TAX NEWS - June 2010

India Tax: No tax on PF, pension fund withdrawals

Yielding to popular demand, the government, on Tuesday, abandoned its controversial proposal to tax retirement benefits like Provident Fund and long-term saving instruments like Public Provident Fund and dropped the idea of levying Minimum Alternate Tax (MAT) on corporate sector based on assets. 

In a revised discussion paper (RDP) on the draft DTC, which proposes to replace the archaic Income Tax Act, the government said "it is now proposed to provide Exempt-Exempt-Exempt method of taxation for government provident fund (GPF), PPF and recognised PF." Though the draft direct tax code proposed to enhance deductions on savings up to Rs 3 lakhs it prescribed EET (exempt-exempt-tax) method of taxation for all long-term savings instruments including the PF. Now, in the revised DTC the government proposes not to tax specified longterm savings used by people mainly to save tax.

Significantly, the government now proposes to put pensions administered under interim Pension Fund Regulatory Development Authority (PFRDA) including pensions of government employees who were recruited since January 204 under EEE (Exempt-Exempt-Exempt) module. It also approved pure life insurance products and annuity schemes under tax exempted categories. "In the absence of adequate social security benefits, taxation of withdrawals from retirement benefits would be harsh," the RDP noted.

Since the revised RDP on DTC has made no comment on personal Income Tax slabs, it is assumed they will remain same as was proposed earlier. The government in its draft DTC had proposed significant Income Tax relief as well as tax benefits for all categories of income groups like hiking deduction limit for savings up to Rs Three Lakh per year.

As per the DTC proposal the general tax payer will pay just 10 per cent up to Rs 10 lakh, 20 per cent on income between Rs 10 lakh and Rs 25 lakhs and 30 per cent beyond Rs 25 lakhs.

"These tax proposals were just illustrative in nature. The exact Income Tax rates as well as tax structure will be known when the legislation on DTC will be introduced in Parliament," Revenue Secretary Sunil Mitra told reporters.

The government will now seek suggestions on RDP till June 30, 2010 and after examining suggestions and comments from various stakeholders it will prepare the legislation for DTC, Mitra said. The revised DTC is likely to be introduced in the forthcoming Monsoon session of Parliament.


Minimum Alternate Tax (MAT) changed

Facing protests from industry, the government dropped the proposal of levying MAT based on gross assets.. The government now proposed to compute Minimum Alternate Tax (MAT) on book profit.

In a major relief to middle class  the government dropped the proposal of withdrawing tax incentives on housing loans.

In the RDP, the government proposes to continue with tax incentive on housing loans and also dropped the earlier proposal to bring in perquisites like government accomodation to be part of salary.