I hate reading ‘draft proposals’ – and this hatred came from the student days hangover. When we were studying for the CA exam we had to know the ‘ACT’ and the changes that were made in the 6 months before the exam. Now if we read the ‘draft provisions’ there was a chance that we would get confused. That hatred for the draft proposals continues…

However the Direct Tax Code was supposed to create far reaching changes. It turned out to be nothing – perhaps because the originator of the D T C is busy fighting the naxalites, the maoists, and the Congressmen who think he is intellectually arrogant (I could not agree more with you Digvijay Singh!).

When I spoke to a very senior person in practice (partner do not want to name his firm, but it is huge) he said the same thing – ‘I do not want to get confused, if you want I will send you a pdf on what our firm has made’ – he said somebody lower down makes it, he does not consider it worth reading, only distributing.

Sorry chief tera to baand baja diya. (he is a good friend and reads this blog)

“The Act even if it goes through is for 2013 (CA’s think on P Y ended basis). In 3 years time, the government could fall, government could make changes in the provisions, the Finance Minister could change, EET could be introduced by a separate bill,…..) just too many imponderables”. This is true.

However I still did a quick ‘find’ and ‘find next’ to see the status of dividends FROM NON-EQUITY FUNDS’ and I could not find whether it is tax free. Sad, but could not find an answer. This means dividends from non-equity mutual funds will be added to your income.

The public provident fund has a life of one year – and every year one has to hope that there is a notification. This puts tremendous pressure on everybody who has assumed P P F to be a ‘must’ in the tax saving scheme of things. Again go to the mercy of the babuji.

I believe that the EET was shot down by Dr. MMS who asked ‘how can you tax provident fund’ – I completely agree. The fact that the returns are truncated thanks to the government is bad enough. If they wish to tax P P F it should be indexed – then the tax will not matter. Or they should levy 1% withdrawal tax – like an exit load in a mutual fund instead of subjecting it to INCOME TAX.

So the direct tax code reminds me of the Akbar and Birbal story (making the horse fly)…God bless the babu.

IMPORTANT TAKE: there is no clarity on how important the D T C will be. Housing, mutual fund and life insuranceĀ  lobbies will work over time to ensure that they are all included in the tax concession. So please do not make any change in your existing life insurance, home loans, ELSS, etc. just let it continue till the D T C actually becomes an Act and is implemented. Do not buy a life insurance policy, pension plan etc. based on tax benefits. Do not be in a hurry to ‘surrender’ your life insurance plans, do not change from dividend option to growth option (if they make the dividends taxable only in the case of corporates, dividend payout / reinvestment could still be a good option…so WAIT….

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  1. Taxation of PPF under EET was pretty doubtful right from the begininning being a very sensitive (read populist) issue.

    One sad aspect of DTC is the exclusion of ELSS and defies logic. On one hand Government (persumably) wants more and more people to be brought in equity culture, the base is already shrinking as is eveident from Equity MF redemptions and on the other hand it takes away one of the best ways to save tax under 80C. ELSS funds had the minimum lock-in, best potential to generated inflation adjusted returns and long term wealth creation.

    I am not hopeful about MF lobby but Insurance companies might be able to muscle their way in, given that IRDA is more of an industry spokesman than being a regulator. You can expect more (mis)selling of ULIPs based on taxation issue in a country where Insurance has never been sold for what it is – Risk Cover.

  2. The Direct Tax Code is also patently unfair to senior citizens. This category of investors have no use or need to invest in PPF, NPS or Term insurance plans. By removing ELSS, FDs etc, there is nothing left in 80C for the senior citizens to avail the tax benefits. Also many of the smart, well-heeled senior citizens would have exhausted the 15 lac limit of Senior citizens savings scheme.This and the inflation will definitely deplete the wealth created by them to fund their retirement years.

  3. ^^ i agree. this is distinctly unfriendly towards senior citizens.the NPS is probably all age -limit bound.anyway,personally,senior citizens should not be taxed at all.they have slaved away a third of their working lives for the govt directly or indirectly(if you were in the 30% brackets).atleast in retirement,they should be freed of such unwanted naukri of the sarkar.

  4. completely agree with you Pravin. In the absence of social security, the least we can do is to show some empathy towards the senior citizens who have to cope with runaway inflation, long retirement years and much lesser avenues of alternate sources of income.

  5. I agree. It is better to keep all options open and wait till the final decision is done. It will be better to book all long term capital gains before March-2012. One bird in hand is better than….

    As for senior citizens, the country is correct in taxing citizens who are better off than most. Let us accept tax as a permanent part of our life. It may be necessary for retired people to be partly invested in stocks or equity mutual funds to keep their returns above the inflation rate. Hoping for tax free income will be a pipe dream.

  6. I think the argument for a retired person can be extended to working person and vice versa. If retired person can not have good quality of life with 20K/month income then a working person also can’t have.

    as per tax slabs, if a retired person is having income of 2.4L/Annum does not have to pay any tax. At income of 5L/Annum the person has to pay only 26K/Annum as income tax.
    How much a retired person needs to have good quality of life? more than 20K/month!!!
    can a retired income have such amount of passive income?
    if he has such huge amount of income, should not be he taxed? A retired person with such huge passive income will surely qualify for wealth tax šŸ™‚

    The argument can be opposite —
    working professional should have less tax to allow them invest more and let compounding work for them.

    Ideally, tax slabs has to consider indexation/inflation and needs to be raised every year.
    else the returns of investment has to be adjusted according to indexation/inflation and then taxed.
    Whatever be the method, I think it needs to be same for retired person as well as working professional.

  7. hmm.yeah.to be honest,we should simply abolish income tax.i did some back of the envelope calculation,if we remove all income tax from the 2008 budget,we will only go back to 2003 budget receipts.can you really say that you will miss much if we replace the 2008 govt with the one from 2003?.

  8. “As for senior citizens, the country is correct in taxing citizens who are better off than most”.
    thats ridiculous.should you pay just because you are doing well financially?.i mean with attitudes like that,somehow we are supposed to be guilty about earning well?. lets not assume that taxes are anything but extortion by the bureaucracy.only 15% (as per rajiv gandhi’s famous remark)of anything we pay is actually spent on the programs.the rest of the money just feeds the bloated bureaucracy.

  9. Pravin,

    Rajeev Gandhi said that only 15% of the benefit money reaches the real target. This may be true but then it reflects on all of us Indians. Even the retired ex govt servants.
    That apart, the collection of taxes is a very old established way of running any govt since the start of civilization. The DTC does give you some tax free avenues. PPF can be continued even after retirement. If you have completed 15 years, then you can extend the account 5 years at a time. Collect substantial money in the account before retirement and enjoy tax free returns and limited flexibility in withdrawal. The money paid in PPF will continue to get tax deduction benefit too? (I am not sure)
    Another tax free option left in at least for time being is the return on equity based mutual funds. By investing in a balanced fund, you can get some equity exposure as well as get no tax on long term capital gains.

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