Direct Tax Code Bill - Changes in Personal Taxation

The DTC will replace the Income Tax Act, and rings many changes in personal and corporate taxation. It will come into effect starting April 1, 2012. Here we demystify what the impact of the DTC will be towards the personal taxation for salaried individuals.Following on from its original proposal last year, the Government had issued a revised discussion paper in June 2010. In its original form the DTC was expected to bring about far reaching changes in the personal taxation slabs and available exemptions. Fast forward to today, and whats been tabled in Parliament appears to be a watered down version of the DTC.

The following are the newly announced tax slabs for individuals:

• For Individual (Men, Women & HUF) - The big change is that the same tax slabs will apply to men and women. Now both are eligible for Rs 2 lakhs tax free exemption, whereas previously it used to be up to Rs 1.6 lakhs for men and up to Rs 1.9 lakhs for women.

Tax Rate	DTC Parliamentary Bill (Aug 2010)	Current Slab under Income Tax Act	Original DTC
Nil	Upto Rs 2,00,000	Upto Rs 1,60,000	Upto Rs. 1,60,000
10%	From Rs 2,00,001 to Rs 5,00,000	From Rs 1,60,001 to Rs 5,00,000	From Rs 1,60,001 to Rs 10,00,000
20%	From Rs 5,00,001 to Rs 10,00,000	From Rs 5,00,001 to Rs 8,00,000	From Rs 10,00,001 to Rs 25,00,000
30%	Above Rs 10,00,000	Above Rs 8,00,000	Above Rs 25,00,000

1. For men or women earning up to Rs 8 lakhs the net annual tax saving under the new DTC bill is going to be a maximum of Rs 4,000.
2. For men or women earning between Rs 8 lakhs to Rs 10 lakhs the net annual tax saving is going to be a maximum of Rs 24,000.
3. For men or women earning above Rs 10 lakhs, there is no additional net annual saving available under the direct tax code other than the Rs 24,000 as mentioned in the above example as well.

• For Senior Citizens - For those above 65 years of age, the tax exemption limit has been raised to Rs 2.5 lakhs from Rs 2.4 lakhs, for a net new saving of Rs 1,000 per annum.

Tax Rate	DTC Parliamentary Bill (Aug 2010)	Current Slab under Income Tax Act	Original DTC
Nil	Upto Rs 2,50,000	Upto Rs 2,40,000	Upto Rs. 2,40,000
10%	From Rs 2,50,001 to Rs 5,00,000	From Rs 2,40,001 to Rs 5,00,000	From Rs 2,40,001 to Rs 10,00,000
20%	From Rs 5,00,001 to Rs 10,00,000	From Rs 5,00,001 to Rs 8,00,000	From Rs 10,00,001 to Rs 25,00,000
30%	Above Rs 10,00,000	Above Rs 8,00,000	Above Rs 25,00,000

Tax Deductions :

1. Currently, the Income Tax Act offers individuals an annual deduction of Rs 1 lakh under 80C that can be used for instruments such as PPF (up to cap of Rs 70,000), PF, NPS scheme, ELSS, premium for pure life insurance or ULIP, principal repayment of home loan, NSC, fixed deposits with a maturity of five years, payment of tuition fees for full-time education for up to 2 children. In the current financial year (April 2010 through March 2011), one can get an additional deduction of Rs 20,000 for investing in certain notified infrastructure bonds under 80CCF. Additionally, 80D gives a deduction of Rs 15,000 towards medical insurance.

2. Under the DTC Bill, some of the above deductions have changed. What was previously available as the 80C deduction of Rs 1 lakh is now available as a deduction towards investments only in retiral accounts such as PPF, PF, NPS, and in savings schemes as notified by the Government. These are all eligible for taxation under EEE treatment. ¬EEE refers to the tax incidence - exempt at time of investment, exempt during accumulation, and exempt at withdrawal. These will be available for the tax year starting April 1, 2012.

3. Additionally, an aggregate deduction of Rs 50,000 is available for premium for pure life insurance, health insurance and tuition fees for two children.

4. As a result, the total deduction available is Rs 1.5 lakhs.

5. Please note that under the previous 80C deduction investments in ELSS and ULIPs were eligible for the Rs 1 lakh deduction, as was a deduction towards repayment of principal for an outstanding home loan. Under the DTC Bill all these three options are no longer eligible for a deduction.

RULES TO BE FOLLOWED FOR WITHDRAWING YOUR EPF

WITHDRAWAL BEFORE RETIREMENT: 
You can withdraw up to 90% of the amount in you EPF account after you attain the age of 54 years, or within one year before actual retirement on superannuation whichever is later. Claim application in form 19 has to be submitted to the concerned Provident Fund Office.

For other cases such as

•  Shifting of Jobs

At such times, the PF balance could be transferred from one employer to another. The existing balance would continue to stay. With fresh contributions made by the new employer.

• Quitting of Job

PF could be withdrawn, if you quit your job and provide a declaration that you do not intend to work for the next six month.

  

WITHDRAWAL AFTER RETIREMENT: You can withdraw full amount in the fund on retirement from service after 55 years of age. You can also withdraw the full amount due to any of the following occurrences:  

1. If you have not attained the age of 55 year at the time of termination of service. 
2. If you retired on account of permanent and total bodily or mental disablement 
3. If you migrated from India for permanent settlement abroad or for taking employment abroad. 
4. In the case of mass or individual retrenchment.

Now you can Check your EPF account online

Here is some good news for those of you contributing towards provident fund from your salary with Employees Provident Fund Organisation (EPFO) of India. Going forward, salaried people would no longer have to go through the tedious and rather long process of knowing the details of their PF account. Every bit of information related to Provident fund that you may want to track would be just a ‘click’ away in the very near future!

This news is indeed of a great help to about 4.5 crore PF subscribers in India. One this system is online, all the PF accounts across the country would be made available online. I have gone through a helluva process of getting my PF account details transferred from my previous employers to current one. After all possible kind of interactions with various levels of authorities, till date I have no clue on what is the status of my account transfer. Hope this new system solves all such painful issues associated with individual PF accounts.

The facility is expected to be fully functional from December this year, according to Labour Ministry sources as quoted by one of the prominent news papers recently. Due to the sheer size of the number of accounts, it wouldn’t be an easy task for the government organizations to solve this in a short span of time. Also the paper quoted – “EPFO officials revealed that computerization of its operation took them eight years. Since April, a test run of the facility has been implemented.”

In the first phase of implementation after opening it for subscribers online, account balance will be made available. In the latter part of the project, which might roll over to sometime in 2010, the subscribers would be able to view their contribution, interest accrued, status of application for advances, loans and a host of other activities. Also, as a matter of fact PF department had collected forms from many of us to provide with what they call as SSN (Social Security Number) – haven’t heard any news on that number, but off late we are all talking about NUIA (National Unique Identification Authority). Not sure how many more such unique numbers are awaiting in the store! I would be very happy the day all my information is made available with ease in accessing without any delays and hierarchies.

The EPF official website – http://www.epfindia.com

If you have already applied for EPF withdrawal and you want to check the status of your claims application, you can visit http://59.177.81.198/homepage_claim_status_new.php and fill up the form with the details of your EPF office and you Employee PF Account Number.

In the same website there is link ‘customer service’.  If you click on this you may file a grievance application on-line.  Since this is monitored by the Central Provident Fund Commissioner, New Delhi , who controls all the EPF offices in India, your grievance stands a very good chance of getting redressed quickly.

Salient features of PPF accounts

Who can open?	Any adult on his / her name or on minor's name in the capacity of guardian of the minor.
Minimum amount	Rs. 500/- per annum is required to be deposited. The accounts in which deposits are not made for any reason are treated as discontinued accounts and such accounts cannot be closed before maturity. The discontinued account can be activated by payment of the minimum deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year.
Maximum amount	Rs. 70,000/- per annum The depositor has flexibility and freedom for depositing any amount in a maximum 12 installments in a financial year.
Maturity period	15 years. An Account, on the expiry of fifteen years, can be extended for a further period of five years at a time.
Interest Rate	The interest is paid as per the rates declared by the Government from time to time. The current rate is 8% per annum. The interest is compounded annually. The interest for the month is calculated on the minimum balance available in the account from 5th of a month to the last date of the month.
Nomination facility	Available
Transferability	A PPF account can be transferred from a branch of State Bank of India or a nationalized bank to Post Office and vice versa and also from a branch of State Bank of India to a designated branch of Nationalized Bank. A PPF account cannot be transferred from one person to another. Even in the case of death of a depositor, the nominee cannot continue the account.
Loan facility	A depositor can avail of loan facility in the third financial year from the financial year in which the account was opened. Application in prescribed form is to be made for loan along with the pass book of the account. In case, the loan is sought from minor's Account, the guardian has to make a declaration that the money is required for the use/benefit of the minor. The loan can be taken up to 25% of the amount in the account at the end of the second year immediately preceding the year in which the loan is applied for. The loan is repayable in lump sum or convenient installments. Where loan is repaid within 36 months, interest is charged at 1% and if it is not repaid within 36 months, the interest at the rate of 6% is charged on the outstanding balance. The interest is to be paid in not more than two installments after the loan amount is fully repaid. Once the first loan is repaid, second loan can be obtained on same terms. This facility is available till the end of 5th financial year from the end of the financial year in which initial subscription was made.
Withdrawal facility	A depositor can make partial withdrawals, once every year from his PPF account after expiry of five years, from the end of Financial Year, in which the initial deposit was made. Application in prescribed form is to be made for withdrawal along with the pass book of the account. In case, the withdrawal is sought from minor's Account, the guardian has to make a declaration that the money is required for the use/benefit of the minor. The amount of withdrawal is restricted to 50% of the credit balance at the end of the fourth year immediately preceding the year of withdrawal or the year immediately preceding the year of withdrawal, whichever is lower. In case of accounts extended beyond Maturity period partial withdrawals are allowed once in a year with the condition that the amount of withdrawal during a five year block period should not exceed 60% of the balance in the account at the commencement of the block period.
Premature Encashment	Premature closure of a PPF Account is not permissible except in the case of death of the depositor.
Deduction u/s 80C	Available
Interest Taxability	Interest income is totally tax free.
Other features	The benefits of exemption of interest from Income Tax is not available on deposits made in a PPF account after expiry of fifteen years without exercising option in writing for continuance of the account within one year. PPF accounts can be opened and operated through an authorized agent appointed by the National Savings Organisation. Only local cheques are accepted for deposit and the date of presentation of local cheque and demand draft is treated as date of deposit in the Account. Balance in PPF account cannot be attached under court decree. Entire deposit in a PPF account is exempt from the Wealth Tax. The deposit in a minor account is clubbed with the deposit of the account of the guardian for the limit of Rs.70,000/-. On death of the account holder his nominee(s)/legal heir(s) cannot continue the account. The account has to be closed in such case. Deposits in excess of Rs.70,000/- in a financial year in a PPF account are refunded without interest and the excess amount is not considered for income tax rebate.

Another amendment to the provident fund (PF) regulations made by Indian Government

Amendment to PF

• In the last two years, the Government of India has been making series of changes to the provident fund regulations.

• After inclusion of international workers (IWs) into the PF net, and also restricting their withdrawals, the Government of India, has made another change whereby it proposes to discontinue payment of interest on inoperative PF accounts.

• At present, even inoperative PF accounts are entitled to interest payment. In September 2010, Ministry of Labour proposed to increase the rate of interest from 8.5% per annum to 9.5% per annum.

• In terms of the amendment, a PF account will be regarded as inoperative if no application is made for withdrawal or transfer of balance within thirty six months from the date on which it became payable to the member. These inoperative PF accounts will not fetch any interest from 1st April 2011.

• PF account balance is payable to a domestic worker upon he/she ceasing employment/retirement/death. Domestic workers who do not make application for withdrawal/transfer after such an event will not be entitled to any interest once the accounts become inoperative.

• In the case of IWs accummulated PF balance is payable on retirement after attaining 58 years. Under the existing PF regulations, repatriated IWs have to retain their PF account in India until they attain 58 years. It is not clear whether the amended PF regulation could treat the repatriated IW PF accounts (which may not be operative for over thirty six months) as inoperative thereby depriving them of interest.

Source: Employees’ Provident Fund (Amendment) Scheme, 2011- GSR 25(E) dated 15 January 2011 of the Ministry of Labour and Employment

EPF vs PPF: What's the difference?

1. What is PPF and PF?

EPF/ PF

The Employee Provident Fund, or provident fund as it is normally referred to, is a retirement benefit scheme that is available to salaried employees.

Under this scheme, a stipulated amount (currently 12%) is deducted from the employee's salary and contributed towards the fund. This amount is decided by the government.

The employer also contributes an equal amount to the fund.

However, an employee can contribute more than the stipulated amount if the scheme allows for it. So, let's say the employee decides 15% must be deducted towards the EPF. In this case, the employer is not obligated to pay any contribution over and above the amount as stipulated, which is 12%.

PPF

The Public Provident Fund has been established by the central government. You can voluntarily decide to open one. You need not be a salaried individual, you could be a consultant, a freelancer or even working on a contract basis. You can also open this account if you are not earning. 

Any individual can open a PPF account in any nationalised bank or its branches that handle PPF accounts. You can also open it at the head post office or certain select post offices.

The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000.

2. What is the return on this investment?

EPF: 8.5% per annum

PPF: 8% per annum

3. How long is the money blocked?

EPF

The amount accumulated in the PF is paid at the time of retirement or resignation. Or, it can be transferred from one company to the other if one changes jobs.

In case of the death of the employee, the accumulated balance is paid to the legal heir.

PPF

The accumulated sum is repayable after 15 years.

The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.

It can be extended for a period of five years after that. During these five years, you earn the rate of interest and can also make fresh deposits.

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4. What is the tax impact?

EPF

The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C.

If you have worked continuously for a period of five years, the withdrawal of PF is not taxed.

If you have not worked for at least five years, but the PF has been transferred to the new employer, then too it is not taxed.

The tenure of employment with the new employer is included in computing the total of five years.

If you withdraw it before completion of five years, it is taxed.

But if your employment is terminated due to ill-health, the PF withdrawal is not taxed.

PPF

The amount you invest is eligible for deduction under the Rs 1,00,000 limit of Section 80C.

On maturity, you pay absolutely no tax.

5. What if you need the money?

EPF

If you urgently need the money, you can take a loan on your PF.

You can also make a premature withdrawal on the condition that you are withdrawing the money for your daughter's wedding (not son or not even yours) or you are buying a home.

To find out the details, you will have to talk to your employer and then get in touch with the EPF office (your employer will help you out with this).

PPF

You can take a loan on the PPF from the third year of opening your account to the sixth year. So, if the account is opened during the financial year 1997-98, the first loan can be taken during financial year 1999-2000 (the financial year is from April 1 to March 31).

The loan amount will be up to a maximum of 25% of the balance in your account at the end of the first financial year. In this case, it will be March 31, 1998.

You can make withdrawals during any one year from the sixth year. You are allowed to withdraw  50% of the balance at the end of the fourth year, preceding the year in which the amount is withdrawn or the end of the preceding year whichever is lower. 

For example, if the account was opened in 1993-94 and the first withdrawal was made during 1999-2000, the amount you can withdraw is limited to 50% of the balance as on March 31, 1996, or March 31, 1999, whichever is lower.

If the account extended beyond 15 years, partial withdrawal -- up to 60% of the balance you have at the end of the 15 year period -- is allowed.

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The better option?

In both cases, contributions get a deduction under Section 80C and the interest earned is tax free. 

Having said that, PF scores over PPF in two aspects.

In the case of PF, the employer also contributes to the fund. There is no such contribution in case of PPF.

The rate of interest on PF is also marginally higher (currently 8.50%) than interest on PPF (8%)