Direct taxes are taxes levied directly on individuals, organizations, or entities based on their income, wealth, or profits. Unlike indirect taxes, which are collected on goods and services, direct taxes are paid directly by the taxpayer to the government. The key characteristic of direct taxes is that the burden of the tax cannot be shifted to another party; it is borne by the taxpayer who earns the income or owns the wealth.
Key Types of Direct Taxes in India
- Income Tax
- Corporate Tax
- Wealth Tax (Note: Wealth Tax was abolished in 2015)
- Capital Gains Tax
- Estate Duty and Gift Tax (Estate Duty was abolished in 1985; Gift Tax has been reintroduced in a different form under Income Tax Act)
1. Income Tax
Definition: Income tax is a tax on the income of individuals, Hindu Undivided Families (HUFs), and other non-corporate entities. It is levied based on the income earned during a financial year.
Key Aspects:
- Progressive Tax Structure: The tax rate increases with income levels.
- Slabs and Rates: Income is divided into slabs, with different tax rates applied to each slab.
- Deductions and Exemptions: Taxpayers can reduce their taxable income through various deductions and exemptions.
Example:
- For the financial year 2024-25, the income tax slabs for individual taxpayers 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, ELSS, etc.
- Section 24(b): Allows deductions up to ₹2 lakhs on home loan interest.
2. Corporate Tax
Definition: Corporate tax is levied on the profits of companies and corporations. It applies to both domestic and foreign companies operating within India.
Key Aspects:
- Tax Rates: The rate varies depending on the type of company and its turnover.
- Taxable Income: Companies are taxed on their net profits after accounting for business expenses, depreciation, and other allowances.
Example:
- For the financial year 2024-25:
- Domestic companies with a turnover up to ₹400 crores: 25%
- Domestic companies with a turnover exceeding ₹400 crores: 30%
- Foreign companies: 40%
Special Provisions:
- Minimum Alternate Tax (MAT): A tax imposed on companies that do not pay taxes under regular provisions, calculated at 15% of book profits.
3. Wealth Tax (Abolished)
Definition: Wealth tax was a tax on the net wealth of individuals, HUFs, and companies. It was levied on the value of assets exceeding a certain threshold.
Key Aspects:
- Tax Rate: 1% on wealth exceeding ₹30 lakhs.
- Assets Covered: Included immovable property, jewelry, bullion, etc.
Status:
- Abolished: Wealth Tax was abolished in 2015 and replaced with a new tax on high-value assets.
4. Capital Gains Tax
Definition: Capital gains tax is levied on the profits earned from the sale of capital assets, such as property, stocks, and bonds. The tax rate depends on the holding period and type of asset.
Key Aspects:
- Short-Term Capital Gains (STCG): Gains from assets held for less than three years (for most assets) are taxed at a higher rate.
- Long-Term Capital Gains (LTCG): Gains from assets held for more than three years are taxed at a lower rate.
Example:
- Equity Shares:
- STCG: Taxed at 15%.
- LTCG: Taxed at 10% on gains exceeding ₹1 lakh without indexation benefits.
- Real Estate:
- STCG: Taxed as per the individual’s income tax slab rates.
- LTCG: Taxed at 20% with indexation benefits.
5. Estate Duty and Gift Tax
Definition:
- Estate Duty: Was a tax on the estate of a deceased person, levied on the value of their estate.
- Gift Tax: Imposed on gifts exceeding a certain threshold received by an individual.
Key Aspects:
- Estate Duty: Abolished in 1985.
- Gift Tax: Reintroduced in 2004 under the Income Tax Act as “Tax on Gifts,” which is levied on gifts exceeding ₹50,000 received from non-relatives.
Example:
- Tax on Gifts: If an individual receives a gift of ₹1 lakh from a friend, the amount exceeding ₹50,000 (₹50,000) is subject to tax as per the individual’s income tax slab.
Summary
Direct Taxes in India encompass several types, including income tax, corporate tax, capital gains tax, and formerly wealth tax. These taxes are levied directly on the income, wealth, or profits of individuals and entities. The Indian tax system aims to balance revenue generation with fairness and economic efficiency through progressive tax rates, special provisions, and tax incentives.
Key Examples:
- Income Tax: Progressive rates based on income slabs.
- Corporate Tax: Varied rates based on turnover and company type.
- Capital Gains Tax: Differentiates between short-term and long-term gains.
These direct taxes play a crucial role in India’s fiscal policy, funding government activities and redistributing wealth to achieve socio-economic goals.
