Direct Tax

Direct tax is a type of tax wherein the prevalence and effect of taxation fall on the same entity. In India, direct taxes are imposed by the central government and include taxes on income and wealth. Direct taxes are important revenue sources for governments at all levels and are generally progressive; higher-income taxpayers pay higher tax rates. This makes direct taxes a vital tool for reducing income inequality. These taxes are levied on individuals, corporate entities, and other organizations.

The major types of direct taxes in India are income tax, corporate tax, and wealth tax. It’s important to note that direct taxes (income tax) are usually paid in proportion to what is earned. This includes taxes on income, property, and other possessions. The Central Board of Direct Taxes (CBDT), a body under the Ministry of Finance, administers direct taxes.

Types of Direct Taxes

We often hear about indirect taxes in the news, but there is a lot of confusion regarding direct taxes. We usually do not know which taxes fall into this category. At the same time, direct taxes are what we pay when we make earnings from any source of income. There are several types of direct taxes that the government levies. These taxes are collected directly from taxpayers and are used to fund government operations. The most significant types of Direct Taxes are outlined below:

Income Tax:

Income tax is a tax that is levied on the income of individuals and businesses. The income tax is progressive, meaning the higher the income, the higher the tax rate. The Income tax is broadly categorized into five heads, i.e., income from salary, income from house property, income from capital gains, income from profits and gains of business and profession, and income from other sources.

The income tax is used to finance the government’s expenditure on public goods and services like infrastructure, healthcare, education, and other social welfare programs. The government has set up a dedicated website for filing income tax returns, which makes it convenient for taxpayers.

Wealth Tax:

The taxpayer is liable to pay wealth tax on an annual basis concerning the market value of the property owned. If an individual owns the property, they must pay wealth tax irrespective of whether the estate generates income. On the other hand, in the HUF (Hindu Undivided Family), corporate taxpayers’ eligibility to pay wealth tax is with respect to the residential status of the property.

Estate Tax:

The estate tax, also known as inheritance tax, is based on the market valuation of the asset one has left after death/demise. 

Income From Salary

A salary is an individual’s remuneration received or accrued periodically for service rendered under an express or implied contract. In terms of taxability, the actual salary receipt in the previous year is not material.

Income From House Property

The annual value of an assessee’s property, whether it is a building or land appurtenant thereto, is taxable under the heading “income from house property.”

Income From Capital Gains

In India, capital gains are the profits generated by the sale of a capital asset, such as land, shares, or a residence.

Type of Capital Gains	Parameters	Tax Liability
Long-term capital gains	Exception: Sales on equity shares/ unit of equity-oriented funds	20.00%
Long-term capital gains	Sales on equity shares/ unit of equity-oriented funds	10.00% over and above INR 10 lakhs
Short-term capital gains	When STT is not applicable	The gains are added to your ITR, and the taxpayer is taxed according to your income tax slab rates
Short-term capital gains	When STT is applicable	15.00%

Income From Profits and Gains of Business and Profession

The term “business and professional income” refers to any income that results from business operations. This category also includes freelancer income. In a nutshell, it is the company’s net profit or loss.

Income From Other Sources

The fifth and last head of income is income from other sources. Income from other sources includes any source of income that doesn’t fall under any additional taxation charges.

Corporate Tax

The corporate tax is a tax levied on the income of corporations. The tax is imposed on the profits earned by the corporation and is typically based on a percentage of the corporation’s total revenue. The tax is also used to finance the government’s regulatory activities, such as enforcing environmental and safety regulations. Companies are taxed at a rate of 30% on their profits. However, several deductions and exemptions can lower this rate. The corporate tax system in India is constantly changing, so it’s essential to stay up to date with the latest rules and regulations.

Sections	Tax Rate	Surcharge
Section 115BA	25%	7% or 12%
Section 115BAA	22%	10%
Section 115BAB	15%	10%
In any other case	30%	7% or 12%

In the case of Foreign Companies

Nature of Income	Tax Rate
Royalty received/ fees for technical services from the Indian government or any Indian concern under an agreement made before 1st April 1976 and approved by the central government	50.00%
Any other income	40.00%

Additional Tax Rates

Particulars	Tax Liability
If total income exceeds INR 1 crore but less than INR 10 crores	●     7% of the tax calculated on a domestic company ●     2% of the tax calculated in a foreign company
If total income exceeds INR 10 crore	●     12% of the tax calculated on a domestic company ●     5% of the tax calculated in foreign company

Securities Transaction Tax

Security transaction taxes (STTs) are taxes levied on securities transactions. STTs are applied on transactions, not on securities themselves. Moreover, taxes are levied on sellers, not buyers. In most cases, the seller pays the tax as a percentage of the transaction value. STTs are levied on equity shares and debt instruments at 0.15% and 0.025%, respectively, to generate revenue for the government and curb speculative trading.

There has been controversy regarding STT, with some arguing that it should be imposed on both the buyer and seller. Some argue that the law should apply only to the seller when it comes to the sale of securities. There is also a debate on the rate of STT, with some arguing that it should be increased to 0.3% for equity shares and 0.1% for debt instruments.

Taxable Securities	Rate	Value on which STT To Be Paid
Delivery-based purchase of equity shares	0.1%	Price at which equity share is purchased*
Delivery-based sale of equity shares	0.1%	Price at which equity share is sold*
Delivery-based sale of oriental mutual funds	0.001%	Price at which unit is sold*
Sale of equity share or unit of equity-oriented mutual fund in a recognised stock exchange otherwise than by actual delivery or transfer and intra-day traded shares	0.025%	Price at which equity share or unit is sold*
Derivatives: sale of an option in securities	0.017%	Option premium
Derivative – Sale of an option in securities where option is exercised	0.125%	Settlement price
Derivative – Sale of futures in securities	0.01%	Price at which such futures is traded
Sale of unit of an equity-oriented fund to the Mutual Fund – Exchange-traded funds (ETFs)	0.001%	Price at which unit is sold
Sale of unlisted shares under an offer for sale to the public included in IPO, and where such shares are subsequently listed in stock exchanges	0.2%	Price at which such shares are sold
Purchase of oriental mutual funds	NIL	N/A

Tax Rate for the Different Types of Direct Tax

An income tax slab of a taxpayer is determined by the age and salary of an individual. The following are the three income tax slabs: 

Individuals and HUFs under the Age of 60

Tax Slab	Income Tax
Upto Rs 2.5 Lakhs	Nil
Rs 2,50,001 – Rs 5 Lakhs	5% of the Total Income that more than 2.5 Lakhs Plus 4% cess
Rs 5,00,001 – Rs 10 Lakhs	20% of the total income that is more than Rs 5 Lakhs along with Rs 12,500 plus 4% cess
Income Above Rs 10 Lakhs	30% of the Total income that is more than Rs 10 Lakhs plus Rs 1,12,500 plus 4% cess

Senior Citizens from the Age of 60 to 80 years. 

Tax Slab	Income Tax
Upto Rs 3 Lakhs	Nil
Rs 3,00,001 – Rs 5 Lakhs	5% of Income that is more than 3 Lakhs plus 4% cess
Rs 5,00,001 – Rs 10 Lakhs	20% of the Income that is more than Rs 5 Lakhs plus 4% cess along with Rs 10,500
Income Above Rs 10 Lakhs	30% of the Income that is more than Rs 10 Lakhs plus 4% cess along with Rs 1,10,000

Super Senior Citizens (Senior Citizens above the age of 80)

Tax Slab	Income Tax
Upto Rs 5 Lakhs	Nil
Rs 5,00,001 – Rs 10 Lakhs	20% of the Income that is more than Rs 5 Lakhs plus 4% cess
Income Above Rs 10 Lakhs	30% of the Income that is more than Rs 10 Lakhs plus 4% cess along with Rs 1,00,000

New Income Tax Slab for Individuals

The following table showcases the New Income tax slab introduced by the Government for Individuals. 

Income Tax Slab	Tax Rate
Upto Rs 2.5 Lakhs	Nil
From Rs 2,50,001 to Rs 5,00,000	5% of the total amount more than 2.5 Lakhs plus 4% cess
From Rs 5,00,001 to Rs 7,50,000	10% of the total amount more than Rs 5 Lakhs plus 4% cess
From Rs 7,50,001 to Rs 10,00,000	15% of the total amount more than Rs 7.5 Lakhs plus 4% cess
From Rs 10,00,001 to Rs 12,50,000	20% of the total amount more than Rs 10 Lakhs plus 4% cess
From 12,50,001 to Rs 15,00,000	25% of the total amount more than Rs 12.5 Lakhs plus 4% cess
Income above 15,00,001	30% of the total amount more than Rs 15 Lakhs plus 4% cess

Explanation of The Direct Tax Codes

The following features explain the Direct Tax Codes: 

• The Direct Tax code brings all the different types of direct taxes under a single code. All the compliance can be unified under this one direct tax code.
• Under the Direct tax code, the rate of taxes is set between the first and fourth schedules of the DTC. This provides stability as the government can make necessary changes in the schedule through an amendment passed in the parliament.
• Elimination of all the other regulatory functions.
• The Direct Tax code allows 5% of the total gross income towards political contributions.
• The law has been drafted to stimulate the economy’s growth without any hindrance to constantly changing the amendment.

Advantages of Direct Tax

Direct taxes are primarily perceived as fairer than indirect taxes, such as the GST. This is because direct taxes are levied on individuals according to their ability to pay, while indirect taxes are levied on everyone regardless of their income.

Effective and Efficient Direct taxes are the most efficient and effective way to collect revenue in India. They are easy to administer and gather and provide a stable revenue source for the government.

Lower Rate of Interest Compared with indirect taxes, they provide a higher rate of tax collection because they are paid directly from the person being taxed instead of from the entire economy. These taxes tend to be borne by the individual and therefore result in enhanced compliance and increased direct government spending.

Progressive in Nature Direct taxes are also progressive, meaning that they place a more significant burden on higher-income earners. This helps to reduce income inequality and can be used to fund social welfare programs.

Accurate Assessment Direct taxes are advantageous because they provide an accurate assessment of an individual’s income. This allows for a more precise tax calculation than if you were to use indirect taxes. Therefore, there are fewer errors and more accurate assessments.

Discourages Non-Compliance Direct taxes are also an excellent way to discourage non-compliance. Because of their direct connection to personal income, there is a strong incentive for people to pay their taxes on time and accurately. Furthermore, individuals who receive a large portion of their income through wages have a significant incentive to pay their fair share. This is due to the amount of money they will lose if they do not.

What is Indirect vs Direct Tax?

Both direct and indirect taxes are essential sources of revenue for the government. However, there are some critical differences between the two.

Indirect taxes are levied on goods and services purchased, while direct taxes are imposed on income and wealth. As a general rule, direct taxes are paid directly to the government, while indirect taxes are delivered to the seller.

Direct taxes are usually progressive, meaning that the more income or wealth you have, the higher your tax rate will be. Indirect taxes, on the other hand, are typically regressive, meaning they take up a more significant percentage of income for low-income earners than high-income earners.

Direct taxes are typically more stable than indirect taxes, as they are not as affected by economic fluctuations. Indirect taxes, however, can fluctuate significantly depending on the level of economic activity.

Overall, both direct and indirect taxes play their own part in funding government operations. However, the key differences between the two should be considered when making tax policy decisions.

History Of Indian Direct Tax

The history of Indian direct taxes can be traced back to the Vedic period when tariffs were imposed on agricultural produce. During the Mughal period, a taxation system was introduced whereby farmers were required to pay a tax percentage on their crop production. However, the British later abolished this system during the colonial period. Instead, they imposed a direct tax on land revenue in 1757. This was followed by taxes on income and expenditure in 1792 and taxes on salt and opium in the 19th century.

After India gained independence in 1947, the Direct Tax Code was introduced in 1948. The Income Tax Act replaced this in 1961. The current Direct Tax Code was introduced in 2010. The Direct Tax Code is constantly updated to keep pace with the changing economy.

Direct taxes are an essential source of revenue for the Indian government. They are used to finance a variety of government programs and services. Its progressive nature states that the rich are taxed at a higher rate than the poor. This helps to reduce inequality in society.

The government has set up several tax exemptions and concessions for certain sections of society, such as senior citizens and women.

Related Resource

Deductions Under Section 80C

Income Tax Slabs and Rates

Income Tax Refund Status

Income Tax e-filing

ITR – Income Tax Return