Decoding the new tax code: Rs 10-Rs 25 lakh slab

In the first part of our series on the new tax code expected to kick in after April 2011, we looked at its impact on those having taxable income of up to Rs 10 lakh. In the second part of the series, we evaluate its impact on the second slab -- income levels between Rs 10 lakh and Rs 25 lakh.

In this year's budget, this category got some benefit due to the removal of the surcharge. This category of individuals is however likely to be hit by the fringe benefit tax (FBT) being removed and becoming taxable as perquisites in the new code. It will be higher especially for those employed in companies that have aggressive reimbursements as part of their salary components.

Here, we look at some of the other impacts this income group can expect:

Home loan benefits: Gone with the wind!
The interest part of the home loan was a major tax break which benefited the higher income brackets. Under the new code however, it is all set to vanish from the scene. Earlier, the tax sops were attractive enough for an individual to avail of a home loan for a pre-dominant part of the funds required. With the home loan benefits being withdrawn in the new code, one might need to wait a little longer to own that dream home.

Dabbling in shares/ mutual funds: No longer attractive
The special rates are gone, the exemptions on long-term capital gains will no longer exist.

Individuals with incomes higher than Rs 10 lakh are most likely to dabble in shares/ mutual funds, given their higher disposable income and investable surplus thereof. The change is likely to have a significant impact on individuals with higher capital gains income, since they will be taxed at normal rates.

The higher the salary, in most cases, the higher will be the contribution towards provident fund, which will have a significant impact if the maturity amount gets taxed. Further, for someone closer to the Rs 25 lakh slab, the earnings from the investment avenues (in the form of returns / interest) could spill him/her into the 30 per cent bracket.

No more perks
Most companies have employee perquisites that are beneficial to this category of employees. While this budget took away some of the benefits (we still await the notifications on the taxability), the new code aims at making things simpler by removing all deductions/ exemptions/ perquisite benefits and having all income as taxable salary. This is likely to take away a large part of the benefit that one would have expected with such large increases in tax slabs.