The finance ministry is likely to retain the EET (exempt-exempt-tax) principle proposed in the Direct Tax Code on the lump sum amount a salaried taxpayer will receive from his investment in savings schemes such as the Public Provident Fund and other superannuation funds. This means while the contribution and accumulation are tax-free, withdrawal will be taxed at the marginal rate of income tax.

According to finance ministry officials, though this will appear to hurt the interests of the salaried class in the low-income bracket, the threshold at which the tax will kick in may also be revised upwards to Rs 2 lakh from 1.6 lakh a year in the Direct Tax Code. At present, individuals with salaries above Rs 1.6 lakh and up to Rs 3 lakh attract a 10 per cent tax.

“The criticism that people will have less money in hand after retirement after tax is not correct. Our calculations suggest that disposable income pre and post retirement would be higher after the implementation of the Direct Tax Code because of a low rate regime overall. The common man will benefit.” The draft Code which proposes to overhaul the existing direct tax regime was released by the government in August this year for public comments.

As per the draft DTC, individuals with:

• Income between Rs 1.6 lakh and Rs 10 lakh will be taxed at 10 per cent.
• Earning between Rs 10 lakh and Rs 25 lakh will pay Rs 84,000 plus 20 per cent of the amount by which the total income exceeds Rs 10,00,000 as tax.
• Further, for those with salaries over Rs 25 lakh, the tax liability will be Rs 3.84 lakh plus 30 per cent.

Under the current regime:

• Annual income up to Rs 1.6 lakh is tax free,
• Incomes between Rs 1.6 lakh and Rs 3 lakh a year – the tax rate is 10 per cent,
• Incomes between Rs 3 lakh and Rs 5 lakh, the rate is 20 per cent and
• Incomes above Rs 5 lakh, 30 per cent.

Tax planners said the DTC regime will hurt people with, say, 5 – 7 years of employment, the most since they are not in a position to plan their savings at such stage. They said there should be some threshold for savings in specified instruments, which would not be taxed.

“Age expectancy in India is rising. We will have a larger number of people who would be living to avail of their retirement benefits. The government should have some threshold like, say, investments up to 5-7 years that will not be taxed. The government should grandfather it to the extent possible,” Sonu Iyer, tax partner, Ernst and Young said.

KPMG executive director on direct taxes) Vikas Vasal said there will be significant impact on tax payers depending on the quantum of fund withdrawn after retirement. “Depending on the quantum withdrawn, almost a third of the savings could be eaten away,” he said.