The Direct Tax Code (DTC) is still a draft version and while it is expected to be in force from April 2012, there could still be some changes. Hence, what we are interpreting today could change especially with respect to the tax treatment of equity-oriented schemes in general and tax savings schemes of mutual funds specifically.
The tax savings schemes of mutual funds will cease to be eligible investments for deduction under section 80C from April 2011 as per the new proposals. Any investments made after that date will not have any tax deduction benefits.
For investments already made in these schemes, the benefit of tax deduction already availed of will stay, as will the locked-in status of the investment for three years.
Dividends received from all equity-oriented funds, including tax schemes, will continue to be tax-free in the hands of the investor. However, the DTC proposes a 5% distribution tax on income distributed by the mutual fund which will be paid by the fund.
Investors will continue to have the benefit of not paying any tax on long-term capital gains from equity oriented funds. For short-term capital gains, a deduction of 50% of the gains will be allowed. The net income after deduction will be taxed at the normal rates applicable to the investor.
Update: (April 1, 2012) ELSS option still available for financial year 2012-13
It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in ELSS schemes of mutual funds
Union Finance Minister Pranab Mukherjee on Saturday (march 31, 2012) said that the long-awaited Direct Tax Code (DTC) would be rolled out from next year.
Union Finance Minister Pranab Mukherjee said
“Next year, I will introduce the DTC fully after examining the recommendations of the parliamentary standing committee. The recommendations of the parliamentary standing committee were available to me on March 9,”