Direct taxes on income in India are levied directly on the income or profits of individuals, corporations, and other entities. These taxes play a significant role in the country’s revenue system. Here’s a detailed explanation of various direct taxes related to income, including Corporation Tax, Minimum Alternate Tax (MAT), Income Tax, Capital Gains Tax (CGT), and Dividend Distribution Tax (DDT), along with suitable examples.
1. Corporation Tax
Definition: Corporation tax is a tax on the profits of companies and corporations. It is applicable to both domestic and foreign companies operating in India.
Key Aspects:
- Tax Rates: Different rates apply to domestic companies based on their turnover and other criteria, while foreign companies are taxed at a higher rate.
- Taxable Income: Companies are taxed on their net profits after deducting business expenses, depreciation, and other allowances.
Example:
- Domestic Companies:
- For the financial year 2024-25, domestic companies with a turnover up to ₹400 crores are taxed at 25%. Companies with a turnover exceeding ₹400 crores are taxed at 30%.
- Foreign Companies:
- Taxed at 40% on their income.
Special Provisions:
- Minimum Alternate Tax (MAT): A tax imposed on companies to ensure that they pay a minimum amount of tax even if they have substantial deductions. MAT is calculated at 15% of book profits.
2. Minimum Alternate Tax (MAT)
Definition: MAT is a tax on companies that ensures they pay at least a minimum amount of tax on their book profits, even if they have substantial deductions under regular tax provisions.
Key Aspects:
- Tax Rate: 15% of book profits.
- Applicability: Applied to companies that have significant tax exemptions and deductions.
Example:
- If a company’s book profit is ₹10 crores, MAT would be ₹1.5 crores (15% of ₹10 crores), even if the company’s taxable income after deductions is less.
3. Income Tax
Definition: Income tax is levied on the income of individuals, Hindu Undivided Families (HUFs), and other non-corporate entities. It is a progressive tax with different rates for different income slabs.
Key Aspects:
- Tax Slabs: The rate of tax increases with income levels.
- Deductions and Exemptions: Taxpayers can reduce their taxable income through various deductions and exemptions.
Example:
- For the financial year 2024-25, income tax slabs for individuals below 60 years are:
- Income up to ₹2.5 lakhs: No tax
- Income from ₹2.5 lakhs to ₹5 lakhs: 5%
- Income from ₹5 lakhs to ₹10 lakhs: 10%
- Income above ₹10 lakhs: 30% (plus applicable cess and surcharge)
Deductions:
- Section 80C: Allows deductions up to ₹1.5 lakhs for investments in PPF, NSC, and ELSS.
4. Capital Gains Tax (CGT)
Definition: Capital gains tax is levied on the profits earned from the sale of capital assets, such as property, stocks, or bonds.
Key Aspects:
- Short-Term Capital Gains (STCG): Gains from assets held for less than three years are taxed at higher rates.
- Long-Term Capital Gains (LTCG): Gains from assets held for more than three years are taxed at lower rates, often with indexation benefits.
Example:
- Equity Shares:
- STCG: Taxed at 15% if the shares are sold within one year.
- LTCG: Taxed at 10% on gains exceeding ₹1 lakh without indexation benefits if held for more than one year.
- Real Estate:
- STCG: Taxed as per the individual’s income tax slab rates if held for less than three years.
- LTCG: Taxed at 20% with indexation benefits if held for more than three years.
5. Dividend Distribution Tax (DDT)
Definition: Dividend Distribution Tax (DDT) was a tax levied on companies distributing dividends to shareholders. The tax was paid by the company before distributing the dividend.
Key Aspects:
- Tax Rate: The company paid DDT at 15% on the dividends distributed.
Status:
- Abolished: DDT was abolished in 2020. Since then, dividends are taxed in the hands of the shareholders.
Current Status:
- Taxation of Dividends: Dividends received by shareholders are now taxed under the head “Income from Other Sources” at the applicable income tax rates. For individual taxpayers, dividends up to ₹10 lakhs are exempt, and any amount above that is taxed at 10% (plus applicable cess and surcharge).
Summary
1. Corporation Tax:
- Tax on company profits.
- Domestic companies: 25% or 30% based on turnover.
- Foreign companies: 40%.
2. Minimum Alternate Tax (MAT):
- Ensures minimum tax payment.
- Calculated at 15% of book profits.
3. Income Tax:
- Levied on individual income.
- Progressive slabs with various deductions.
4. Capital Gains Tax:
- Tax on profits from asset sales.
- Short-term and long-term capital gains with different rates.
5. Dividend Distribution Tax (DDT):
- Abolished in 2020.
- Dividends now taxed in the hands of shareholders.
These direct taxes are fundamental in India’s tax system, contributing significantly to government revenue while ensuring that the burden is aligned with the taxpayer’s ability to pay. Each type of direct tax has specific rules and rates, impacting individuals and corporations differently.
