Financial planning for businesses and individuals involves proper asset/expense allocation and being informed about tax liabilities. There are commonly two types of taxes applicable in India: indirect and direct tax.
Being aware of the different direct tax types and how they work – especially direct taxation, is important. This can help you avoid paying any fines or penalties when filing your taxes due to any discrepancies.
Through this blog, you will learn what direct tax is, different direct tax types, and other crucial information regarding direct tax.
What is Direct Tax?
Direct tax in India is a type of taxation where the burden falls directly on the individual or organization being taxed. It is levied directly on the income or wealth of individuals and organizations.
Governed by the Central Board of Direct Taxes (CBDT), these taxes are a primary source of revenue for the government.
Notable direct tax types include Income Tax, levied on the annual income of persons; Corporate Tax, imposed on the earnings of companies; and Capital Gains Tax, applied to the profit from the sale of assets.
Direct taxes are progressive in nature. The tax rate is decided based on the income earnings of businesses and individuals. It follows the simple rule that the higher the income, the higher the direct tax rate, and vice versa, thereby aiming to achieve equity in the taxation system.
Direct tax liabilities cannot be transferred, and failure to make timely payments against direct taxes can result in fines and other consequences.
Difference Between Direct Tax and Indirect Tax
The primary difference between direct and indirect taxes is who bears the burden of the taxes.
- Direct taxes are levied on the income or wealth of individuals or organizations and must be paid directly by them to the government. These taxes cannot be passed on to someone else. Examples include Income Tax, Corporate Tax, and Wealth Tax.
- Indirect taxes, on the other hand, are levied on the sale of goods and services and can be passed on from the seller to the buyer. The burden of these taxes shifts from the producer or seller to the consumer, who ultimately bears the tax. Examples include Goods and Services Tax (GST) and Value Added Tax (VAT).
Different Direct Tax Types
- Income Tax – As the name suggests, income tax is imposed on the earned income of individuals and businesses. the tax rate is determined based on the total income from different sources minus the available deductions and exemptions.
- Capital Gains Tax – The capital gains tax is applied to all the gains incurred by the sale of capital assets like stocks, mutual funds, real estate, etc. There are two types of capital gains tax –
- Short-Term Capital Gains – The tax rate for this direct tax depends on the total income of the individual and the holding period, which should be less than 36 months.
The applicable tax rate is 15% when STT (Securities Transaction Tax) is applicable. When it it does not apply, you will taxed as per normal slab rates.
Note: STT is a direct tax applied to every sale and purchase of a security listed on recognised stock exchnages in India. It is similar to TCS and the rates are decided by the governement. STT amounts must be paid over and above the transaction value.
- Long-Term Capital Gains – The tax rate for this direct tax is fixed at a flat 20% and is applicable for assets with a holding period longer than 36 months.
It is applied at a rate of 10% for income over ₹1 lakh from sales of equity shares or equity-oriented mutual funds.
- Wealth Tax – Wealth tax was abolished in the 2015 budget (effective FY 2015-16), simplifying the tax structure. As an alternative, the finance minister hiked the surcharge from 2% to 12% for people with annual incomes over ₹1 Crore and for companies with annual incomes over ₹10 Crore.
- Property/ Estate Tax – Another type of direct tax is property tax. The state authorities levy this tax category on individual property owners based on their area-based rating. Government lands or properties and vacant land are exempted under this tax.
- Corporate Tax – The corporate tax is applied to all domestic companies based on their earned income from business operations. This direct tax is also applicable to any foreign business entity running its operations in India.
- Securities Transaction Tax – There is a direct tax applicable on the sale and purchase of listed securities like bonds, equity, mutual funds, etc., called the securities transaction tax. This tax is applicable to the buyer or the seller based on the nature of the transaction.
Direct Taxation Rates
Income Tax Rates: New Tax Regime for AY 2024 – 25
| Income Tax Slabs (in ₹) | New Regime Tax Rate (%) |
| Upto Rs. 3,00,000 | – |
| From Rs. 3,00,001 to Rs. 6,00,000 | 5% |
| From Rs. 6,00,001 to Rs.9,00,000 | 10% |
| From Rs. 9,00,001 to Rs. 12,00,000 | 15% |
| From Rs. 12,00,001 to Rs. 15,00,000 | 20% |
| Above Rs. 15,00,000 | 30% |
Income Tax Rates: Old Tax Regime
| Income Tax Slabs (in ₹) | Old Regime Tax Rate (%) |
| Up to 60 years of age | |
| Up to 2.5 Lakhs | Nil |
| 2.5 Lakhs to 5 Lakhs | 5% |
| 5 Lakhs to 10 Lakhs | 20% |
| Above 10 Lakhs | 30% |
| Senior Citizens (60-79 years) | |
| Up to 3 Lakhs | Nil |
| 3 Lakhs to 5 Lakhs | 5% |
| 5 Lakhs to 10 Lakhs | 20% |
| Above 10 Lakhs | 30% |
| Super Senior Citizens (80 years and above) | |
| Up to 5 Lakhs | Nil |
| 5 Lakhs to 10 Lakhs | 20% |
| Above 10 Lakhs | 30% |
Capital Gains Tax Rates
- Short-term capital gains follow the same tax slabs as the income tax slabs.
- For long-term capital gains with indexation benefits, a 20% tax is implied.
- For long-term capital gains without indexation benefits, a 10% tax is implied.
Corporate Tax Rates
| Domestic Company | Turnover < ₹250 crores | 25% |
| Turnover > ₹250 crores | 30% | |
| Surcharge for income between ₹1 crore – ₹10 crore | 10% | |
| Surcharge for income between > ₹10 crore | 12% | |
| Cess | 4% | |
| International Company | Turnover < ₹1 crore | 40% Tax + 3% cess |
| Turnover > ₹1 crore | 40% Tax + 3% ceess + 2% surcharge | |
| Turnover > ₹10 crore | Basic tax + 5% surcharge |
Top Advantages of Direct Tax
- Promotes Equity – Based on the direct tax examples, the main purpose of imposing these taxes is to ensure a fair distribution of wealth by applying higher tax rates on high incomes and lower tax rates on low incomes. This further improves the tax system in the country.
- Promotes Economic Well-being – Direct taxation is collected by the government. The contributions collected via different direct tax types increase the government revenue to provide better public services and infrastructure.
- Encourages Investments – Along with the distinctive direct tax rates applicable to individuals and businesses, there are several deductions and exemptions on a range of investments. This encourages people to save and invest more.
- Increases Accountability – With the strict deadlines for filing all direct tax returns, individuals and businesses are encouraged to comply with the law, improving accountability and promoting responsible citizenship.
Conclusion
When it comes to direct tax, having a thorough understanding of all the forms, deductions, calculations, etc., is necessary before application. With the knowledge of what direct tax is and different direct tax examples and slabs, you can assess ways to reduce your tax liability.
Investments in tax-free bonds, stocks, and other such categories can help you manage your finances better and reduce your tax liability. However, assessing which stocks to buy can be challenging.
To resolve this, you can seek consultation from an investment advisory to benefit from improved portfolio management and daily reporting.
Direct Tax Most Common FAQs
Is GST a direct tax?
No, GST (Goods and Services Tax) is not a direct tax.
It is an indirect tax that has replaced many indirect taxes in India, such as the excise duty, VAT, and services tax. GST is levied on the supply of goods and services and allows sellers to pass on the tax burden to the consumers, making it an indirect tax.What is the difference between short-term and long-term capital gains tax?
Short-term capital gains tax applies to assets held for less than 36 months and taxed based on income slabs.
Long-term capital gains apply to assets held over 36 months and are taxed at a flat 20%.How does the new income tax regime differ from the old regime?
The new income tax regime offers lower tax rates across different slabs and benefits taxpayers who opt for fewer investments or forgo tax-deductible investments like medical insurance or life insurance.
The Old tax regime has slightly higher tax rates but offers more deductions and is perfect for taxpayers who choose to invest in tax-efficient assets.Can investments reduce my direct tax liability?
Yes, certain investments and expenses qualify for deductions and exemptions, reducing your taxable income and, hence, your direct tax liability under the old tax regime.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.