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Direct Tax

A direct tax is a tax that is paid by an individual or an organization to the imposing entity, or to be precise, Direct Tax is the one which is paid to the Government by taxpayers. These taxpayers include people and organization both. Also, it is directly imposed by the Government and cannot be transferred for payment to some other entity.

With Direct Taxes, especially in a tax bracket system, it can become a disincentive to work hard and earn more money, as more money you earn, the more tax you pay.

The Central Board of Direct Taxes in India

The Central Board of Direct Taxes or the CBDT, which was formed as the result of the Central Board of Revenue Act, 1924 looks after the Direct Taxes in India. This department is part of the Department of Revenue in the Ministry of Finance and is responsible for the administration of the direct tax laws. Besides that, the Central Board of Direct Taxes also provides inputs and suggestions for policy and planning of the direct taxes in India.

Advantages of Direct Taxes

  • Curbs inflation: The Government will often increase tax when there is inflation. This reduces the demand for goods and services and as a result of descending demand, inflation is bound to compress.

  • Social and economic balance: On the basis of every individual’s earnings and overall economic situation, the Indian Government has well-defined tax slabs and exemptions in place so that the income inequalities can be balanced out.

  • Certainty: There is a sense of certainty with respect to direct taxes 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 considered to be very productive, the reason being, as the working population and community grows, so do the returns from direct taxation.

  • Creates equal distribution of wealth: The money is equally distributed as the Government charges more taxes from the ones who can afford and this money is used for the benefit of the lower and poorer sections of the society.

The Direct Tax Code

The DTC or Direct tax code has been drafted to replace the existing Indian Income Tax Act of 1961. This was done to establish a more efficient, effective and equitable direct tax system. The aim was to stabilize, amend all laws relating to the direct taxes in order to ease voluntary compliance and increase the tax-GDP ratio. With 319 sections and 22 schedules in it, the DTC aims to replace the old Income Tax Act and provide a more stable, well organized and overall better code for taxation.

Following are the Direct Tax Codes explained with examples

Here, the Direct Tax code is explained in this section by delving into its key features. Examples of income tax, corporate tax, wealth tax, and Capital Gains Tax are given below.

  • A Single code for direct taxes:A single unified taxpayer reporting system can be facilitated by bringing all direct taxes under a single code with unified compliance features.

  • Flexibility: The law has been created in such a way that can accommodate the changes and requirement of a growing economy without having to constantly resort to amendments.

  • Stability: With reference to the current system, the taxes are formed in the Finance Act of the relevant year. The rates of taxes under Direct tax code are proposed to be prescribed in the First to the Fourth schedule of the DTC itself. Also, any amendments to the same will be brought before the Parliament as an Amendment Bill.

  • Eliminates the problem of constant litigation: Special care is taken to avoid ambiguity and contradiction in the code in order to avoid misinterpretation and misuse.

  • Eliminates regulatory functions: The regulatory functions are to be carried out by other regulatory authorities.

  • Fringe benefits tax: These are charged to the employee than charging it to the employer.

  • Political contributions: There are political contributions of up to 5% of the gross total income that will be eligible for deduction.

Types of Direct Taxes in India

The following taxes are imposed directly and applicable to all Indian citizens.

Income Tax

  • This comes across as the most important and common tax that every Indian must pay.

  • This tax is directly charged on the income of the person.

  • The rate at which income tax is charged depends on the level of income.

  • Income Tax is chargeable to individuals, corporate houses, firms, companies, trusts, Hindu Undivided Families (HUF’s), and any artificial judicial person.

  • Income tax is chargeable on taxable income

ie: Taxable income = (total income) – (applicable deductions and exemptions)

Also, the different heads of Income under which income tax is chargeable are as follows:

  • Income from a profession or business

  • Income from property or house

  • Income from salaries

  • Income that is in the form of capital gains

  • Income from other sources

Note: Income Tax is levied differently for different people depending on their residency status.

Wealth Tax

  • This tax is charged on the benefits derived from property ownership.

  • The same property is taxed every year depending on its current market value.

  • There is no difference for a tax that is levied on the Individuals, HUF’s and companies.

Note: Income tax on wealth is chargeable depending on the residential status

Corporate Tax

  • Corporate tax is applicable to companies who exist as separate entities from their shareholders.

  • Foreign companies are also taxed on the income that arises or that is considered to arise in India.

  • This type of tax is charged on gains from the sale of capital assets located in India, royalties, interest, fees for technical services and dividends.

  • Corporate tax includes Minimum Alternative Tax (MAT) which was introduced to bring Zero Tax companies under the income tax bracket and whose accounts were made as per the Companies Act.

  • Fringe benefit (it is an extra benefit supplementing an employee's salary) is included in Corporate tax that is paid by the companies on the fringe benefits provided (or deemed to have been provided) to employees.

  • Lastly, it also includes Securities Transaction Tax (STT) which is a tax levied on taxable securities transactions. However, there is no surcharge applicable to this.

Capital Gains Tax

  • Capital gains tax is taxed on the income derived from the sale of assets or investments.

  • Capital investments will cover farms, businesses, homes, work of arts etc.

  • Capital Gains = (money received from sales) - (cost of capital investment).

  • Capital Gains are categorized as short term gains (ie: gains on assets sold within 36 months of acquisition) and long-term gains (ie: gains on assets sold after 36 months of acquisition and holding).

  • Also, Voluntary tax is paid by the taxpayer when the asset is sold.

Tax Rates for Different Types of Direct Taxes

Income Tax

In India, Income Tax is charged according to slabs which lay out the details for different tax rates for different levels of income.

  • Following is the tax slab for individual residents under 60 years of age:
Income SlabsTax Rates
Taxable income under Rs.2, 50,000.NIL.
Taxable income between Rs.2, 50,000 and Rs.5, 00,000.5% of the amount by which the taxable income exceeds Rs.2,50,000.
Taxable income above Rs.5, 00,000 and Rs.10, 00,000.20% of the amount by which the taxable income exceeds
Taxable income above Rs.10, 00,000.30% of the amount by which the taxable income exceeds Rs.10, 00,000.
  • Following is the tax slab for residents between 60 and 80 years of age:
Income SlabsTax Rates
Taxable income under Rs.3, 00, 000.NIL.
Taxable income between Rs.3, 00, 000 and Rs.5, 00,000.5% of the amount by which the taxable income exceeds Rs.3,00,000.
Taxable income between Rs.5,00,000 and Rs.10, 00,000.20% of the amount by which the taxable income exceeds Rs.5,00,000.
Taxable income above Rs.10, 00,000.30% of the amount by which the taxable income exceeds Rs. 10, 00,000.
  • Following are the tax slabs for Individual residents above 80 years of age
Income SlabsTax 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, 00,000.30% of the amount by which taxable income exceeds Rs.10, 00,000.

Surcharge of 10% of income tax is applicable when total income is above Rs. 50 lakhs up to Rs. 1 crore.

Surcharge of 15% of income tax is applicable when total income surpasses Rs. 1 crore.

Health and Education Cess is applied at 4% of Income Tax

Note: Amounts that are 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.

Capital Gains Tax

  • The short term capital in the Capital Gains is taxed as per the normal tax slabs.

  • The long term capital gains are taxed at 20% in case it is computed with the benefit of indexation.

  • The long term capital gains are taxed at 10% in case it is computed without the benefit of indexation.

Corporate Tax

For International companies:

  • The ones 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%.

  • The companies that are earning a 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.

  • And, the ones that are earning more than 10 crore rupees, a surcharge of 5% is applicable in addition to basic tax.

For Domestic companies:

  • The corporate tax levied for domestic companies is 25% for companies with turnover upto 250 crores and 30% for companies with a turnover exceeding 250 crores in the previous year

  • In case the taxable income of the company is in the range of Rs.1 to 10 crore, a surcharge of 7% is applicable to the taxable income.

  • Also, if the net income of the company exceeds Rs.10 crore, a surcharge of 12% is applicable to the net income.

  • Cess is also applied at 4% of the corporate tax

Wealth Tax

  • Wealth Tax is charged on net wealth, which is sum total of all taxable assets clubbed together and minus the amount of debt owed.

  • Net Wealth = (All assets) – (all debt)

  • Net wealth is valued on 31st March immediately preceding the assessment year.

  • However, Wealth tax has been abolished (with effect from April 1, 2016 for wealth held as on March 31, 2016.

Frequently Asked Questions

What are the rules relating to taxation of gifts?

  • Gifts that exceed over Rs. 50, 000 are taxable unless it is received from:

    a) A relative

    b) On occasion of marriage

    c) Under a will, inheritance or in contemplation of the death of the payer.

What is the kind of investments that I can make to save Income Tax?

You can make investments under Section 80C, 80CCC and 80D the following to save on Income tax.

  • Fixed deposits

  • Investments in the National saving certificate (NSC’s)

  • PPF schemes

  • Health and life insurance policies

What is the disadvantage of Direct tax?

The most common disadvantage of Direct tax is that the process of filing tax return itself is very time-consuming.

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