I-T to kick in at Rs 2 lakh, 30% tax for income over Rs 10 lakh

Individual taxpayers are in for a bonanza with the Direct Tax Code (DTC) Bill approved by the Union Cabinet today raising the income tax exemption limit to Rs 2 lakh a year from Rs 1.6 lakh now.

It has retained the tax benefit on home loan interest payments up to Rs 1.5 lakh and continued with the tax-free status on long-term savings instruments such as provident funds through their entire life cycle.

Finance Minister Pranab Mukherjee confirmed to reporters that the personal income tax will kick in at Rs 2 lakh once the DTC is enacted.

The DTC will replace the archaic Income Tax Act and simplify the direct tax regime in the country. The Bill will be introduced in Parliament on Monday and is likely to be referred to a select committee of the two Houses.

Ministry sources, however, expected that the new DTC will come into force from April 1, 2011.

"The whole objective is that a plethora of exemptions will be limited. (Income) tax slabs will be three. Rate of taxes will be taken in the schedule so that they need not be changed every year," Mukherjee told reporters.

Asked about the new tax slabs, he said, "That will be discussed in Parliament."

The Bill proposes to levy corporate tax at the present rate of 30 per cent, but India Inc can expect relief on two counts. One, it is likely that the surcharge and cess on taxes are eliminated.

Besides, the Ministry also has acceded to the industry's demand that the minimum alternate tax (MAT) be imposed only on book profits and not on gross assets as proposed in the draft DTC. It will, however, be levied at 20 per cent of the book profit compared with the existing 18 per cent.

Sources said that the three slabs are likely to be: 10 per cent for Rs 2-5 lakh income, 20 per cent for Rs 5-10 lakh and 30 per cent for those earning over Rs 10 lakh a year.

At present, the tax kicks in at an annual income of 1.65 lakh. The three slabs are 10 per cent for Rs 1.65 lakh to Rs 5 lakh, 20 per cent for Rs 5-8 lakh and 30 per cent for over Rs 8 lakh.

For senior citizens and females, the tax slabs are likely to be relaxed further.

In the first draft, the Ministry had suggested 10 per cent tax for income between Rs 1.60 lakh and Rs 10 lakh, 20 per cent on Rs 10-25 lakh and 30 per cent beyond that. The Ministry had, however, clarified that the slabs were illustrative.