DTC Bill has some significant changes from the earlier draft, not all being concessions to taxpayers.
Long-term equity investors can breathe easy. The Direct Taxes Code (DTC) Bill has done away with the long-term capital gains tax on equities and related instruments where an investor has paid the securities transaction tax.
This means an investor would not need to pay tax on profits on equity investments routed through stock exchanges or through mutual funds that he or she holds for more than a year. The revised draft code had proposed to tax these gains.
Short-term gains on equity
If you are an investor who falls in the 10 per cent or 20 per cent tax bracket, the proposed norms will be beneficial as compared with the current one, especially for short-term gains. According to the DTC Bill, investors in the 10 per cent slab will now have to pay just five per cent tax if they sell equity investments within one year of purchase. Investors in the 20 per cent tax bracket will now pay 10 per cent, as against the current 15 per cent rate applicable across the board. For the high-income bracket, the current rate will remain the same.
“The rationalisation of short-term capital gains tax for the small investor is a major relief, as the revised draft had proposed to scrap short-term capital gains. It suggested one uniform structure for any gains made, irrespective of the holding period,” said Homi Mistry, tax partner, Deloitte, Haskins and Sells.
The Bill also mentions that the long-term capital loss cannot be carried forward. “It was not specified, but through a judicial decision, the rule had prevailed. The draft just clearly spells it out,” said Mistry.
Capital gains taxation
The Bill has changed the demarcation between long-term and short-term gains. It said that if debt instrument, gold or property is held for more than one year, the gains will be added to the income and taxed as per the income slabs after indexation benefits.
Kuldip Kumar, executive director–tax and regulatory services at PricewaterhouseCoopers, pointed to another change in capital gains made through selling house property. According to current laws and the revised draft, a person could invest just the gain made on selling house property in either another house or capital gains tax-saving bonds.
| Investments | Current (2010-2011) | Revised DTC draft | In the current Bill |
| Tax benefits limit on Investment available under u/s 80C/80CCF (Rs) | 1,20,000 | 3,00,000 | 1,00,000 |
| Short-term capital gains | |||
| Equity and equity instruments | Flat 15% (if STT is paid) | No distinction between short term capital gain and long capital gain. Taxable at applicable marginal rate. | 50 per cent deduction and the remaining added to income |
| House property and gold | Added to the income and taxed | Added to the income and taxed | Added to the income and taxed |
| Debt instrument | Added to the income and taxed | Added to the income and taxed | Added to the income and taxed |
| Long-term capital gains | |||
| Equity and equity instruments | Nil (if STT is paid) | No distinction between short-term capital gain and long capital gain. Taxable at applicable marginal rate. | Nil (If STT is paid) |
| House property and gold | Flat 10% or 20% with indexation benefit | Added to income after indexation benefits | Added to income after indexation benefits |
| Debt instrument | Flat 10% or 20% with indexation benefit | Added to income after indexation benefits | Added to income after indexation benefits |
“The Bill, however, states that a person would need to use the entire money to buy another house, if he or she wishes to save tax,” said Kumar.
However, in case you had a debt instrument, gold or house property purchased prior to April 1, 2000, you can take the value of the asset as on April 1, 2000, rather than the original date of purchase.
Let’s say you invested in an instrument in 1995 that will mature in 2015. The cost of purchase was '50. If the value of this investment was '70 as of April 1, 2000, you can calculate the gains based on '70, rather than the original cost of purchase.
“A person would need to pay lower taxes on debt instruments and capital assets,” said Mayur Shah, associate director, Ernst and Young.
Capital loss
To rationalise the benefits of short-term capital gains in unlisted securities, the Bill says only half the short-term capital loss can be carried forward. Currently, tax laws allow the investor to carry forward the entire loss, that can be set off against capital gains in the future.
“The Finance Ministry’s idea is that if a person is given benefit of lower taxes, the future adjustments should be restricted in lieu of it,” said Kumar.
Tax-saving investments
Tax experts said the the Bill restricts investment benefits currently available under Section 80C of the income tax law. The Bill said the deductions were available for specified instruments only. Tax experts believe this could mean tax-saving instruments such as Equity-Linked Savings Scheme, National Savings Certificate, Kisan Vikas Patra, unit-linked insurance plans and five-year fixed deposits would not be eligible for deductions.
Also, there is no clarity if infrastructure bonds would continue to get the extra '20,000 deduction once the government implements DTC.
“We still need to wait and see if government notifies any of these instruments in the future,” said Vikas Vasal, executive director, KPMG. He said investments in gratuity and leave encashment also remain unclear.
If you are worried on what happens to your current investments once DTC comes into effect, the good news is that the current laws would apply. “The DTC will not have a retrospective effect,’ said Kumar.
So, if you currently got a deduction in a traditional insurance plan that matures after DTC’s implementation, be sure the entire money will come to your bank account.
