Good And Bad of DTC(Direct Tax Code)

          The pace of globalisation in the last decade has set a legendary chapter in India’s economic history and our consumption patterns have shown sharp contrast. However, when it comes to saving and investing for the future, we always stand by our values. The saving pattern of the salaried class is by and large motivated by the annual tax incentives, which stimulates the level of investment in the economy.

        With brand new draft Direct Tax Code (DTC) ready to be implemented from 2011 and onwards, the government is planning to move all tax-saving investments from EEE (exempt-exempt-exempt) to EET (exempt-exempt-taxation). Under EET, an investment is free from taxation only in the first two stages of its life and is taxed at the time of withdrawal or maturity. The discussion paper on DTC mentions the objective behind its drafting as lowering the tax burden of individuals and simplifying the tax structure. Ironically, once the code is decoded, it ends up increasing the tax liability by taxing all the retirement benefits at the time of withdrawal.
       Once EET gets operational, permanent tax saving won't be possible as there is a mere deferment of tax and not saving of tax. In other words, under EET, you can at the most postpone the payment of tax depending upon the lock-in of your tax-saving investment. Tax will be levied at the time of maturity. So, it is more of wealth creation which promotes deferment of redemption rather than permanent tax saving.

     After an era, it is time again for the common man to search new avenues to park and drive up his hard earned money, but where and how?

  Every story has the good, bad and the ugly. In direct tax code, these are defined below:

      The good is that it increases the limit for tax-saving investments, currently pegged at Rs 1 lakh per annum to Rs 3 lakh per annum. Further, the introduction of “Grandfathering” will ensure EEE model is at least workable for the accumulated balance, till March 31, 2011.

          The bad is that the investment options have been reduced only to - Public Provident Fund (PPF), Employees’ Provident Fund, life insurance, superannuation funds, National Pension System (NPS) and claims for children’s tuition fee expenses. So, 2011 onwards, no more tax breaks for National Savings Certificates, Senior Citizens Savings Scheme, tax-saving bank fixed deposits and equity-linked savings schemes (ELSS) of mutual funds.

       But the ugly is that there is no incentive for repayment of principal on housing loan. This disappoints the majority class of individuals, as buying a house in these tough times is a challenge, especially when the weekly rising inflation hits the common man hard.

       There are, however, some recommendations to deal with the bad and ugly aspects of DTC:

         Grandfather the existing: ‘Grandfathering’ here refers to the exception provided for the investments made prior to a certain date. DTC proposes to exempt any ‘accretion’ to accumulated balance in approved Provident Fund (including PPF) as on 31 March 2011.


          So, you can invest up to a maximum of Rs 70,000 per annum in your PPF account and enjoy special treatment on the accumulated balance, till March31,2011 under EEE. This one investment ensures triple advantage of good return, safe investment and exemption on withdrawal.

        Continue your insurance: It is beneficial to continue the insurance policies, if the annual premium is less than 5 per cent of the sum assured as they are tax free under DTC. But evaluate buying new money back insurance plans promising returns on investment as the ‘grandfathering’ would be available on accumulation and premium (more than 5% of sum assured) would not be eligible for tax deduction post DTC.

      Invest in child’s future: What could be better investment than investing in children’s education that will give you and your children exponential returns for life? The amount paid by way of tuition fee to any educational institution in India for the purposes of full-time education can be claimed as deduction post DTC as well.

        Pre pay home loan: DTC proposes to withdraw deduction of interest on borrowed capital for self occupied property and there would be no deduction on repayment of housing loans. Any surplus funds may be utilised towards repayment of principal amount if the house property is self occupied. This will achieve the twin objective of saturating the limit of tax saving (1 lakh) under existing Section 80C of the I-T Act and reducing the burden of future interest cost.

       The introduction of EET would completely change the tax saving investment preferences of a common man. Hence, one should re-evaluate the current tax-saving investment portfolios and future investment plans. To sum up, let’s wait and watch how the government is actually going to introduce this new way of tax planning investment scheme into practice and hope for the best.

source: Thanks to:The EconomicTimes
(Views expressed by  Tax Analyst)

RBI plans more security features for cheques

               Reserve Bank today said more security features will be introduced to make cheques tamper- proof and prevent fraudulent withdrawal of funds.


           "It has been decided to prescribe certain benchmarks towards achieving standardisation of bank cheques across the country," the RBI said in a communication to all banks.

             The new features would include use of The quality paper, water-mark and printing of bank logos in invisible ink, standard size, clutter-free background, use of ultra violet images etc. "Homogeneity of security features is expected to act as a deterrent against cheque frauds," RBI said.

           The RBI also said the "Cheque Truncation System-2010 Standard" will be introduced after ascertaining the readiness of banks to adopt it.The proposed format is based on the report of the RBI working group in this regard.

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