The change
All tax-free allowances might become taxable under the Direct Taxes Code.
Some of the allowances given to employees are tax-free under certain conditions and subject to applicable limits. So, leave travel assistance, house rent and expenses on medical treatment, newspapers and magazines, telephone and conveyance are taxfree if actual bills are submitted. Under the new code, all exemptions may be abolished and the entire income might be taxed.
50 per cent of the basic salary is the HRA received by an employee. Other allowances account for about 20 per cent of the income.
36 crore man hours is the estimated time spent every year by the 3 crore tax assessees to claim their allowances.
The impact
The change would raise the tax liability of salaried individuals, especially those who get fat perks.
Tax on perks: Allowances form a significant chunk of the income of a salaried person, especially in the private sector. The tax exemption offered on perks such as HRA helps reduce the burden of high rents in metros and large cities. If all perks are added to the income and taxed at the normal rate, the net taxable income of many salaried individuals would go up. However, self-employed professionals and businessmen would not be affected.
Higher tax
If all allowances are taxed as income, the tax outgo of an individual would go up significantly.
Taxable income (Rs) 8,00,000 (Current regime) 12,00,000 (Under DTC)
Tax-free allowances (Rs) 4,00,000 (Current regime) Nil (Under DTC)
Tax payable (Rs) 94,000 (Current regime) 1,24,000 (Under DTC)
DTC will make life simpler by combining all types of incomes under an omnibus figure for the year.
The silver lining: Though the removal of exemptions and deductions will raise the net taxable income of salaried individuals, they will also be spared the monthly rigmarole of filling out forms or manufacturing false receipts to claim tax-free allowances. Employees spend an estimated one hour every month trying to obtain false receipts if their actual expense under the head falls short of the permitted allowance.
