Finally, a Tax Reform of Substance

Recently, the Finance Minister proposed the new Direct Tax Code that is likely to be effective from 2011. This proposed Code will in effect replace the Income Tax Act, 1961. Broadly it proposes to:

• Raise the tax slabs for individuals substantially as per the table below:
  

  Tax Rate	Existing (Rs)	Proposed (Rs)
  Nil	160,000	160,000
  10%	160,001-300,000	160,001-1,000,000
  20%	300,001-500,000	1,000,001-2,500,000
  30%	Above 500,000	Above 2,500,000

  (Source: Direct Tax Code Bill, 2009)
• Increase the Section 80C limit from Rs 1 lacs to Rs 3 lacs
• Make the investments in saving schemes like provident fund, life insurance, New Pension Schemes, EET (Exempt-Exempt-Tax). This will be applicable to all contributions made after the commencement of the Code
• Scrap the exemption on the interest on home loans of Rs 1.5 lacs
• Abolish Securities Transaction Tax (STT). This will bring down the transaction cost for investors
• Remove the distinction between short-term and long-term Capital Gains Tax. This means capital gains will be taxed irrespective of the investment horizon
• Raise the wealth tax limit to Rs 500 lacs and lower the rate to 0.25%

The new Direct Tax Code has to be first passed by Parliament before it can be implemented. When implemented, it will boost savings of individuals.

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