Existing provisions of the Act |
Proposed provisions in original
DTC |
Revised Proposals as per RDP |
Investments in Provident Funds,
Pension Funds etc. and accrued
income thereon are governed by the
EEE scheme of taxation.
Withdrawals from these schemes are
also tax free. |
Investments in Provident Funds,
Pension Funds etc. will be
governed by the EET scheme of
taxation. Withdrawals from these
schemes would be liable to tax. |
As of now, the EEE method of
taxation will continue to apply for
Government Provident Fund (‘GPF’),
Public Provident Fund (‘PPF’) and
Recognised Provident Fund (‘RPF)
and the Pension Scheme
administered by Pension Fund
Regulatory and Development
Authority. Investments made
before the commencement of the
DTC in instruments which enjoy
exemption under the current law
will be eligible for the same tax
treatment for the full duration of
the financial instrument. |
The RDP has accepted that switching over to a
complete EET system of taxation for all savings
instruments would entail many administrative,
logistical and technological challenges. The
requisite infrastructure to implement the EET
scheme is not in place. Hence, the RDP lays down
that “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 Fund (‘RPF) and the Pension
Scheme administered by Pension Fund Regulatory
and Development Authority”.
SKP’s comments:
The relaxation provided by the RDP comes as a big
relief to a large number of salaried and other tax
payers. However, it can be observed that the EEE
scheme of taxation has been restored on the
grounds of administrative, logistical and
technological deficiencies to implement the same.
The RDP is, however, silent on the merits of the
EET scheme of taxation and its applicability in
absence of a social security system in India.
Moreover, the restoration of EEE scheme of
taxation has been made ‘as of now’. Hence, the
relief provided could only be an interim measure. It
is possible that once the required infrastructure is in place, the Government may re-consider the
implementation of EET scheme of taxation. Hence,
notwithstanding the social and political
ramifications that the EET scheme may have, the
Government could still be considering the
implementation of the EET scheme of taxation.
However, it is too early to come to a conclusion on
this issue.
INCOME FROM EMPLOYMENT
Wherever an employer-employee relationship
exists between two persons, the remuneration that
the employee receives or is entitled to in respect of
such employment is considered as salary income at
present. This position would continue even under
the DTC.
Principally, under the DTC, the taxable salary would
be computed in a manner as below -
Gross Salary
Less: Exemptions provided for under section 9
Less: Deductions provided for under section 22
Thus, to begin with, all items of income received
from an employer would be treated as part of gross
income and thereafter the exemptions and deductions would be reduced.
There are several changes proposed in the DTC in the computation of salary income (which will now
be known as “income from employment”)
Existing provisions of the Act |
Proposed provisions in original DTC |
Revised Proposals as per RDP |
Basis of taxation |
Salary is taxable on accrual or receipt
basis whichever is earlier and in
respect of salary from employer or
former employer |
The same system continues – no change
in the basis of taxation |
There is no specific mention about this
in the RDP |
Definition of Salary |
The definition is an inclusive one and
lists down several items which are
included in “salary” |
There is no clear definition of salary given.
It appears that everything received by an
employee from his employer would be
considered as income from employment
subject to specified deductions. |
There is no specific mention about this
in the RDP |
Deductions available |
At present, the only real deduction
that is available from salary income is
in respect of Profession Tax paid by
the employee. Apart from this, Govt.
employees are also entitled to a
deduction of the entertainment
allowance subject to an upper limit. |
In contrast, under the DTC, most of the
exemptions that are presently available
under section 10 (such as gratuity, VRS
settlement, conveyance allowance,
commutation of pension, etc.) are
proposed to be allowed as deductions
from salary instead of as exemptions. |
There is no specific mention about this
in the RDP |
At present, there are no conditions
for claiming the deductions (since
there is only one deduction available
for most categories of employees) |
The deduction in respect of gratuity,
commutation of pension and the VRS
settlement will be available only if the
amount received is deposited by the employee in a “Retirement Benefits
Account” to be opened with a “permitted
savings intermediary” which, in turn, is
defined to mean an approved PF or an
approved superannuation fund or a life
insurer or New Pension System Trust. The
Central Govt. will notify a scheme for this
purpose. |
It has been proposed not to introduce
the Retirement Benefit Account
scheme. Further, it is proposed that
these retirement benefits would be
exempt subject to specified limits for
all employees. |
At present, the employees are
entitled to claim exemption in
respect of amount received by way
of Leave Travel Concession, Leave
Encashment, House Rent Allowance,
Medical Reimbursements,
free/concessional medical treatment,
etc. |
The existing exemptions in respect of LTA,
HRA and medical reimbursements have
neither been provided for under section 9
nor have they been provided by way of
deductions under section 22. |
The value of medical facilities/
reimbursement provided by an
employer to its employees would be
valued as at present but with raise in
the monetary limits. Thus, subject to
an upper limit that will be prescribed,
reimbursement of medical expenses
will continue to be exempt in the hands
of an employee. |
Valuation of perquisites |
Valuation of perquisites is presently
done as per Rule 3 of the Income-tax
Rules. |
The methodology for valuation of taxable
perquisites is yet to be prescribed.
However, it was apprehended that value
of accommodation provided to Govt.
Employees would be done as per market
values and that would adversely affect
such employees. |
In respect of valuation of rent free
accommodation it has been clarified
that the DTC does not propose to
compute said perquisite value based
on market value. Other than this, there
is no clarification or preview of what
would be the perquisite valuation
rules. |
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SKP’s comments:
The originally proposed RBA Scheme has been
scrapped in the revised proposal to provide a major
relief to the middle class as now the retirement
benefits would not be required to be once again
blocked up in any scheme as proposed earlier.
To the extent of allowances other than
reimbursement of medical expenses, the taxable
salary as per the new rules would be higher than
the amount as per existing provisions. Only after
the new rules for valuation of perquisites are
prescribed can there be a greater clarity and further
analysis about the taxability of Salary Income.
TAXATION OF INCOME FROM
HOUSE PROPERTY
Under the existing scheme of the Act, income from
house property is computed with reference to the
actual rent realised or the annual lettable value (i.e.
fair rent), whichever is higher. The original DTC
proposed certain changes in the manner in which the income from house property would be
computed. It also laid down that the gross rent of a
house property shall be the higher of contractual
rent for the year and presumptive rent calculated at
the rate of 6% of rateable value fixed by the
municipal authority. Where no rateable value is
fixed, the gross rent would be 6% of the cost of
acquisition or construction of the property.
Representations were made to the Government
that the method of determination of notional rent
on presumptive basis is inequitable as it
discriminates against recent purchasers of properties as
cost is a function of inflation. Hence, the gross rent
would be higher for newly acquired properties in
comparison to the old properties. Also, the original
DTC did not provide for deduction for interest on
housing loan on self-occupied properties.
Summary of changes made:
Based on the representations received, the changes
proposed by the original DTC and the RDP are
summarised hereunder:
Existing provisions |
Original DTC |
Revised Discussion Paper |
Calculation of Gross Rent for house property that has been let out |
Higher of Contractual rent, Fair
Rent and Municipal Value |
Higher of:
i. Contractual rent for the financial
year; and
ii. The presumptive rent calculated at
6% p.a. of the rateable value fixed by
the local authority.
If no rateable value has been fixed, 6%
shall be calculated with reference to the
cost of construction or acquisition of
the property.
The presumptive rent shall be calculated
on a proportionate basis for a
property acquired during the financial
year. |
Gross rent will be the amount of rent received
or receivable for the financial year.
Gross rent will not be computed at presumptive
rate of 6% of the rateable value
or cost of construction / acquisition.
It appears that as per the RDP, if a property
is not actually let out, there will be no
deemed or notional income that would be
taxed in the hands of the owner. This is a
welcome change. |
Standard Deduction |
(Gross rent less municipal taxes
actually paid) x 30% |
Gross rent x 20% |
There is no specific mention about this in
the RDP. Therefore, the proposal in the
DTC remains intact. |
Deduction for Interest on borrowed capital for self-occupied house property |
Rs. 1.5 lacs, subject to certain
conditions |
No deduction |
Rs. 1.5 lacs, subject to certain conditions |
Inseparable letting of building and furniture – Whether taxable as income from property or income from other sources? |
There is considerable controversy as
to whether income from
inseparable property should be
treated as income from house
property or as income from other
sources |
Income from inseparable letting to be
considered as income from house
property |
There is no specific mention about this in
the RDP. Therefore, the proposal in the
DTC remains intact. |
SKP’s comments:
The revised Discussion Paper has provided due
relief to individual and HUF tax payers by
reinstating the deduction for interest on housing
loan for one self-occupied house property. No change has been made to the standard deduction
which was reduced to 20% by the original DTC.
Gross rent is now based on the rent received or
receivable during the year. On a literal reading, it appears that income from house property would be
computed with reference to contractual rent and
the requirement of considering the fair rent and
municipal value of the property let out is not
required to be considered. However, such an
interpretation does not seem to be as per the
intention of law. The fine print of the revised DTC
will have to be examined to understand how the
computation mechanism would actually operate |