Every so often, India’s working population jointly celebrates the liberty, freedom and power that comes with being rewarded for a job well done. This gut-twisting warmth and excitement of achievement comes at different times through different channels for different people, but two things unite all types of earners in India – the feeling of achievement and success, and the slight pang of sadness that comes with noticing the amount isn’t really what you signed on for or expected.
So why isn’t the amount as much as it ought to be? What’s that deduction for?
It’s because of Income Tax, a type of direct tax which is levied by the Government of India on those whose income exceeds certain “slab” amounts.
What is Direct Tax?
Broadly, there are two types of taxes that the Indian government levies on its citizens – direct tax and indirect tax.
Definition or Meaning: Direct taxes are those which are paid directly to the government by the taxpayer. These taxes are not paid deducted and paid on behalf of the taxpayer. It’s imposed on the people and organizations directly by the government. This tax liability has to be paid by the taxpayer in question and cannot be transferred to any other entity for payment.
Examples of Direct Taxes In India:
Key examples of direct taxes are
- Income tax
- Wealth tax
- Corporation tax
The Central Board of Direct Taxes in India:
Direct taxation in India is overseen by the Central Board of Direct Taxes or the CBDT, which was formed as a result of the Central Board of Revenue Act, 1924. The CBDT is a part of the Department of Revenue in the Ministry of Finance and is responsible for the administration of the direct tax laws. It also provides inputs and suggestions for policy and planning of the direct taxes in India.
The CBDT is the hub and nexus of all direct taxation policy and enforcement. It is headed by a CBDT Chairman, and comprises of six members who are also Special Secretary to the Government of India.
The Direct Tax Code:
In a move to establish a more efficient, effective and equitable direct tax system, the Direct Taxes Code or DTC has been drafted to replace the existing Indian Income Tax Act of 1961. It aims to consolidate and amend all laws relating to the direct taxes in order to facilitate voluntary compliance and increase the tax-GDP ratio. With its 319 Sections and 22 Schedules, the DTC aims to replace the old Income Tax Act and provide a more stable, efficient and overall better code for taxation incorporating the best taxation principles and proven international practices.
The Direct Tax Code Explained With Examples:
The DTC is explained in this section by delving into its key features. Key examples of DTC are income tax, corporate tax, wealth tax and Capital Gain Tax. These are explained in detail below.
- Single code for direct taxes: By bringing all direct taxes under a single code with unified compliance features, a single unified taxpayer reporting system can be facilitated.
- Eliminates the problem of constant litigation: Special care has been taken to avoid contradictory and ambiguity in the code, to avoid misinterpretation and misuse.
- Flexibility: The statute has been structured in a way that can accommodate the changes and requirement of a growing economy without having to constantly resort to amendments.
- Eliminates regulatory functions: Regulatory functions are to be carried out by other regulatory authorities, keeping it simple.
- Stability: In the current system, the tax rates are formed in the Finance Act of the relevant year. All rates of taxes under the DTC, however, are proposed to be prescribed in the First to Fourth schedule of the DTC itself, and any amendments to the same will be brought before Parliament as an Amendment Bill.
- Political contributions of up to 5% of the gross total income will be eligible for deduction.
- Fringe benefits tax will be charged to the employee rather than the employer.
- Annual investments in approved funds and insurance proposed at Rs.1,50,000, instead of Rs.1,20,000.
What are the Types of Direct Taxes One Pays?
Direct taxes come in many shapes and forms. All of the below mentioned tax headings have two things in common – they are imposed directly and apply to every Indian citizen.
List of Direct Taxes In India:
- Income tax is the most common and most important tax that an Indian must pay.
- It is charged directly on the income of a person.
- The rate at which it is charged varies, depending on the level of income.
- It’s charged to individuals, co-operative societies, firms, companies, Hindu Undivided Families (HUFs), trusts and any artificial judicial person.
- Income tax is charged on an income known as “taxable income”, which is:
Taxable income = (total income) – (applicable deductions and exemptions).
The different heads of income under which income tax is chargeable are:
- Income from house and property.
- Income from business or profession.
- Income from salaries.
- Income in the form of capital gains.
- Income from other sources.
It is levied differently for different people depending on their residency status.
- Levied on companies who exist as separate entities from their shareholders.
- Foreign companies are taxed on income that arises, or is deemed to arise, in India.
- It is charged on royalties, interest, gains from sale of capital assets located in India, fees for technical services and dividends.
- Includes Minimum Alternative Tax (MAT) which was introduced to bring Zero Tax companies under the income tax net, whose accounts were made in accordance with the Companies Act.
- Includes Fringe Benefit Tax (FBT) which is a tax that companies pay on the fringe benefits provided (or deemed to have been provided) to employees.
- Incudes Dividend Distribution Tax (DDT) which is a tax levied on any amount declared, distributed or paid as dividend by any domestic company. International companies are exempt from this tax.
- Includes Securities Transaction Tax (STT) which is a tax levied on taxable securities transactions. There is not surcharge applicable on this.
- Wealth tax is charged on the benefits derived from property ownership.
- The same property will be taxed every year on its current market value.
- Wealth tax is charged whether the property in earning an income or not.
- The tax is levied on the individuals, HUFs, and companies alike.
- Chargeability depends on residential status.
The following will not be taxed as they are “working assets”:
- Assets held as stock in trade.
- Property held as a commercial complex.
- Gold deposit bonds.
- House property held for business or profession.
- House property let out over 300 days in a year.
- Taxed on the income derived from the sale of assets or investments.
- Capital investments cover homes, farms, businesses, works of art, etc.
- Capital gains = (money received from sale) – (cost of capital investment).
- Categorized as short-term gains (gains on assets sold within 36 months of acquisition) and long-term gains (gains on assets sold after 36 months of acquisition and holding).
- Voluntary tax that is paid by the taxpayer when the asset it sold.
Tax Rates for Different Types Of Direct Taxes:
- Income Tax
- Corporate Tax.
In India, Income Tax is charged according to slabs which outline the details for different tax rates for different levels of income.
For individual residents under 60 years of age:
|Income Slabs||Tax Rates|
|Taxable income under Rs.2,50,000.||NIL.|
|Taxable income between Rs.2,50,000 and Rs.5,00,000.||10% of the amount by which the taxable income exceeds Rs.2,50,000. Less: Tax Credit u/s 87A – 10% of taxable income (up to a maximum of Rs.2,000).|
|Taxable income above Rs.5,00,000 and Rs.10,00,000.||Rs.25,000 plus 20% of the amount by which the taxable income exceeds|
|Taxable income above Rs.10,00,000.||Rs.1,25,000 plus 30% of the amount by which the taxable income exceeds Rs.10,00,000.|
For individual residents between 60 and 80 years of age:
|Income Slabs||Tax Rates||Taxable income under Rs.3,00,000.||NIL.||Taxable income between Rs.3,00,000 and Rs.5,00,000.||10% of the amount by which the taxable income exceeds Rs.3,00,000. Less: Tax Credit u/s 87A – 10% of taxable income (up to a maximum of Rs.2,000).||Taxable income between Rs.5,00,000 and Rs.10,00,000.||Rs.20,000 plus 20% of the amount by which the taxable income exceeds Rs.5,00,000.||Taxable income above Rs.10,00,000.||Rs.1,20,000 plus 30% of the amount by which the taxable income exceeds Rs.10,00,000.|
For Individual residents above 80 years of age:
|Income Slabs||Tax Rates|
|Taxable income under Rs.5,00,000.||NIL.|
|Taxable income between Rs.5,00,000 and Rs.10,00,000.||20% of the amount by which taxable income exceeds Rs.5,00,000.|
|Taxable income above Rs.10,00,000.||Rs.1,00,000 + 30% of the amount by which taxable income exceeds Rs.10,00,000.|
*Amounts invested in certain specific investments like EPF, PPF, NSC, Tax Saving FDs, etc. are eligible for deductions under Section 80C up to Rs.1,50,000 per year.
For domestic companies:
- The Corporate Tax rate for domestic companies is 30%.
- If the company does not have an income of over Rs.1 crore, then it does not have to pay any corporate income tax.
- If the net income of the company is in the range of Rs.10 crore, a surcharge of 5% is applicable on the net income.
- If the net income of the company exceeds Rs.10 crore, a surcharge of 10% is applicable on the net income.
For international companies:
- That are earning less than 1 crore rupees, a corporate tax of 41.2% is applicable – inclusive of 40% basic tax and an education cess of 3%.
- That are earning more than 1 crore rupees, a corporate tax of 42.024% is applicable – inclusive of 40% basic tax, 3% education cess and a 2% surcharge.
- That are earning more than 10 crore rupees, a surcharge of 5% is applicable in addition to basic tax.
Minimum Alternative Tax (MAT) is presently charged at 19.05%.
Dividend Distribution Tax (DDT) is charged at a rate of 16.995% on declared dividends.
- Is charged on the net wealth, which is sum total of all taxable assets clubbed together, minus the amount of debt owed.
- Net wealth = (All assets) – (all debt).
- The valuation date for net wealth is 31st March immediately preceding the assessment year.
- Wealth tax is charged at 1% of the amount by which the net wealth exceeds Rs.15,00,000 (15 lakhs).
- Wealth tax has been abolished (with effect from April 1, 2016 for wealth held as on March 31, 2016)
Capital Gains Tax.
- Short term capital gains are taxed as per the normal income tax slab rates.
- Method of indexation using the cost inflation index will be done to the cost of acquisition and the cost of improvement, and the resultant figures will be used for computation.
- Long term capital gains are taxed at 20% if computed with the benefit of indexation.
- Long term capital gains are taxed at 10% if computed without the benefit of indexation.
Benefits of Direct Taxation:
- Equitable: The burden of direct taxes can’t be shifted, and an equitable sacrifice of income and wealth can be achieved from all sections of society through progressive taxation.
- Economical: Income tax and most other forms of direct taxation are done at source with the help of TDS (Tax Deduction at Source), and are hence not a problem for the government to collect.
- Certainty: There is a sense of certainty from the taxpayer and the government, as each know how much to pay and how much to expect to collect respectively.
- Productivity: Direct taxes are very productive in the sense that as the working population andcommunity grows, so do the returns from direct taxation.
- Consciousness of duty: When people consciously pay their taxes, they can claim the right to know how their money is being spent by the government.
- Creates equal distribution of wealth: The government charges more taxes from those that can afford them, and uses this money to uplift the lower and poorer sections of society.
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Frequently asked questions about direct tax.
- How can I save on my taxes?
It is possible to have a portion of your income viewed as or deemed non-taxable – by investing it in certain funds, investments and policies which are income tax deductible.
- What are some of the investments that I can make to save on Income Tax?
Investments under Section 80C, 80CCC and 80D are directly exempt from taxation – like some tax saving fixed deposits, investments in National Savings Certificates (NSCs), insurance policies, EPF and PPF schemes, etc.
- What is TDS?
TDS is Tax Deducted at Source. Before you receive your pay, a certain amount is deducted as tax through the method of TDS.
- What is an assessment year?
An assessment year is a 12 month period that starts on the 1st of April, up to the 31st of March the next year.
- Are all incomes and receipts considered as taxable income?
No, there are two types of receipts – 1. Revenue receipts and 2. Capital receipts. All revenue receipts are taxable unless specifically exempted and all capital receipts are exempted unless specifically taxed.
- What are the rules relating to taxation of gifts?
Gifts exceeding over Rs.50,000 are taxable unless received from:
- A relative.
- On occasion of marriage.
- Under will or by inheritance or in contemplation of the death of the payer.
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