New tax code for more cash in your pocket

In what could provide a major relief to income tax payers, the government today proposed to tax only 10% of income up to Rs 10 lakhs while under the existing regime this relief is limited to people with income of Rs 3 lakh only.

If all goes as planned, in less than two years from now you could end up paying less tax.

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The new Direct Taxes Code promises to put more money in your pocket. Companies will also benefit. Here’s why:

The code proposed a sweeping rejig of the existing tax slabs that would benefit each one of India’s 31.5 million (3.15 crore) taxpayers. See Graphics

Under the proposed norms, income tax would be charged at 10 per cent for income between Rs 1.6 lakh and Rs 10 lakh, 20 per cent between Rs 10 lakh and Rs 25 lakh, and 30 per cent beyond Rs 25 lakh.

Besides, the code proposes that the ceiling on tax saving investments be raised to Rs 3 lakh annually, from Rs 1 lakh now.

“We expect to have better compliance and better collection of taxes,” finance minister Pranab Mukherjee told reporters after releasing the code and a discussion paper for public debate on Wednesday.

Mukherjee said the government plans to introduce a Bill to legislate the code in the winter session of Parliament later this year.

The code also proposes to bring down the corporate income tax rate to 25 per cent, from 34 per cent. It also says that the securities transactions tax should be abolished — a move that is likely to bring cheer in the equity markets.

The code, which is expected to come in force from April 1, 2011, has proposed to major changes in the wealth tax norms.

The threshold limit is proposed to be raised to Rs 50 crore from Rs 15 lakh and the rate be reduced to 0.25 per cent against 1 per cent at present.

The new code is equipped with tax calculators and simple formulae for calculating taxes.

These would help taxpayers avoid the arduous task of referring to voluminous explanations for every clause and sub-clause of the Income Tax Act for computing effective taxes.

Analysts welcomed the move.

“It is an extremely positive move by the government because it would clean up the existing act,” said Shailesh Haribhakti, CEO of BDO Haribhakti Group. “The new structure would be simpler and more compliance oriented.”