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written by Khatabook | November 22, 2021

What Is Direct Tax, and What Are Its Different Types?

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The meaning of Direct Tax can be explained as a tax in which the tax's burden and payment fall on the same person. Direct taxes are levied based on the ability to pay principle, which states that people with greater resources and a higher income must pay higher taxes. The direct regulations are written so that taxes become a tool for the redistribution of wealth in the country. The burden of direct taxation cannot be transferred from one person to another. Direct taxes are levied on businesses and people, and they are fully responsible for paying them. Fines and imprisonment may be imposed if taxes are not paid on time. These are mostly income or wealth taxes. Direct taxes include income tax, corporate tax, property tax, inheritance tax, and gift tax.

What are the Different Types of Direct tax?

The various types of direct taxes are:

1. Income Tax

Is Income Tax a direct tax? Yes, Income Tax is a direct tax as the individual pays income tax depending on their taxable income in a particular financial year. Total income, relevant deductions and exemptions are referred to as taxable income. There are two schemes for Income Tax, the existing and the new regime. The New Income Tax Regime was introduced in February 2020. However, it is up to the people to choose which scheme is more beneficial to them.

The government's income tax collection for 2020-21 was estimated at Rs 6,25,000 crore in the Budget. Income tax projections for the 2019-20 Budget were reduced to Rs 5,47,000 crore, whereas actuals for the 2018-19 Budget were Rs 4,61,487 crore.

2. Tax on Corporates

Corporation tax, a type of direct tax, is the amount of money paid by firms and corporations on the income they make in a particular, fiscal year. The central government stated in September 2019 that the rate of corporate tax for domestic firms would be reduced to 22% from 30% before. For firms that do not get any incentives or exemptions, the effective corporate tax rate, including all additional levies, is now 25.2%. Further, the corporate tax has been divided into the following types given as follows -

Types of corporate tax:

  • Minimum Alternate Tax (MAT)- This tax is levied on those companies who prepare their accounts according to the company act and are zero-tax companies. Zero Tax companies are those companies who earn profit as per their Balance Sheet and Profit & Loss Account prepared under the Companies Act but pay no income tax. This is because their income becomes zero or negative due to certain benefits or deductions allowed against the profit as per the provisions of the Income Tax Act. 

They may be a deduction of higher depreciation on machinery in Income Tax as compared to depreciation provided under the Companies Act. The Government has stopped this practice by making amendments in the Income Tax Act in 1987 by the introduction of section 115J. Now the companies have to pay tax on Book Profit as provided in section 115J or 115JB.

  • Dividend Distribution Tax (DDT)- DDT is imposed on domestic corporations that declare, distribute, or receive sums as dividends from shareholders. DDT, on the other hand, is not imposed on international firms.
  • Securities Transaction Tax (STT)- Tax should be paid on any income earned via taxable security transactions. The Security Transaction Tax (STT) was introduced by the Finance Act, 2004. It is levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India. 

Securities covered under STT are shares, stocks, scrips, debentures, debenture stocks, units or other instruments of any investment scheme, and derivatives. It also comprises Government securities of equity nature, securitised debt instruments, and equity-oriented units of any mutual fund, etc. 

  • Fringe benefits tax- Fringe Benefits Tax (FBT) was introduced in FY 2005-06 but was abolished with effect from FY 2010-11. This was a tax paid by the employers on certain benefits paid to the employees in addition to the salary during the course of his/her employment. These benefits may include-

- any free or concessional tickets provided by the employer to the employee or their family for any private journey, 

- contribution by the employer towards the superannuation fund of the employee, 

- any other expenditure incurred by the employer directly or in the form of reimbursement to the employee like entertainment, hospitality, use of car or driver, repair and maintenance of a car, telephone expenses, servants at home, festival celebration, club expenses, etc. 

The rate of Fringe Benefits Tax was 30% of the value of Fringe Benefit + Applicable Surcharge & Cess.

3. Property Tax

Property tax, sometimes known as 'house tax,' is a local and direct tax placed on owners of buildings and attached land forming part of the house. Property Tax or Municipal Tax is charged by the Municipal Authorities or Local Bodies of the State Governments in all the cities of India. Generally, this tax is levied on residential and commercial properties situated in urban areas but in some states property Tax is also levied on industrial properties and commercial or residential properties situated in semi-urban areas also. The rates of property tax are fixed by the State Government for different cities and towns situated in that state. 

Normally these tax rates are based upon the value of the properties. It is also called Annual Rateable Value (ARV). The property tax is payable annually. At some places, fire tax, sewerage tax, or tax for any other facility provided by the Govt. are also added to the property tax. The vacant land is generally not subject to any property tax but properties given on rent attract a slightly higher rate of tax than self-occupied properties for own residence. Similarly, properties belonging to the Central or State Govt. are also normally exempt from property tax.

Also Read: Education Cess - Definition, What is education cess?

4. Tax on Inheritance (Estate)

 An inheritance tax (also known as an estate tax or death duty) is a direct tax imposed on a person's estate after they die. It is a tax imposed on a deceased person's estate or the total worth of their money and property. From 1953 until 1985, India imposed an estate duty. The Estate Duty Act of 1953 took effect from October 15, 1953. The Estate Duty (Amendment) Act of 1984 abolished estate duty on agricultural land. The Estate Duty (Amendment) Act, 1985 also removed the levy of Estate Duty regarding the property (other than agricultural land) passing on death on or after March 16, 1985.

5. Gift Tax

 The Gift Tax Act was a type of direct tax enacted on April 1, 1958, which governs India's gift tax. Except for Jammu & Kashmir, it went into force across the country. All gifts in excess of Rs 25,000 received in cash, draught, cheque, or other forms from someone unrelated to the receiver by blood were taxed under the Gift Act of 1958. However, as of October 1, 1998, the gift tax was abolished, and any donations made on or after that date were tax-free. However, the legislation was partially resurrected in 2004. Section 56 of the Income Tax Act of 1961 included a new provision (2).

Section 56 of the ITA states that any individual or Hindu Undivided Family who receives gifts have to provide gift tax. It also states that if any individual or a member of Hindu Undivided Family (HUF) receives any gift exceeding the prescribed limit (Rs. 50,000/-) in a financial year, the same will be taxable in the hands of the recipient. 

However, the gift received from a relative will be exempt from tax. The persons covered in the definition of relative under Income Tax are father, mother, son, daughter, spouse, son-in-law, daughter-in-law, grandfather, grandchildren, brother and sister of the spouse, etc.

Rates of different types of direct taxes

1. Income Tax

Every individual falls under a different tax bracket according to age and salary. The three different types of direct tax rates are:

For resident individuals, Hindu Undivided Families (HUF ) who are below the age of 60 years:

Limit of slab

Income tax rate

Up to Rs.2.5 Lakh

Nil

From Rs 250001 to Rs.5,00,000

5% of total income that is more than Rs.2.5 Lakh + 4% cess

From Rs.500001 to Rs.10,00,000

20% of total income that is more than Rs .5 Lakh 12500 + 4% cess

Income above Rs. 10 Lakh

30% of total income, which is more than Rs 10 Lakh 112500 + 4 % cess.

For Senior citizens who are above 60 years but below 80 years of age:

Limit of slab

Income tax rate

Up to Rs.3 Lakh

Nil

From Rs.300001 to Rs.5,00,000

5% of total income that is more than 3 Lakh + 4% cess.

From Rs. 500001 to Rs..10,00,000

20% of total income that is more than 5 Lakh Rs. 10500 + 4% cess.

Income above Rs. 10 Lakh

30% of total income that is more than 10 Lakh 110000 + 4 % cess.

For Super Senior Citizen, i.e. resident Indians who are more than 80 years of age:

Limit of slab

Income tax rate

Up to Rs. 5 Lakh

Nil

From Rs. 500001 to Rs. 1000000

20% of total income that is more than Rs .5 Lakh + 4% cess

Income above Rs. 10 Lakh

30% of total income that is more than 10 Lakh 100000 + 4% cess

New Tax Regime

On 1st February 2020, a new tax regime was introduced by Finance Minister Nirmala Sitharaman. This new regime is only optional. People can choose whether to follow this one or the existing one. The tax rate structure for the new tax regime has been given below -

Income tax slab

Tax rate

Up to Rs. 2.5 Lakh

Nil

From Rs250001 to Rs.500000

5% of total income that is more than Rs.2.5 Lakh + 4% cess

From Rs.500001 to Rs. 750000

10% of total income that is more than 5 Lakh + 4% cess

From Rs.750001 to Rs. 1000000

 15 % of total income that is more than 7.5 Lakh + 4 % cess.

From Rs. 1000001 to Rs. 1250000

20 % of total income that is more than 10 Lakh + 4 % cess.

From Rs.1250001 to Rs.1500000

25 % of total income that is more than 12.5 Lakh + 4 % cess.

Above Rs. 1500001

30 % of total income that is more than 15 Lakh + 4 % cess.

2. Corporate Income Tax

The following are the tax rates for local and international businesses:

Domestic businesses:

  •  The corporation tax rate  is 25% if the company's revenue is less than Rs.250 crore. However, if the company's sales exceed Rs 250 crore, the corporation tax rate is 30%.
  • If your taxable income is between Rs 1 crore and Rs 10 crore, you would be charged a surcharge of 10% of your taxable income.
  • If the company's taxable income exceeds Rs 10 crore, a surcharge of 12% is ap  plied.

International Companies

  • A corporation tax of 41.2% is charged on firms generating less than Rs 1 crore. The corporation tax consists of a 40% base tax and a 3% education cess.
  • A corporation tax of 42.024% is charged on firms earning more than Rs 1 crore. The corporation tax consists of a 40% basic tax, a 2% surcharge, and a 3% education cess.
  • If a company earns more than Rs 10 crore, it is subject to a 5% surcharge on top of the base tax.

3. Tax on Capital Gains

  • Short-term capital gains are taxed according to standard tax rates.
  • Long-term capital gains are taxed at a rate of 20% if the Capital Gains Tax is calculated with the indexation advantage in mind.
  • Long-term capital gains are taxed at 10% if the Capital Gains Tax is calculated without considering the indexation advantage.

Direct Tax Code

The Direct Tax Code, often known as the DTC, was created to replace the Income Tax Act of 1961. DTC's primary goal is to make direct taxation more equal, effective, and efficient. The DTC was also written to update and stabilise all direct tax legislation so that the tax-to-GDP ratio rises and voluntary compliance becomes easier.

Benefits of Direct Income Tax

The various benefits of the direct taxes are:

1. Equal Distribution of Income

The government levies higher taxes on those persons or businesses that can pay them. This extra cash is utilised to assist India's impoverished and lower socioeconomic groups. 

2. Clarity 

There is a sense of confidence from both the government and the taxpayer due to direct tax. The taxpayer and the government both know how much money they need to pay and how much they need to collect.

3. Reduction in Inflation

During inflation, the government raises taxes. Increased tax limits the demand for goods and services, causing inflation to fall.

4. Increase in Productivity

As the number of people working and living in the community grows, so do the returns from  direct tax. As a result, direct taxes are seen to be ex tremely productive.

5. Economic and social equilibrium: 

The Indian government has implemented well-balanced tax bands based on an individual's earnings and age. The tax slabs are also affected by the country's economic status. Exemptions are also implemented to balance out any income disparities.

Also Read: Section 194I - TDS On Rent - Income Tax Act, 1961.

Conclusion 

Direct Tax has been existent in India for a very long time. Direct taxes help in the redistribution of wealth in the country. It is a tax in which the tax's burden and payment fall on the same person. The persons with a higher income must pay higher taxes, and those with less income must pay less tax. Despite a few drawbacks, direct taxes play a critical role in developing India's economy. If these taxes are implemented correctly, they can play a significant role in maintaining price levels and preventing inflation. Increase your knowledge about direct taxes by knowing direct tax meaning and the definition along with further details. 

Download the Khatabook app for regular updates relating to Direct Taxes.

FAQs

Q: What is the age criteria to be qualified as a senior or super senior citizen?

Ans:

People having attained 60 years of age and less than 80 years of age fall in the category of senior citizens. At the same time, people who have reached the age of 80 or above fall in the category of super senior citizens.

Q: What are the various types of corporate taxes?

Ans:

The various types of corporate taxes are Minimum Alternative Tax (MAT), Dividend Distribution Tax (DDT), and the Security Transaction Tax (STT).

Q: Why was the Direct Tax Code Introduced?

Ans:

The Direct Tax Code, often known as the DTC, was created to replace the Income Tax Act of 1961. DTC's major goal is to make direct taxation more equal, effective, and efficient.

Q: Is it compulsory to follow the New Income Tax regime introduced in February 2020?

Ans:

No, the New  Income Tax regime introduced in February 2020 is optional and not compulsory. People can choose whether to follow this one or the existing one.

Q: What are some of the benefits of direct tax?

Ans:

Some of the direct tax benefits are equal distribution of income, economic and social equilibrium, clarity of payment, reduction in inflation, etc. 

Q: What are the different types of direct taxes?

Ans:

The different types of direct taxes are income tax, corporate tax, property tax, gift tax, and inheritance tax. 

Q: Who bears the burden of the direct tax?

Ans:

In a direct tax, the burden and the payment of the tax falls on the same person.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.