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What Is Direct Tax? Know The Types Of Direct Taxes In India Research Team | Posted On Tuesday, March 26,2019, 11:22 AM

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What Is Direct Tax? Know The Types Of Direct Taxes In India



What Is Direct Tax?

Direct tax is the tax paid by individuals and organizations/Corporates to the tax imposing authority. Direct Tax is paid directly to the Government by taxpayers. Taxpayers include both citizens and organizations. Moreover, direct tax is levied by the Government and cannot be transferred for payment to another body.

Direct taxes are levied on the basis of income and profit levels of individuals and organizations. More you earn, more are the taxes.

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What Is Direct Tax? Know The Types Of Direct Taxes In India

Central Board Of Direct Taxes In India

The Central Board of Direct Taxes, CBDT, was constituted through the Central Board of Revenue Act, enacted in 1924, and is responsible for levying and regulating Direct Taxes in India. The central board of direct taxes in India, works under the Department of Revenue in the Ministry of Finance and is responsible for the regulation of the direct tax laws. Adding to that, the Central Board of Direct Taxes is consulted by the Government, while framing policies related to the direct taxes in India.

A chairman heads CBDT and there are up to six members in the committee. The Central Board of Direct Taxes is the apex policy framing body for the Income Tax Department.

SEE ALSO:  What is Direct Tax?

Types Of Direct Taxes In India

The following direct taxes are applicable to all Indian citizens and organizations:

Income Tax

  • This is the most important and common tax that each Indian pays. This is one of the main sources of income to the Government.
  • Income tax is levied directly on the basis of income levels of an individual.
  • Income Tax is levied on individuals, corporate organizations, firms, companies, trusts, Hindu Undivided Families (HUF’s), and any artificial judicial body.
  • Income tax is levied on taxable income.

That is, Taxable income = (overall income) – (deductions and exemptions).

Different heads of Income under which income tax is chargeable are as follows:

  • Income from a profession or business
  • All income from properties including residential buildings
  • Income from salaries
  • Income in the form of capital gains
  • Income from other sources

Remember that Income Tax is levied differently on the basis of nationality and residential status.

Wealth Tax

  • Wealth tax is levied on the benefits resulting from property ownership.
  • All properties are taxed each year on the basis of current market price.
  • All individuals, HUFs and organizations have wealth tax on the same lines and with no differences.

Corporate Tax

  • Corporate tax is levied on companies that exist as a separate entity from shareholders.
  • Foreign companies are also liable to pay wealth tax.
  • Corporate tax is levied on gains from the sale of capital assets in India, interest, royalties, and charges for technical consultants, services and dividends.
  • Corporate tax includes Minimum Alternative Tax (MAT), introduced with a view to get Zero Tax companies under the income tax bracket and whose accounts were made as per the guidelines of the Companies Act.
  • Fringe benefit is included under Corporate Tax. It is paid by companies on the fringe benefits offered to employees.
  • Corporate Tax also includes Securities Transaction Tax (STT), levied on taxable securities transactions.

Capital Gains Tax

  • Capital gains tax is levied on the income resulting from sale of assets and investments.
  • Capital investments include farms, businesses, homes, work of art and so on.
  • Formula to calculate: Capital Gains = (money received due to sales) - (cost of capital investment).
  • Capital Gains are sorted under short term gains (ie: profits on assets sold within 3 years of acquisition) and long term gains (ie: profits on assets sold post 3 years of acquisition and holding).

SEE ALSO:  Types Of Direct Taxes In India

Tax Rates For Different Types Of Direct Taxes

As mentioned earlier, income tax is levied on the basis of income. Income tax rates differ with age.

The table below shows the tax rate for individuals below 60 years:

The table below shows the tax rate for individuals that are aged above 60 years but less than 80 years:

The table below shows the tax rate for individuals that are aged above 80 years:

Surcharge of 10% of income tax is levied if the total income exceeds Rs 50 lakhs and is less than Rs 1 Crore.

Surcharge of 15% of income tax is levied if the total income exceeds Rs 1 Crore.

Health and Education Cess is levied at 4% of Income Tax.

Note: Investments in certain schemes like EPF, PPF, NSC, 5 Year Tax Saving FDs and so on, are eligible for tax deductions of up to Rs 1,50,000 per financial year, as per Section 80C, under Income Tax Act.

Capital Gains Tax

  • The short term capital in the Capital Gains is levied as per the normal tax rates.
  • The long term capital gains are levied at 20% when computed with the benefits of indexation.
  • The long term capital gains are levied at 10% when computed with no benefits of indexation.

Corporate Tax

For International companies:

  • For companies earning less than Rs 1 Crore, a corporate tax of 41.2% is applicable which includes 40% basic tax and an education cess of 3%.
  • For companies earning more than Rs 1 Crore, a corporate tax of 42.024% is applicable which includes 40% basic tax, 3% education cess and 2% surcharge.
  • For Companies earning more than Rs 10 Crore, a surcharge of 5% is levied in addition to the basic tax.

For Domestic Companies:

  • Corporate tax levied at 25% on domestic companies that have turnover of up to Rs 250 Crores and 30% on companies that have turnover exceeding Rs 250 Crores in the previous year.
  • In case the taxable income of the company is in the range of Rs 1 Crore to Rs 10 Crore, then a surcharge of 7% is levied on the taxable income.
  • If the net income of the company is more than Rs 10 Crores, a surcharge of 12% is levied on the net income.
  • 4% cess is levied on the corporate tax.

Wealth Tax

  • Wealth Tax is levied on the net wealth, which are a sum total of all taxable assets put together minus the amount of debt owed.
  • Net Wealth = (All assets) – (all debt)
  • Note that Wealth tax has been abolished (with effect from April 1st 2016 for wealth held as on March 31st, 2016).

Direct Tax Code

We have explained the Direct Tax Code in this section along with key features. We have taken examples of income tax, corporate tax, wealth tax and capital gains tax for explaining the Direct Tax Code.

  • A Single code for direct taxes: A unified taxpayer reporting system is facilitated by getting all direct taxes under a single code with unified compliance.
  • Flexibility: The law has been made in such a way that it can accommodate changes and requirements of a growing economy without having to resort to amendments frequently.
  • Stability: Considering the current system, the taxes are formed in the Finance Act of the relevant financial year. The rates of taxes under Direct tax code are composed to be prescribed in the First to the Fourth schedule of the DTC itself. All amendments to the same will be implemented before the Parliament as an Amendment Bill.
  • Eliminates the problem of constant litigation: Extra measures are taken to eliminate ambiguity and contradiction in the code to avoid misinterpretation.
  • Political contributions: Political contribution of a maximum 5% of the total gross income is eligible for tax deductions.

Advantages Of Direct Tax

  • Curbs Inflation: The Government often increases tax when there are signs of inflation. This reduces demand for goods and services, and as a result of reducing demand, inflation is kept at bay.
  • Social and Economic Balance: On the basis of individual’s earnings and overall economic situation, the Government has well defined tax slabs and deductions in place so that income inequalities are reduced.
  • Certainty: There is a certainty with respect to direct taxes payable by taxpayers, as they know how much to pay.
  • Productivity: Direct taxes are considered productive as working population grows over time, so do the returns from direct taxation.

Direct Tax Law

The DTC, Direct tax code or Direct Tax Law, was drafted to replace the Indian Income Tax Act of 1961. This was done to establish a much effective and equitable direct tax system. The vision was to stabilize and amend all laws pertaining to direct taxes in order to ease compliance and increase the tax-GDP ratio. With 319 Sections and 22 Schedules under Direct Tax Law or Direct Tax Code, DTC, the aim was to replace the old Income Tax Act and offer a more stable, well organized and overall better code of taxation.

How To Avail Tax Deductions?

Income Tax Department has laid down guidelines for availing tax deductions. You can avail tax deductions under the following circumstances:

1. Exemption of HRA

Salaried individuals living in a rented house can get the benefit of House Rent Allowance, HRA. If you are not living in a rented house and still continue to receive HRA, then you are taxed. HRA is offered on minimum of the following conditions:

  • Total HRA received from employer.
  • Rent paid is less than 10% of (Basic salary + DA).
  • 40% of the salary (Basic + DA) for non metro cities and 50% of salary (Basic + DA) for metro cities.

2. Leave Travel Allowance (LTA)

The income tax laws allow LTA exemptions to salaried employees. It is important to note that the exemption does not include expense of the trip like shopping, food expenses, entertainment and so on. LTA is allowed for two travels over four years. If employees don’t use LTA exemption within 4 years, then they carry the same to the next block. Below are the conditions applied on LTA deduction:

  • LTA covers domestic travel and international travel is not covered.
  • The mode of travel must be railway, air travel, or public transport.

3. Section 80C, 80CCC and 80CCD(1)

As per this section, an individual or a HUF (Hindu Undivided Family), investing or spending on stipulated avenues, are allowed to claim tax deduction of up to Rs 1.5 Lakhs a year. Deductions under Section 80C of the Income Tax Act, 1961, are offered for the investments made in a wide range of financial instruments. Some of the schemes covered under Section 80C are mentioned below:

  • Life insurance premium
  • Equity Linked Savings Scheme (ELSS)
  • Employee Provident Fund (EPF)
  • Annuity/ Pension Schemes
  • Principal payment on home loans
  • Tuition fees for children
  • Contribution to PPF Account
  • Sukanya Samriddhi Account
  • NSC (National Saving  Certificate)
  • 5 Year Tax saver Fixed Deposit (Tax Savings)
  • Post office time deposits
  • National Pension Scheme

4. Medical Insurance Deduction (Section 80D)

Section 80D is a deduction offered on medical expenses/hospitalization. Deductions under this Section are available over and above the deduction under Section 80C. You can save tax by availing health insurance for self, family and dependent parents. These expenses are deducted from overall taxable income. The ceiling for Section 80D deductions is set at Rs 25,000 for premiums paid for self/family. You can claim deduction of up to Rs 50,000 on premiums paid for parents who are senior citizens.  Health checkups of up to Rs 5,000 are also covered under the overall limit of Rs 25,000 and Rs 50,000 depending on the case.

5. Interest on home Loan (Section 80C and Section 24)

Homeowners have the option of claiming up to Rs 2 Lakh a year as deduction for interest on home loan repayment for a self occupied property as per Section 24. If the house is let out, then there is no upper limit on the deduction, you can deduct entire amount paid towards interest on home loan. In addition to the above, you can also claim the principal component of the housing loan repayment as a deduction under Section 80C, up to Rs 1.5 Lakhs a year. 

6. Deduction for Education Loan for Higher Studies (Section 80E):

Income Tax Act offers deduction of interest on education loans. You can claim this deduction from the year in which the loan repayment commences and up to the next seven years (i.e. total of 8 assessment years) or before repayment, whichever is earlier. Legal guardians too are eligible to avail this income tax deduction. 

7. Deduction for Donations (Section 80G)

Section 80G of the Income Tax Act, 1961, provides income tax deduction to donors who make donations to certain charitable organizations. This deduction varies on the basis of the receiving organization (place where you donate), which means you can avail tax deductions of 50% or 100% of the amount donated, with or without restriction.

8. Deduction on Saving Account Interest (Section 80TTA)

Section 80TTA of the Income Tax Act, 1961, allows a deduction of Rs 10,000 a year on interest income on bank savings accounts. This deduction is allowed to both Individuals and HUFs. The ceiling on the deduction under this section is Rs 10,000 a year. If the income from savings bank interest is less than Rs 10,000 a year, then the entire amount is allowed as a deduction. If the income from bank interest exceeds Rs 10,000 a year, then the deduction would be restricted to Rs 10,000.

9. Additional Deduction for interest on home loan (Section 80EE):

Section 80EE offers home owners an additional deduction of Rs 50,000 for interest paid on home loan. This is over and above Section 24. This is applicable if the loan is less than Rs 35 Lakh and the value of the property is less than Rs 50 Lakhs.  Moreover, the individual must not have any other property registered under his or her name at the time the loan is sanctioned. 

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