer 100 100

Less: Cost of acquisition 600 600

of listed shares / units of equity
oriented mutual fund for Rs. 600

Capital Gain 300 300

Tax liability 45 (@ 15%) 90 (@ 30%)

Tax liability doubles for higher income groups as benefit of lower rate is not available under DTC

9 August 2010 29 Direct Tax Code- Personal Tax Implications

Issues
► Roll over benefit on sale of a residential house currently available under the Act
irrespective of the number of houses owned, is sought to be restricted in DTC.

► Avenue for deposit of capital gains to get exemption from tax needs to be specified as
Capital Gains Savings Scheme (‘CGSS’) is not to be introduced.

► STT proposed to be re-calibrated.

9 August 2010 30 Direct Tax Code- Personal Tax Implications

Tax Incentives
Tax Incentives
► DTC proposed the EET method of taxation for savings.

► EET stands for:

► E-where the contribution towards certain savings is deductible from taxable income
► E- where the accumulation/accretion are exempt from tax till such time they are
invested
► T- where all withdrawals are taxed subject to applicable marginal rate

► Grandfathering under EET:

► DTC exempted the withdrawal of any accumulated balance from recognised
Provident Fund (‘PF’) and Public Provident Fund (‘PPF’) available as on March 31,
2011 and;
► Only new contributions/ accretions after DTC were to be subject to EET .

9 August 2010 32 Direct Tax Code- Personal Tax Implications

Tax Incentives
► Based on recommendations received from various sections, RDP has restored EEE
taxation for:
► Government Provident Fund
► Public Provident Fund
► Recognised Provident Fund
► Pension Scheme administered by Pension Fund Regulatory and Development
Authority (‘PFRDA’)
► Approved pure life insurance products and annuity schemes
► Investments made prior to commencement of DTC which enjoy EEE method under
the Act

► Though as of now EET is proposed to be withdrawn but the issue is whether it is a

serious move or temporary adjustment to smoothly introduce the DTC ?

9 August 2010 33 Direct Tax Code- Personal Tax Implications

Wealth Tax
Wealth Tax
Particulars Existing provisions Proposed provisions

Scope of Wealth Tax ► Applicable to Individuals, HUFs ► Applicable to all tax payers except
and Companies non profit organizations

Threshold Limit ► Wealth tax payable on net wealth ► Limit to be suitably calibrated
in excess of Rs. 30 lakhs

Rate of tax ► 1% of net wealth in excess of Rs. ► Limit to be suitably calibrated

30 lakhs

Assets ► Specified assets such as motor ► Likely to be the same as existing

cars, jewellery, urban land etc provisions
(specified unproductive assets)

9 August 2010 35 Direct Tax Code- Personal Tax Implications

Rates of Personal Tax
 Rates of Personal Tax
Tax Rates Tax Savings (without considering the effect of HRA, LTA etc.)

Income Slab Existing Proposed Income Current Proposed Savings Savings

Rates Rates (Rs.) tax (Rs.) tax (Rs.) (Rs.) (%)

Upto Rs.1,60,000* Nil Nil 1,50,000 Nil Nil - -

Rs.1,60,000 to 5,00,000 10% 3,00,000 14,420 14,000 420 3

Rs.5,00,000 to 8,00,000 20% 5,00,000 35,020 34,000 1,020 3

10%

Rs.8,00,000 to 10,00,000 30% 7,50,000 86,520 59,000 27,520 32

Rs.10,00,000 to 25,00,000 30% 20% 10,00,000 158,620 84,000 74,620 47

Above Rs. 25,00,000 30% 30% 20,00,000 467,620 2,84,000 183,620 39

*Higher limits for women and senior citizens

9 August 2010 37 Direct Tax Code- Personal Tax Implications

Rates of Personal Tax
► No change in minimum threshold

► No change in tax rates up to Rs.5 lakhs

► Tax slabs likely to be calibrated

► It is likely that the highest slab will be in the range of Rs.15 lakhs to Rs.20 lakhs

9 August 2010 38 Direct Tax Code- Personal Tax Implications

Thank you

Ernst & Young Presenter

Sonu Iyer – Partner, Ernst & Young India

Recorded version of the webcast will be accessible till 08 September 2010 at:
http://webex.wstream.net/eytaxupdate/directtaxcode/

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9 August 2010 Direct Tax Code- Personal Tax Implications

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