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The Government of India is keen on scrapping the age old Income Tax Act, 1961, and implementing a new Direct Tax Code. Direct Tax Bill has been presented and government expects to implement the new code with effect from 01st April, 2012. Let’s have a look on the impact of DTC (Direct Tax Code) on the taxability of salaried individuals.
The new bill has invited a debate on “EEE†and “EEF†tax regime.
“EEE” stands for Exempt-Exempt-Exempt & “EET” stands for Exempt-Exempt-Taxed.  Now the question arises, that what is Exempt-Exempt-Exempt and Exempt-Exempt-Taxed? The three words stand for three stages of investments and the tax liability arising thereon on each of these steps. The three Steps are as follows;
Step 1 – Investment
Step 2 – Income arising from the Investment
Step 3- Withdrawal or liquidation of Investment.
For example let’s take the case of Mr. Paul, an Individual who deposits Rs. 70, 000/- annually in his PPF account.
(Exempt – Exempt – Exempt) Regime
Firstly, the deposit of Rs. 70, 000 (Step 1- Investment) will qualify for deduction/exemption, and the amount of investment will not be considered for taxation of the individual and will be deducted from the total income computed for the purpose of calculation of Income Tax.
Secondly, during the year interest will be credited to the PPF account of the depositor (Step 2 – Income arising from the investment). In the EEE regime, the interest will also not be taxable, and shall not form part of total income computed for the calculation of income tax thereon.
Thirdly, during maturity, the amount (Principal + Interest) shall be withdrawn by the individual (Step 3 – Withdrawal of Investment). In the EEE Regime, the final mature amount shall also be exempt from tax.
(Exempt – Exempt – Taxed) Regime
In the EET regime, the first two steps shall be exempt from tax. I.e. the investment and, income arising on the investment shall not attract income tax, but income tax shall be imposed on the final amount which shall be withdrawn / received by the individual, at the final stage.
DTC vis-Ã -vis Income Tax Act, 1961
The Income Tax Act, 1961, (“The Actâ€) is following the “EEEâ€, regime for various investment options. For example, investment in PPF, LIC, Infrastructure Bonds etc, are exempt from taxes in all the three stages. Some investments are under ETT and even TTE system.
The initial DTC draft bill, proposed the implementation of uniform EET regime for investments covered under EEE in the erstwhile Income Tax Act, 1961, but wide spread furor from various sections of the society, forced the government to again shift to EEE regime. For individuals, the bill has proposed to continue with exempt-exempt-exempt (EEE) method of taxation on investments up to Rs 3 lakh in a fiscal year in provident fund, pension fund and pure life insurance products. Under EEE, tax will not be levied during all the three stages — when investment is made, interest earned and when the money is withdrawn.
Timely and efficient tax planning go long way in lowering your total taxes by employing and taking advantages of in-built provisions of tax exemptions, deductions, concessions, rebates, relief’s, allowances and other benefits granted by the tax laws so that the incidence of tax is reduced.
We at Taxmantra.com have the expertise to guide you in lowering your tax outgo and thus enhancing your total take away. We at Taxmantra.com provide full year support solving all your tax issues, in addition to filing of your return of income with excellent tax planning.
Please join us now in pursuit of simplifying individual taxation!
Alok Patnia
Founder and Director at Taxmantra.com
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