Direct Taxes Code Explained

What are the changes made with reference to residential status by the proposed Direct Taxes Code, 2009?

The Act presently classifies individuals into resident and ordinarily resident, resident but not ordinarily resident and non-resident.

In the case of a resident but not ordinarily resident (RNOR), income accruing or arising or deemed to accrue or arise outside India or received or deemed to be received outside India is not taxable in India unless such income is from a business or profession set up and controlled in India.

The tax code proposes to do away with the classification resident but not ordinarily resident. This would mean that Indians working abroad would be classified as resident even if they fall under the category of resident but not ordinarily resident and, consequently, such income would be taxable in India.

How is income classified under the draft code?

Income is to be classified as income from ordinary sources being (A) income from employment, (B) income from house property, (C) income from business, (D) capital gains, (E) income from residuary sources and as income from special sources which in the case of a resident assessee would be income by way of (i) any lottery or crossword puzzle, (ii) race, including horse race or (iii) card game or any other game or gambling or betting.

What are the changes with regard to computation of capital gains?

The distinction between short-term and long-term capital gains is done away with and the income from transfer of an investment asset is to be computed under the head capital gains.

The term investment asset is defined to mean a capital asset not being a business asset.

A capital asset is defined to mean every property other than a business trading asset.

In computing capital gains the deductions are (a) the amount of expenditure incurred wholly and exclusively in connection with the transfer of the asset (b) the cost of acquisition of the asset and (c) the cost of improvement of the asset.

If the investment asset has been held for more than one year the deductions that are permitted are (a) the amount of expenditure incurred wholly and exclusively in connection with the transfer of the asset, (b) the indexed cost of acquisition of the asset, (c) the indexed cost of improvement of the asset and (d) the amount of relief for rollover of the asset.

The base year for the benefit of indexation is to be taken as the financial year 2000-01 and if an assessee has acquired an asset prior to April 1, 2000, the fair market value as on April 1, 2000, can be substituted as the cost of acquisition at the option of the assessee.

Deduction in respect of rollover of investment asset is computed for an individual or Hindu Undivided Family on the basis of the formula {A * (B+C+D)}/ E.

A is the amount of capital gains arising from the transfer of the original asset; B is the amount invested for purchase or in construction of the new asset within one year before beginning of the financial year in which the transfer of original investment asset is effected; C is the amount invested for purchase or in construction of the new asset during the financial year in which the transfer of original investment asset is effected.

D would be the amount deposited in an account in post office in accordance with the Capital Gains Deposit Scheme of the Centre in this behalf, by the end of the financial year in which the transfer of original investment asset is effected and E is the net consideration received as a result of the transfer of the original asset.

The deduction is permissible in respect of investments in certain new assets (such as land, residential house or investment in capital gains scheme) specified in the bill.

What are the deductions that are permissible to an individual under the code?

An individual can claim a deduction in respect of the following:

- Rs 3 lakh in respect of permitted savings, which would be taxed when withdrawn.

- Tuition fee paid for full-time education of two children in a university, school or educational institution situated in India

- Interest on loan taken for higher education of the individual or his relative for eight years

- Health insurance premium of up to Rs 15,000. In case of the insurance taken by an individual for a senior citizen, Rs 20,000 would be allowed as deduction.

This deduction is available in respect of premium paid for the individual, the spouse, any dependent child of the individual and any member of the Hindu Undivided Family.

- Expenses on medical treatment in respect of prescribed diseases and ailments of the individual, the spouse of such individual, the dependent children or dependent parents of the individual of up to Rs 40,000, and if the ailing person is a senior citizen, then the amount would be Rs 60,000.

- Expenses on medical treatment, nursing or training and rehabilitation of a disabled dependent suffering from specified disabilities of up to Rs 50,000 and in case of a person suffering from severe disability of up to Rs 1 lakh.

- Rs 50,000 as deduction to a person suffering from certain disabilities and if the disability is severe, Rs 1 lakh

How are loans treated?

An amount of loan or deposit borrowed or repaid otherwise than by an account payee cheque or account payee draft and exceeding Rs 20,000 including interest thereon at the time of repayment is to be treated as income in the hands of the recipient.

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