DTC and its impact

DTC – Direct tax code will be applicable in India from April 1^st,2012. The main points from DTC are as follows.

As per DTC tax slabs are as below

INCOME	TAX
Upto 2,00,000	No tax
2,00,000 to 5,00,000	10% amount by which the total  income exceeds 2,00,000
5,00,000 to 10,00,000	30,000+20% amount by which the total income exceeds 5,00,000
more than 10,00,000	1,30,000 + 30% amount by which the total income exceeds 10,00,000

DTC impact on 80C

The DTC will maintain the existing deduction of Rs1 lakh under 80C but DTC removes most of the categories of exempted income like ULIP s, ELSS funds, NSC, Infrastructure bonds, and term deposits. Additionally Tax deduction in principal part of the housing loan under 80C is also removed.

How insurance gets impacted

DTC will have significant impact on insurance. Under DTC, to be eligible for tax deduction, a policy should give life cover of at least 20 times the annual premium. If this condition is not met, you will not get any tax deduction on the premium and even the income from the policy will be taxable.

Right now income received from insurance policies is free. So make sure if you are looking for tax deduction on insurance plan, you buy a policy which offers a bigger cover. This is possible only if term plan is for duration of 20 to 25 years. Bigger the cover, better for the policyholder.

Another not so good news is that tax deduction limit for life insurance will get reduced from present Rs 1 lakh an year to Rs 50,000 an year. This annual limit of Rs 50,000 will include the amount paid for tuition fees of children as well as medical insurance for self and parents. So an insurance policy with a large premium, around Rs 80,000 to Rs1 lakh will fetch maximum tax deduction of only Rs 50,000.

DTC impact on Housing Loans

The repayment of principal of your home loan will not be eligible for tax deduction under the DTC, But  DTC  importantly has retained tax benefit on the interest paid on home loan. Also a bright spot wherein there is removal of tax on notational rent. Right now people who own more than one house have to pay tax on notational rental income even if second house is lying vacant. The DTC will remove this anomaly and make investment in second home more tax efficient.