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View Full Version : Implications of direct taxes code bill, 2010 for senior citizens



S.Balasubramanian
31-08-2010, 05:11 PM
A lot of euphoria has been created that nearly 96% of income tax assessees will be greatly benefited by the new tax structure and slabs provided for in the Direct Taxes Code Bill introduced in Parliament and being referred to a Select Committee of Parliament.
In other words, nearly 4% of assessees are not going to be benefited but rather adversely affected. Senior citizens fall under this catgeory. For instance, suppose a senior citizen has a total income of Rs.3.4 lakhs; if he invests Rs.1 lakh under the instruments specified in section 80C of the present Act, (which will be locked for 3 years), he does not have to pay any tax at present. But with the replacement of section 80C by a new section which provides for tax exemption only for savings in long-term investments such as GPF, PPF, annuity plans, pension plans, and life insurance policies, which are of no avail to senior citizens, a senior citizen will, after the revised exemption limit of Rs.2.5 lakhs, after the direct taxes code comes into effect, have to pay a tax of Rs.9000 at the rate of 10% on the balance of Rs.90000 after Rs.2.5 lakhs, plus Rs.270 as cess at 3% of tax, if that continues.
Surely, it is not the intention of Government to push senior citizens to a worse position, especially when the whole thrust is to give more benefit to all assessees in general. It is hoped that Government will incorporate the necessary amendments at the Select Committee stage to ensure that senior citizens are not adversely affected.
Pensioners' associations could think of sending memoranda to the Select Committee of Parliament with further examples of how senior citizens will be adversely affected by the new direct taxes code bill when it becomes law, and with the humble prayer to the Hon. Committee to redress the grievances of senior citizens/pensioners on this score by sugggesting suitable amendments for the purpose. One such amendment could be to fix the exemption limit or no-tax limit for senior citizens at Rs.3.4 lakhs with no further tax exemptions, which at best will ensure the continuation of the [I]status quo.
S.Balasubramanian.

S.Balasubramanian
27-09-2010, 06:25 PM
It has been stated that nearly 96% of income tax assessees will be greatly benefited by the new tax structure and slabs provided for in the Direct Taxes Code Bill introduced in Parliament and referred to a Select Committee of Parliament.
In other words, nearly 4% of assessees are not going to be benefited but rather adversely affected. Senior citizens fall under this category. For
instance, suppose a senior citizen has a total income of Rs.3.4 lakhs; if he
invests Rs.1 lakh under the instruments specified in section 80C of the present Act, such as ELSS (which will be locked for 3 years), he does not have to pay any tax at present. But with the replacement of section 80C by a new section which provides for tax exemption only for savings in long-term investments such as GPF, PPF, annuity plans, pension plans, and life insurance policies, which are of no avail to senior citizens, a senior citizen who avails of Sec.80C investments in short-term instruments like ELSS and has no tax at present, will, even after the revised exemption limit of Rs.2.5 lakhs, after the direct taxes code comes into effect, have to pay a tax of Rs.9000 at the rate of 10% on the balance of Rs.90000 after Rs.2.5 lakhs, plus Rs.270 as cess at 3% of tax, if that continues.
Surely, it is not the intention of Government to push senior citizens to a
worse position, especially when the whole thrust is to give more benefit to
all assessees in general. It is hoped that Government will incorporate the
necessary amendments at the Select Committee stage to ensure that senior
citizens are not adversely affected.
.Here is a relatively more detailed analysis of the position. The financial instruments, investment in which qualifies for exemption of income tax up toRs.1 lakh under present section 80C are as follows:
“Section 80C of the Income Tax Act [2] allows certain investments and expenditure to be tax-exempt. The total limit under this section is Rs. 100,000 (Rupees One lac) which can be any combination of the below:
Contribution to Provident Fund or Public Provident Fund
Payment of life insurance premium
Investment in pension Plans
Investment in Equity Linked Savings schemes (ELSS) of mutual funds
Investment in specified government infrastructure bonds
Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80 limit)
Investment in Unit Linked insurance plans
National Savings Certificates
FDs in banks
Senior citizen deposit scheme
Payments towards principal repayment of housing loans. Also any registration fee or stamp duty paid.
Payments towards tuition fees for children to any school or college or university or similar institution. (Only for 2 children) or towards coaching fee of various competitive exams.
Post office investments The investment can be from any source and not necessarily from income chargeable to tax.
From April, 1 2010, additional limit of 20,000 is included in 80C provided that amount is invested in infrastructure bonds.”
But clause 69 of the DTC Bill which provides for tax incentives on savings reads as follows:
“69. (1) A person, being an individual, shall be allowed a deduction for savings in respect of the aggregate of the sum referred to in sub-section (2) to the extent of one lakh rupees.
(2) The sum referred to in sub-section (1) shall be the amount paid or deposited by the person in a financial year as his contribution to any approved fund to an account of the individual, spouse or any child of such individual.”
Clause 314 (18) defines “approved fund” as:
“(18) “Approved Fund” means—
(a) a provident fund, superannuation fund or gratuity fund approved in
accordance with the provisions of the Nineteenth Schedule;
(b) a pension fund, which has been approved by the Board in accordance
with the Scheme framed and prescribed by the Central Government in this
behalf;
(c) any other fund which has been approved by the Board in accordance
with the scheme framed and prescribed by the Central Government in this behalf”.
It will thus be seen that the following short-term financial instruments, namely ELSS, ULIP, NSC, FDs in banks, and Senior Citizen Deposits do not find a place in the above definition and hence will no longer be available to senior citizens who are of advanced age, for investment for tax exemption.
The revised discussion paper states the policy formulation thus and confirms the above conclusion:

“3.1 Therefore, as of now, it is proposed to provide the EEE method of taxation for Government Provident Fund (GPF), Public Provident Fund (PPF) and Recognised Provident Funds (RPFs) and the pension scheme administered by Pension Fund Regulatory and Development Authority. Approved pure life insurance products and annuity schemes will also be subject to EEE method of tax treatment. In order to achieve the objective of long term savings, the rules for contribution as well as withdrawal will be harmonised and made uniform so that such savings are actually made and utilised by the taxpayer for the long term. Investments made, before the date of commencement of the DTC, in instruments which enjoy EEE method of taxation under the current law, would continue to be eligible for EEE method of tax treatment for the full duration of the financial instrument.”

Thus, senior citizens of advanced age will not be able to avail of the tax exemption for investment in approved funds as specified in clause 69 read with clause 314 (18) of the DTC Bill, as long as short-term investments for such exemption are not made available to them.
It will thus be seen that senior citizens who avail of tax incentive on savings up to Rs.1 lakhs in short-term investments befitting their age, such as ELSS with lock-in of 3 years, in all the tax slabs and with tax rates as in F.Y.2010-11 will be losing Rs.9000 or more in all the tax slabs and tax rates as a result of the proposed Sec.69 of DTC.

Suggestion: It is hoped that it is not the intention of Government which is liberalizing the tax slabs and tax rates for all assessees, to act harshly on all senior citizens in all tax slabs by subjecting them to an extra tax ranging from Rs.9000 to Rs.19000 as compared to what they are paying in F.Y.2010-11, because of the fact that the proposed section 69 leaves out short-term investments from out of the tax incentives up to Rs.1 lakh.
This situation can be remedied by adopting one of the following ways:
1.By increasing the exemption limit for senior citizens to Rs.3.5 lakhs; or
2.By floating 3 year tax-free bonds for senior citizens, similar to the RBI and Government of India bonds or the UTI bonds floated earlier; or
3.By providing for 3 year tax-free senior citizen deposits with designated post offices/nationalized banks; or
4.By amending proposed section 69 of DTC by adding provisos to the effect that:
“Provided that in the case of senior citizens, “approved funds” would also
include ELSS, ULIP, NSC, infrastructure bonds, FDs with banks, and
senior citizens savings deposit schemes..
Provided further that investment in such funds, interest thereon and amount at the time of withdrawal will be tax free”.

It is hoped that the Hon. Select Committee of Parliament will take steps to redress the grievances of senior citizens/pensioners on this score by suggesting suitable amendments for the purpose as suggested above.
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-----S.Balasubramanian.

S.Balasubramanian
29-09-2010, 03:08 PM
The tables below will indicate a comparison between the tax liability of a senior citizen availing of income exemption for investment in short-term instruments under sec.80C at present and that after the DTC Bill as proposed becomes law:








Table showing incidence of income tax in the case of senior citizens who avail of tax incentives on short-term investments as in ELSS with lock-in period of 3 years, up to Rs.1 lakh under section 80C during financial year 2010-2011 (without taking into account Education cess at 3%as at present) as compared to the incidence after DTC comes into effect


Tax after investment Tax without
Income Taxable of Rs.1 lakh in ELSS benefit of exemption
in Rs. income with 3-year lock-in, up to1 lakh
Rs. (A.Y.2011-12) (Rs.) of DTC (Rs.)

2.4 lakhs 1.4 lakh @10% Nil @10% Nil
2.5 lakhs 1.5 lakh Nil Nil
2.6 lakhs 1.6 lakh Nil 1000
2.7 lakhs 1.7 lakh Nil 2000
2.8 lakhs 1.8 lakh Nil 3000
2.9 lakhs 1.9 lakh Nil 4000
3.0 lakhs 2.0 lakh Nil 5000
3.1 lakhs 2.1 lakh Nil 6000
3.2 lakhs 2.2 lakh Nil 7000
3.3 lakhs 2.3 lakh Nil 8000
3.4 lakhs 2.4 lakh Nil 9000
3.5 lakhs 2.5 lakh 1000 10000
3.6 lakhs 2.6 lakh 2000 11000
3.7 lakhs 2.7 lakh 3000 12000
3.8 lakhs 2.8 lakh 4000 13000
3.9 lakhs 2.9 lakh 5000 14000
4.0 lakhs 3.0 lakh 6000 15000
4.1 lakhs 3.1 lakh 7000 16000
4.2 lakhs 3.2 lakh 8000 17000
4.3 lakhs 3.3 lakh 9000 18000
4.4 lakhs 3.4 lakh 10000 19000
4.5 lakhs 3.5 lakh 11000 20000
4.6 lakhs 3.6 lakh 12000 21000
4.7 lakhs 3.7 lakh 13000 22000
4.8 lakhs 3.8 lakh 14000 23000
4.9 lakhs 3.9 lakh 15000 24000
5.0 lakhs 4.0 lakh 16000 25000
@ 10% @20%
5.1 lakhs 4.1 lakh 17000 27000
5.2 lakhs 4.2 lakh 18000 29000
5.3 lakhs 4.3 lakh 19000 31000
5.4 lakhs 4.4 lakh 20000 33000
5.5 lakhs 4.5 lakh 21000 35000
5.6 lakhs 4.6 lakh 22000 37000
5.7 lakhs 4.7 lakh 23000 39000
5.8 lakhs 4.8 lakh 24000 41000
5.9 lakhs 4.9 lakh 25000 43000
6.0 lakhs 5.0 lakh 26000 45000
___________________________________
@ 20%
6.1 lakhs 5.1 lakh 28000 47000
6.2 lakhs 5.2 lakh 30000 49000
6.3 lakhs 5.3 lakh 32000 51000
6.4 lakhs 5.4 lakh 34000 53000
6.5 lakhs 5.5 lakh 36000 55000
6.6 lakhs 5.6 lakh 38000 57000
6.7 lakhs 5.7 lakh 40000 59000
6.8 lakhs 5.8 lakh 42000 61000
6.9 lakhs 5.9 lakh 44000 63000
7.0 lakhs 6.0 lakh 46000 65000
7.1 lakhs 6.1 lakh 48000 67000
7.2 lakhs 6.2 lakh 50000 69000
7.3 lakhs 6.3 lakh 52000 71000
7.4 lakhs 6.4 lakh 54000 73000
7.5 lakhs 6.5 lakh 56000 75000
7.6 lakhs 6.6 lakh 58000 77000
7.7 lakhs 6.7 lakh 60000 79000
7.8 lakhs 6.8 lakh 62000 81000
7.9 lakhs 6.9 lakh 64000 83000
8.0 lakhs 7.0 lakh 66000 85000
............

8.5 lakhs 7.5 lakh 76000 95000
8.6 lakhs 7.6 lakh 78000 97000
8.7 lakhs 7.7 lakh 80000 99000
8.8 lakhs 7.8 lakh 82000 101000
8.9 lakhs 7.9 lakh 84000 103000
9.0 lakhs 8.0 lakh 86000 105000
------------------------------------------------------
@ 30%
9.1 lakhs 8.1 lakh 89000 107000
9.2 lakhs 8.2 lakh 92000 109000
9.3 lakhs 8.3 lakh 95000 111000
9.4 lakhs 8.4 lakh 98000 113000
9.5 lakhs 8.5 lakh 101000 115000
9.6 lakhs 8.6 lakh 104000 117000
9.7 lakhs 8.7 lakh 107000 119000
9.8 lakhs 8.8 lakh 110000 121000
9.9 lakhs 8.9 lakh 113000 123000
10.0 lakhs 9.0 lakh 116000 125000
---------------------------------------------------
@ 30%
10.1 lakhs 9.1 lakh 119000 128000
10.2 lakhs 9.2 lakh 122000 131000 ad so on

It will thus be seen that senior citizens who avail of tax incentive on savings up to Rs.1 lakhs in short-term investments befitting their age, such as ELSS with lock-in of 3 years, in all the tax slabs and with tax rates as in F.Y.2010-11 will be losing Rs.9000 or more in all the tax slabs and tax rates as a result of the proposed Sec.69 of DTC.