Direct Tax

Direct Tax in India

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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 taxes 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 their 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 Taxes

  • 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 slabIncome tax
Up to Rs.2.5 lakhNil
From Rs.2,50,001 to Rs.5,00,0005% of the total income that is more than Rs.2.5 lakh + 4% cess
From Rs.5,00,001 to Rs.10,00,00020% of the total income that is more than Rs.5 lakh + Rs.12,500 + 4% cess
Income of above Rs.10 lakh30% 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 slabIncome tax
Up to Rs.3 lakhNil
From Rs.3,00,001 to Rs.5,00,0005% of the total income that is more than Rs.3 lakh + 4% cess
From Rs.5,00,001 to Rs.10,00,00020% of the total income that is more than Rs.5 lakh + Rs.10,500 + 4% cess
Income of above Rs.10 lakh30% 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 slabIncome tax
Up to Rs.5 lakhNil
From Rs.5,00,001 to Rs.10,00,00020% of the total income that is more than Rs.5 lakh + 4% cess
Above Rs.10 lakh30% 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 1 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 SlabTax Rate
Up to Rs.2.5 lakhNil
From Rs.2,50,001 to Rs.5,00,0005% of the total income that is more than Rs.2.5 lakh + 4% cess
From Rs.5,00,001 to Rs.7,50,00010% of the total income that is more than Rs.5 lakh + 4% cess
From Rs.7,50,001 to Rs.10,00,00015% of the total income that is more than Rs.7.5 lakh + 4% cess
From Rs.10,00,001 to Rs.12,50,00020% of the total income that is more than Rs.10 lakh + 4% cess
From Rs.12,50,001 to Rs.15,00,00025% of the total income that is more than Rs.12.5 lakh + 4% cess
Income above Rs.15,00,00130% 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.

Frequently Asked Questions

  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 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.