How New tax Code can Impact us?

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?