Direct Tax

A type of tax where the impact and the incidence fall under the same category can be defined as a Direct Tax. The tax is paid directly by the organisation or an individual to the entity that has imposed the payment. The tax must be paid directly to the government and cannot be paid to anyone else.

Types of Direct Taxes

The various types of direct tax that are imposed in India are mentioned below:

  • Income Tax

    Depending on an individual’s age and earnings, income tax must be paid. Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid. The taxpayer must file Income Tax Returns (ITR) on a yearly basis. Individuals may receive a refund or might have to pay a tax depending on their ITR. Huge penalties are levied in case individuals do not file ITR.

  • Wealth Tax

    The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property. In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not. Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status. Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.

  • Estate Tax

    It is also called as Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.

  • Corporate Tax

    Domestic companies, apart from shareholders, will have to pay corporate tax. Foreign corporations who make an income in India will also have to pay corporate tax. Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India are taxable. The below-mentioned taxes are also included under Corporate Tax:

    • Securities Transaction Tax (STT)

      The tax must be paid for any income that is earned via security transactions that are taxable.

    • Dividend Distribution Tax (DDT)

      In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.

    • Fringe Benefits Tax

      Companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.

    • Minimum Alternate Tax (MAT)

      For zero tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.

  • Capital Gains Tax

    It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and home come under capital assets. Based on its holding period, tax can be classified into long-term and short-term. Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains. Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

Tax Rate for the Different Types of Direct Tax

  • Income Tax: Depending on the individual’s age and salary, he/she will fall under a particular tax slab. The three different tax slabs are mentioned below:
  • For resident individuals and Hindu Undivided Families (HUFs) who are below the age of 60 years:

    Tax slab Income tax
    Up to Rs.2.5 lakh Nil
    From Rs.2,50,001 to Rs.5,00,000 5% of the total income that is more than Rs.2.5 lakh + 4% cess
    From Rs.5,00,001 to Rs.10,00,000 20% of the total income that is more than Rs.5 lakh + Rs.12,500 + 4% cess
    Income of above Rs.10 lakh 30% of the total income that is more than Rs.10 lakh + Rs.1,12,500 + 4% cess

    For senior citizens who are above the age of 60 years and below the age of 80 years:

    Tax slab Income tax
    Up to Rs.3 lakh Nil
    From Rs.3,00,001 to Rs.5,00,000 5% of the total income that is more than Rs.3 lakh + 4% cess
    From Rs.5,00,001 to Rs.10,00,000 20% of the total income that is more than Rs.5 lakh + Rs.10,500 + 4% cess
    Income of above Rs.10 lakh 30% of the total income that is more than Rs.10 lakh + Rs.1,10,000 + 4% cess

    For resident Indians who are above the age of 80 years (Super Senior Citizen):

    Tax slab Income tax
    Up to Rs.5 lakh Nil
    From Rs.5,00,001 to Rs.10,00,000 20% of the total income that is more than Rs.5 lakh + 4% cess
    Above Rs.10 lakh 30% of the total income that is more than Rs.10 lakh + Rs.1,00,000 + 4% cess

    In addition to the existing tax slabs mentioned above, the Finance Minister Nirmala Sitharaman has introduced a new tax regime on 1st February 2020. However, it should be kept in mind that the new income tax regime is optional and is an alternative for the existing income tax regime. The income tax slabs for the FY 2020-21 under the new regime can be summed up as follows:

    New Income Tax Slab for Individuals

    Income Tax Slab Tax Rate
    Up to Rs.2.5 lakh Nil
    From Rs.2,50,001 to Rs.5,00,000 5% of the total income that is more than Rs.2.5 lakh + 4% cess
    From Rs.5,00,001 to Rs.7,50,000 10% of the total income that is more than Rs.5 lakh + 4% cess
    From Rs.7,50,001 to Rs.10,00,000 15% of the total income that is more than Rs.7.5 lakh + 4% cess
    From Rs.10,00,001 to Rs.12,50,000 20% of the total income that is more than Rs.10 lakh + 4% cess
    From Rs.12,50,001 to Rs.15,00,000 25% of the total income that is more than Rs.12.5 lakh + 4% cess
    Income above Rs.15,00,001 30% of the total income that is more than Rs.15 lakh + 4% cess

    Note: The income tax rates mentioned above are optional.

  • Corporate Tax: The tax rates for domestic and international companies are mentioned below:
  • Domestic companies:

    • In case the turnover of the company is less than Rs.250 crore, the corporate tax that is levied is 25%. However, if the turnover of the company is more Rs.250 crore, the corporate tax that is levied is 30%.
    • A surcharge of 10% of the taxable income is levied in case the taxable income is between Rs.1 crore and Rs.10 crore.
    • In case the taxable income of the company is more than Rs.10 crore, the surcharge that is levied is 12%.
    • 4% of the corporate tax is levied as cess.

    International companies:

    • In case companies are earning less than Rs.1 crore, a corporate tax of 41.2% is levied. The corporate tax includes 40% basic tax and 3% education cess.
    • In case companies are earning more than Rs.1 crore, a corporate tax of 42.024% is levied. The corporate tax includes 40% basic tax, 2% surcharge, and 3% education cess.
    • In case companies earn more than Rs.10 crore, a surcharge of 5% is levied apart from the basic tax.
  • Capital Gains Tax
    • According to the normal tax slabs, short-term capital gains is levied.
    • In case Capital Gains Tax is computed considering indexation benefit, the long-term capital gains that are levied are taxed as 20%.
    • In case Capital Gains Tax is computed without considering indexation benefit, the long-term capital gains that are levied are taxed at 10%
  • Wealth Tax
    • Depending on the net wealth, Wealth Tax is levied. Net wealth can be calculated by the sum of all taxable assets minus the total debt that is owed.
    • The formula for net wealth is, Net Wealth = (Sum of all assets) – (sum of all debt).
    • The value of net wealth is considered on March 31 of every year that immediately precedes the assessment year.
    • However, with effect from 1 April 2016, for wealth that was being held as of 31 March 2016, Wealth Tax has been abolished.

Direct Tax Code

The Direct Tax Code or DTC was mainly drafted to replace the Income Tax Act of 1961. The main aim of DTC is to establish a more equitable, effective, and efficient direct tax system. DTC was also drafted to amend and stabilise all laws that are related to direct taxes so that the tax-GDP ratio increases and voluntary compliance becomes easy.

Explanation of the Direct Tax Codes

The key features of the Direct Tax Code are explained below:

  • All direct taxes have a single code: By bringing all direct taxes under one code, a single, unified taxpayer system can be brought into effect. All compliance features can also be unified under one code.
  • Stability: Currently, based on the Finance Act of the relevant year, taxes are formed. However, under the Direct Tax Code, the tax rates are being made between the First and Fourth schedule of the DTC. Any changes to the schedule can be made by passing an Amendment Bill before the Parliament.
  • Regulatory Functions are eliminated: Other regulatory authorities must handle all regulatory functions.
  • Political contributions: 5% of the gross total income that can be deducted will be made towards political contributions.
  • Flexibility: A law has been created so that changes and requirement to grow the economy can be accommodated without having to make amendments on a constant basis.
  • Constant litigation problems have been eliminated: Special care has been put forth so that the code is not misused or misinterpreted in order to avoid contradiction and ambiguity.
  • Fringe benefits tax: The tax is levied on employees rather than employers.

Advantages of Direct Taxes

The main advantages of Direct Taxes in India are mentioned below:

  • Economic and Social balance: The Government of India has launched well-balanced tax slabs depending on an individual’s earnings and age. The tax slabs are also determined based on the economic situation of the country. Exemptions are also put in place so that all income inequalities are balanced out.
  • Productivity: As there is a growth in the number of people who work and community, the returns from direct taxes also increases. Therefore, direct taxes are considered to be very productive.
  • Inflation is curbed: Tax is increased by the government during inflation. The increase in taxes reduces the necessity for goods and services, which leads to inflation to compress.
  • Certainty: Due to the presence of direct taxes, there is a sense of certainty from the government and the taxpayer. The amount that must be paid and the amount that must be collected is known by the taxpayer and the government, respectively.
  • Distribution of wealth is equal: Higher taxes are charged by the government to the individuals or organisations that can afford them. This extra money is used to help the poor and lower societies in India.

Even though there are a few disadvantages, direct taxes play a very important role in India’s economy. If these taxes are brought into effect appropriately, they could play a huge role in sustaining price levels and to prevent inflation.

FAQ's on Direct Tax

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. What is the disadvantage of Direct taxes?
  7. The disadvantage of Direct taxes is that the process of filing income tax return itself is more time consuming.

News About Direct Tax

  • Govt. collects Rs.92,681 crore through net direct taxes as of mid-June

    As of 15 June, the government has collected Rs.92,681 crore through net direct tax collections. The collection is 7.03 percent of its full-year target of Rs.13.19 lakh crore. It must be noted here that the government had collected Rs.1,36,941 crore in net direct taxes around the same time last fiscal. Gross direct tax collections received as on 15 June stood at Rs.1,37,825 crore. It was down by 31 percent when compared to last year’s collection.

    The fall in tax collections is accounted to the lockdown caused by the coronavirus pandemic. The revenue department is closely monitoring tax collections and will take a cautious approach before resetting the budgeted tax collection targets.

    Corporate advance tax collections, personal income tax advance tax collection and dividend distribution tax or DDT recorded a fall. Collections from securities transaction tax however increased.

    16 June 2020

  • CBDT Reports 8% Increase in Direct Tax Collection

    The Central Board of Direct Taxes (CBDT) had said clarified that the annual gross direct tax collection growth in the year 2019-2020 had been 8% at Rs.14,01,920 crore, and the tax reforms of Rs.1,68,200 crore had announced last year had driven 5% contraction in the tax receipts.

    The impacts of revenue on corporate tax reforms and the personal income tax concessions had been Rs.1,45,000 crore and also Rs.23,200 crore.

    After having adjusted the revenue losses because of the two reforms gross direct tax collection in the year 2019-2020 had been Rs.12,33,720 crore, which is a 4.92% contraction as compared to Rs.12,97,674 crore in the year, 2018-2019.

    Finance minister Nirmala Sitharaman, last year had cut the corporate tax rates for promoting investment growth and also this had provided tax reliefs to all people who were going through the raising standard deduction and also increase in personal income tax limit.

    In an attempt to boost the investments, the government had given a Rs.1.45 lakh crore bonanza to this industry by reducing the corporate tax rates. The firms had an option for a lower corporate tax rate of 22% provided they forgo the exemptions.

    08 June 2020

  • Direct tax mop-up rises by 39% amid the sharp decline in disbursement of refunds

    Gross direct tax collections recorded a drop of 13% till 23 May 2020 when compared to the collection of the same during the same period last year. This has come up on the back of economic disruption caused by the outbreak.

    However, what needs to be noticed in this regard is the fact that there has been a bump of 39% in the net collection by the income tax department during this period, despite a sharp decline in the disbursement of refunds. The gross collections witnessed a decline and stood at Rs.91,646 crore during the period of 1 April 2020 to 23 April 2020. The same was Rs.1.05 trillion last year during the same period.

    26 May 2020

  • Emails to seek tax updates not recovery notices, clarifies tax department

    The Income-Tax (I-T) department on Tuesday said that people should not misconstrue the computer generated emails sent to about 1.72 lakh assesses such as individual taxpayers, corporate and start-ups and should treat them as a request for seeking an update.

    The Central Board of Direct Taxes (CBDT), the apex body which regulates any matter related to income tax, dispelled any doubts regarding the allegation that the I-T department was pursuing recovery proceedings and seeking arm-twisting methods by adjusting outstanding demands of the start-ups.

    The CBDT responded to certain observations made in social media that alleged I-T department is “pursuing recovery proceedings” and “using arm-twisting methods” by adjusting outstanding demands of the start-ups.

    The CBDT said that emails were sent to assesses by the I-T department seeking clarification from assesses who were entitled to get tax refund, but also had outstanding tax to pay. The statement said that these computer-generated emails had been sent to almost 1.72 lakh assesses which included all classes of taxpayers - from individual to HUF to firms, big or small companies including start-ups. CBDT refused to belive that start-ups being singled out and harassed was total misrepresentation of facts.

    These emails are part of the faceless communication that protects public money by ensuring that refunds are not released without adjusting outstanding demands of the past, it said.

    21 Apr 2020

  • Coronavirus may drive low direct tax collections

    For the fiscal year, ending 31 March, India’s direct tax collection may mostly see a shortfall of around Rs.1.5 trillion as compared to the revised estimates (RE). This will take place for the very first time in at least 20 years and will derail all of the government’s fiscal deficit goals.

    A few senior officials have said that the income tax department is now estimating the collection to be between Rs.10.5 trillion and Rs.10.7 trillion. These figures are against the revised numbers of Rs.11.7 trillion.

    The tax officials have added that this shortfall is because of the coronavirus pandemic. However, the earlier months of this year have also been pretty bad for the direct tax collection. The central government set the direct tax collection figure at a target of Rs.13.5 trillion for the current financial year in the budget estimates (BE), and this is an increase of 17% over the previous year.

    02 Apr 2020

  • Direct tax collections shrink by 3.5%

    During the period of April to February of the current fiscal year, net direct tax collections were Rs.8.13 lakh crore, which was a decline of 3.5%. Indirect tax collections, however, grew by 3.8% to amount to Rs.8.75 lakh crore. In the remaining one month of the fiscal year, the requirement is to collect Rs.4.67 lakh crore. Of this, Rs.3.56 lakh crore is supposed to be from direct taxes and Rs.1.1 lakh crore is supposed to be from indirect taxes. These are the revised estimates for the tax revenues set by the central government. In the last fiscal period of April to February, the direct tax collections were Rs.8,43,582 crore while indirect tax collections were Rs.8,43,400 crores. The center has collected 69.6% of this year’s direct tax revenue target already and has to collect the remaining 30.4% in the month of March alone. The 69.6% was collected during the period of April to February. For indirect tax collections, however, only 11.3% of the entire year’s revised estimate remains to be collected in the month of March. However, the targets set by the government were cut during the Budget presentation of 2020-21. For FY20, direct tax collection target was reduced by Rs.1.65 lakh crore while indirect tax collection target was reduced by Rs.51,016 crore.

    17 Mar 2020

  • Collection of direct tax in the negative zone

    The economy of India continues its bad run as the collection of the direct tax hit the negative zone for the first time. According to government sources, direct tax collection up to 15 January 2020 has fallen by 6.1% when compared to the same time last year.

    The latest development would test the ability of the government to manage its finances, it can also ensure that no big tax cut announcements are made in the upcoming Budget. According to sources, direct tax collections between April-January for the current financial year is at Rs.7.26 lakh crore. The collection was at Rs.7.73 lakh crore at the same time last year. The tax collection has reduced when compared to the previous year after a long gap. The development has already raised fears that the current economic crisis may take much longer time to recover than expected. The effective tax rate on corporates has been reduced by the Finance Minister from 35% to 25%. The corporate tax, which makes up a huge share in the direct tax collection, has been hurt badly in the third quarter of the current financial year. The collections have remained weak in the month of January as well.

    23 Jan 2020

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