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Direct Income Tax: Everything You Need to Know

When it comes to paying taxes in India, it can seem like a complex subject. But when broken down, taxation is simple to grasp. In India, there are two types of taxes, direct and indirect tax. The Department of Revenue takes care of the collection of both direct and indirect tax through two statutory bodies.

The Central Board of Direct Taxes (CBDT) monitors direct tax revenue, and the Central Board of Indirect taxes and customs (CBIC) is looks into indirect tax revenue. As an Indian citizen, you have a duty to pay all taxes you are eligible to pay. But first, it is crucial to understand the various tax types.

Find out more about direct tax laws to understand your tax obligations better. 

What are Direct Taxes and Indirect Taxes?

Direct tax is tax paid by an individual or company to the Indian government without any intermediary. Indirect tax is a tax levied on goods and services that the government levies on goods and service providers but it is borne by the end consumer or customer pays.

What are the Types of Direct Tax?

  • Income tax

    Direct income tax* is one of the most prominent taxes* that Indian taxpayers know. Income tax is a direct tax levied on an individual’s age and earnings from their profession, business, real estate, or other investments.

    Both salaried and self-employed persons have to pay direct income tax at the end of a financial year by filing income tax returns with the Department of Income Tax. Depending on a person’s earnings and age, the government determines how much tax they have to pay per the different tax slabs.

    There are two tax regimes that the taxpayer can choose between to pay tax. Under both tax regimes, any individual earning less than ₹2,50,000 in a year does not have to pay tax. Those earning between ₹2,50,000 and ₹5,00,000 can make income tax direct payments and can be eligible to receive a refund/ rebate.

  • Wealth tax

    Wealth taxgot eliminated in the budget of 2015 but now exists in the form of surcharges. It is a tax paid by individuals, Hindu Undivided Families (HUFs), or companies of high net worth who have residential status in India and own properties here. Subject to the ownership of the property, the owner is liable to pay wealth tax. The tax has to be paid no matter if the property in question is generating revenue or not.

    The super-rich with an income above ₹30,00,000 have to pay a surcharge between 2%-12% Individuals with income above ₹1 crore and companies with income of over ₹10 crores also fall under the scope of this direct tax law.

    Tax is also levied on the properties owned by the super-rich segment. Every year they have to pay tax based on the market value of the property. However, assets like gold deposit bonds, stock holdings, house property or commercial property that have been on rent for a period exceeding 300 days used for professional and business purposes are wealth tax exempt.

  • Corporate tax

    Corporate tax is taxpaid by domestic firms (except shareholders) and foreign corporations who earn money in India. The gains/income earned can be via technical service fees, selling assets, royalties, dividends, or interest that are based in the country. Other taxes under corporate tax types include:

    • Dividend Distribution Tax: It is a tax paid by domestic companies on the declaration, distribution, and payment of any amounts as dividends by shareholders.

    • Minimum Alternate Tax: It is a tax paid by zero tax companies whose accounts are made as per the Companies Act.

    • Securities Transaction Tax:  It is tax paid for any income that has been earned with the help of security transactions.

    • Fringe Benefits Tax: It is a tax paid by companies on providing fringe benefits for drivers, maids, and other employees.

  • Capital gains tax*

    Capital gains tax is tax paid by individuals on benefits or gains from selling capital assets like investments in the stock market, real estate, farms, bonds, businesses, and art, among others. Capital gains tax has two categories based on the period of holding the asset - short-term Capital Gains (STCG) and Long-term Capital Gains (LTCG).

    STCG are capital gains earned from assets held for less than 12 months or 36 months depending on the type of asset. LTCG are capital gains earned from assets held for longer than the period of more than 12 months or 36 months. Taxpayers have to pay STCG based on the income bracket fixed by the government. While LTCG is taxed between 10% and 20%.

Is GST@ a Direct Tax or Indirect Tax?

 

GST@, short for Goods and Service Tax, is an indirect tax levied on the sale of goods and services. GST is an umbrella tax for various indirect taxes that existed before, including value-added tax, service tax, purchase tax, excise duty, and more. GST@ is applicable all over India and is a tax liability that one entity can pass to another.

Technically, the entity manufacturing the goods and services has to pay GST. But the manufacturer passes this liability on to the service provider, who then passes it on to the retailer, and ultimately the retailer passes the onus of paying GST@ on the customer purchasing the product or service.

Should You Buy Life Insurance Plans to Save on Tax?

Yes, when you buy life insurance plans, you can save on direct income tax through specific provisions under the Income Tax Act, 1961. You can save direct income tax *on the premiums paid by you towards a life insurance plan for yourself, your spouse, or your child.

Under section 80C of the Act, you can claim up to ₹1,50,000 in a year from the premiums paid. Life insurance companies also provide tax* exemptions on the maturity amount or sum assured paid under section 10(10D) of the Act.

Conclusion

The core objective of the government by levying direct tax is to ensure equity and parity among the rich and poor strata of society. Paying direct tax contributes to the equal distribution of wealth and the national revenue. Knowing the various types of direct tax* can help you become aware of what taxes you lawfully owe to the government and do your bit for the country.


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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Disclaimers

  • Insurance cover is available under the product.
  •  The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication; however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
  • @All Premiums, Charges, and interest payable under the policy are exclusive of applicable taxes, duties, surcharge, cesses or levies which will be entirely borne/ paid by the Policyholder, in addition to the payment of such Premium, charges or interest. Tata AIA Life shall have the right to claim, deduct, adjust and recover the amount of any applicable tax or imposition, levied by any statutory or administrative body, from the benefits payable under the Policy