When it comes to taxation, there are two main narratives. One is that taxes are the ‘cost of living in a civilized society (Oliver Wendell Holmes Jr.). In this view, taxes are a positive good rather than a necessary evil. Greater taxes purchase more ‘civilization.’ The alternative viewpoint is that It is an involuntary transfer of wealth from those who produce it to those who wield coercive power with no reciprocal benefit. Taxes, in this view, are a curse on the civilized. We will walk you through what is direct tax, is income tax a direct tax and the A-Z of everything direct tax. So, without further delay, let’s jump to the topic.
What is a Direct Tax?
Taxes are imposed in India by the Central Government and State Governments, which the Indian Constitution empowers. Local governments, such as the Municipality, levy some modest taxes as well.
Article 265 of the Constitution places a significant limit on this power, stating that “no tax shall be levied or collected unless by the authority of law.” As a result, each tax imposed or collected must be accompanied by a statute passed by either the Parliament or the State Legislature. Nonetheless, tax evasion is a major issue in India, which has resulted in a slew of negative consequences for the country. CBDT (Central Board of Direct Taxes) announced direct tax receipts of roughly INR 12.33 trillion in 2019–20.
So, what is direct tax, and which is direct tax that the people have been trying to evade?
A direct tax is a tax in which the impact and incidence are both included in the same category. The tax is paid directly to the entity that imposes the payment by the organization or an individual. The tax must be paid to the government directly and not to anyone else.
Income tax, corporate tax, property tax, inheritance tax, and gift tax are some of the taxes that come under the purview of direct tax.
A direct tax is mostly based on the ability-to-pay premise. According to this economic theory, individuals with more resources or a higher income should pay a higher tax burden. Some critics argue that this serves as a disincentive for people to work hard and achieve more money because the more money they earn, the more taxes they must pay.
A direct tax is the opposite of an indirect tax, which is imposed on one entity (e.g., a seller) and paid by another (e.g., a sales tax paid by the customer in a retail context). Governments rely on both types of taxes to generate money.
Example of Direct Taxes
The key example of direct taxes can be your salary. The income tax is filed on an annual basis even though the deductions are made on monthly basis. Apart from this, corporation tax, inheritance tax, property tax and gift tax are also direct taxes.
- An individual or organization pays a direct tax to the entity that imposed it.
- Income, property, and asset taxes are all examples of direct taxes.
- Indirect taxes, such as sales taxes, also exist in the Indian taxation system and are imposed on the seller but are paid by the buyer.
Types of Direct Taxes
“The hardest thing in the world to understand is the income tax.” Albert Einstein. But you don’t have to start worrying now because you’ve got us by your side to simplify things. So, let us start with the various types of direct tax imposed in India.
Types of direct tax in India
|Income tax||Wealth tax||Estate tax||Corporate taxSecurities transaction taxDividend distribution taxFringe benefits taxMinimum alternate tax||Capital gains tax|
Income tax must be paid based on an individual’s age and wages. The Indian government has several tax slabs that determine how much income tax must be paid. The taxpayer must file an income tax return each year (ITR). Individuals may be eligible for a refund or may be required to pay a tax depending on their ITR. Individuals who fail to file their ITR face severe fines.
This direct tax is due annually and is calculated based on the property’s ownership and market value. If a person possesses a property, he or she must pay a wealth tax, which is imposed regardless of whether the property provides income. Corporations, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residency status. Assets such as gold deposit bonds, stock holdings, home property, commercial property rented for more than 300 days, and house property owned for business and professional usage are excluded from wealth tax.
It is also known as Inheritance Tax and is calculated based on the value of an individual’s estate or the money left after his or her death.
Apart from shareholders, domestic enterprises will have to pay corporate tax. Foreign firms that earn money in India must pay corporate tax. In India, income obtained through asset sales, technical service fees, dividends, royalties, or interest is taxed. This direct tax is further classified into Securities Transaction Tax (STT), Dividend Distribution Tax (DDT), Fringe Benefits Tax and Minimum Alternate Tax (MAT).
Capital Gains Tax
It’s a type of direct tax that’s levied on revenue derived from the sale of assets or investments. Capital assets include farms, bonds, stocks, businesses, art, and real estate investments. Depending on how long it is held, tax can be classified as long-term or short-term. Any assets other than securities sold within 36 months of purchase are considered short-term profits. If any income is earned through the sale of properties that have been held for longer than 36 months, long-term assets are assessed.
Benefits of Direct Tax
We are fans of the saying; focus on the good, and the good gets better.
Despite a few drawbacks, direct taxes play a critical part in India’s economy. If these taxes are implemented correctly, they can significantly maintain price levels and prevent inflation. Let’s glance over direct tax benefits as we focus on the good side.
|Advantages of direct tax|
|Economic and social balance|
|Inflation is curbed|
|Equal distribution of wealth|
|Imposes a sense of certainty|
Direct Taxes vs. Indirect Taxes
While direct taxes are applicable on the activities conducted and the income earned, indirect taxes are levied on services and products. The tax burden cannot be shifted in case of a direct tax whereas in case of a direct tax the burden can be easily shifted. A direct tax is paid by the concerned personnel, whereas an indirect tax is paid by an individual but recovered by another individual who bears the tax.
Tax Rates for Different Types of Direct Tax
Is income tax a direct tax? Yes, so its tax rate/slabs are something you should be aware of. This will eliminate confusion and make the ITR filing process hassle-free.
Your age and salary will determine which tax bracket you fall into. Here are the three distinct tax brackets:
For Resident Individuals and Hindu Undivided Families (HUFs) Who are Below the Age of 60 years
Individuals and Hindu Undivided Families (HUFs) under the age of 60 years who are residents:
|Tax Slab||Income Tax|
|Up to INR 2.5 lakh||Nil|
|From INR 2.,50,001 to INR 5,00,000||5% of the total income that is more than INR 2.5 lakh + 4% cess|
|From INR 5,00,001 to INR 10,00,000||20% of the total income that is more than INR 5 lakh + INR 12,500 + 4% cess|
|Income of above INR 10 lakh||30% of the total income that is more than INR 10 lakh + INR 1,12,500 + 4% cess|
For Senior Citizens Who are Above the Age of 60 Years and Below the Age of 80 Years
Senior persons between the ages of 60 and 80 are eligible for direct tax (income tax) as follows:
|Tax Slab||Income Tax|
|Up to INR 3 lakh||Nil|
|From INR 3,00,001 to INR 5,00,000||5% of the total income that is more than INR 3 lakh + 4% cess|
|From INR 5,00,001 to INR 10,00,000||20% of the total income that is more than INR 5 lakh + INR 10,500 + 4% cess|
|Income of above INR 10 lakh||30% of the total income that is more than INR 10 lakh + INR 1,10,000 + 4% cess|
For Resident Indians Who are Above the Age of 80 years (Super Senior Citizen
For residents of Indian origin who are over the age of 80 (Super Senior Citizen):
|Tax Slab||Income Tax|
|Up to INR 5 lakh||Nil|
|From INR 5,00,001 to INR 10,00,000||20% of the total income that is more than INR 5 lakh + 4% cess|
|Above INR 10 lakh||30% of the total income that is more than INR 10 lakh + INR 1,00,000 + 4% cess|
New Income Tax Slab for Individuals
In addition to the existing previously announced tax slabs, Finance Minister Nirmala Sitharaman has introduced a new tax regime that took effect on February 1st, 2020. However, it should be noted that the new income tax regime is an optional alternative to the current income tax regime.
To submit income taxes in India, you must have a PAN card and an Aadhaar card. The Income Tax Department issues PAN (permanent account number) cards, whereas the Unique Identification Authority of India issues Aadhaar cards (UIDAI).
Individuals can file income tax when the window is open. They may file their taxes together with the penalty if they fail to file by the deadline. Failure to file income taxes may result in jail and penalties.
Explaining the Direct Tax Code
The Direct Tax Code, sometimes known as the DTC, was created to replace the Income Tax Act of 1961. DTC’s major goal is to make direct taxation more equitable, effective, and efficient. The DTC was also written to alter and stabilize all direct tax legislation so that the tax-to-GDP ratio rises and voluntary compliance becomes easier.
|Objectives of the direct tax code|
|To simplify and consolidate all the central government’s direct tax rules.|
|To improve the effectiveness and efficiency of the tax system.|
|To bring the consolidated law on direct taxes, such as income tax and dividend tax, into effect.|
|To achieve horizontal fairness among different classes of taxpayers, best worldwide practices must be followed|
|Tax regulations must be straightforward, stable, and resilient to improve compliance.|
|To gradually phase out a plethora of tax breaks and deductions to broaden and deepen the tax base.|
Before this, taxes might have got you feeling blue, but now we are sure you are out of despair, having known the basics of which is direct tax, is income tax a direct tax, what is direct tax and everything you can probably consume of direct tax in one go.
So, before it’s income tax time again, folks: time to gather up those receipts, get out those tax forms, sharpen up that pencil, and get going.
Thank us for all the direct tax knowledge later.
By investing a portion of your income in tax-deductible funds, investments, and policies, you can have a portion of your income treated as or declared non-taxable.
Some tax-saving fixed deposits, investments in National Savings Certificates (NSCs), insurance policies, EPF and PPF schemes, and other investments are immediately excluded from taxation under Section 80C, 80CCC, and 80D.
Direct taxes have the drawback that filing an income tax return takes longer than indirect taxes, which you don’t even realize while paying.
An assessment year is a 12-month period that begins on April 1st and ends on March 31st.
No, receipts are divided into two categories: revenue receipts and capital receipts. All revenue receipts are taxable unless specifically exempted, and all capital receipts are exempt unless specifically taxed.
GST is an indirect tax that is levied on goods and services.
No, TDS is an indirect tax
All the current TDS rates can be accessed here: https://www.incometaxindia.gov.in/charts%20%20tables/tds%20rates.htm
If a person’s income is less than 2.5 lakhs, he /she is not liable to pay any tax. For people above the bracket, the taxation is calculated as follows: https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-1