After my post on Better Way to Save Tax there were lots of emails where I am asked about the new tax code proposal and my view on it and so today I thought I will clarify it for once and for all.
First let’s see what the new code is. Remember this is still not final statement and if it becomes it would be applicable from the financial year 2011-12. Also I have not taken into account all the options and points but mainly those that effect the equity based investment areas and tax.
For an individual, annual income up to
- Rs 1.6 lakh (Rs 160,000) – Tax Free.
- Rs 1.6 lakh and Rs 10 lakh (Rs 1 million) – 10%.
- Rs 10 lakh and Rs 25 lakh (Rs 2.5 million) – 20%.
- Above Rs 25 lakh – 30%.
But this relaxation in tax comes at a price.
It does not distinguish between short- and long-term capital gains from equity market.
So if you have equity holding for more than 1 year you may need to pay the tax on the gains. However, gains made after one year, there may be a factor of inflation to inflate up the cost price of the stock and so your actual return may not be taxable but based on the inflated price of the stock.
Also the proposal of tax saving under 80C may go up from 100k to 300k but then it would not allow any mutual funds to have any ELSS funds and you can save tax only in few worst return areas like PPF.
How New Code Can Impact you?
I think there are 2 side of every coin and so is the case here.
One side is – You may not be forced to invest to save a large chunk of Tax. Why? Because the actual tax saving would be hardly 10% because many people do not fall into the income group of 20% as is the case now.
Now if you fall into the slab of 20% or 30% you will have your employee provident fund which will cover your 80C and so there will be very less for you to actually invest in other options which are anyway going away.
I think this will only benefit people and not harm but yes ELSS fund house will definitely not let it happen because it kills their USP.
So now over to you and so what are your views on the same?
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{ 11 comments… read them below or add one }
Shabir,
That means, what way investors get tax benefits when they take an endowment insurance plan? Does the sec 10 10 D is still in force for traditional insurance plans?
Insurance and especially LIC plans all fall under the second level of 50k
Shabir,
I asked:
1. Can I get tax exemption for investing in Insurance policies
under section 80C in Direct tax code? If so, what is the maximum limit? If Ilakh limit still prevails?
2. Earlier, we used to enjoy tax free maturity under section 10 10 D for all insurance products. Now they removed ULIPS from it. Please confirm if traditional plan still enjoys the same 10 10 D benefits?
Regards
salm
Salm, Insurance is now not under 80C anymore and for 80C it is only PF and PPF. Insurance premium separated from 80C and I do not remember the exact number under which it falls as of now.
Hello,
How about traditional insurance policy maturity and death benefits? Are they comes under taxable income? I heard sec 10(10D) is removed for ULIP plan under new tax code.
Any idea?
Insurance is not covered under DTC 1 Lakh and so it will be under the next 50k category
In case the new tax code become applicable from april 2011 as indicated, the question arises what happens to the equity generated gains which have not been realised.
Two options: (1)Sell the equity and book profit during current year as and when the market is in good moood.(2)Hope for the exemptions as on date of applicability of new tax code.
The returns from ELSS also has to be thought off as they can be reddemed only after three years.
Any suggestions.\with regards
What happens cases such as Policy taken for 25 year etc?
Will they treat pre New Code era and post new code era separately?
Any view on such issues?
Policy does not fall as ELSS funds and so I don’t think they would have any impact apart from your increase in saving limit to them.
Good informative post. why cant this be implemented in 2010-2011. the earlier .. the better for a salaried person.
Because there will be people who may have some equity based investment which is tax free till date and should be allowed to book profit and not pay the tax. This is the one reason I can think off.