What is Direct Tax?

Direct tax is tax that is levied on the income of a person or company and directly paid to the government by the person or company. The burden of direct taxes cannot be passed on to another person or company. The Central Board of Direct Taxes (CBDT) is responsible for collection of direct taxes in India.

What are the Different Types of Direct Taxes?

The types of direct taxes in India are as follows:

1. Income Tax :

Income tax is paid on the income of the person. The rate of tax varies based on the level of income, age bracket of the person, residential status and type of legal entity. It is calculated on annual basis for the financial year starting from 1st April and ending on 31st March. It is paid every year by filing Income Tax Return (ITR) online.

There are five heads of income under Income Tax
i. Salary
ii. House Property
iii. Business Income
iv. Capital Gain
v. Other Income

Depending on the nature of transaction, income is bifurcated under each head.

2. Dividend Distribution Tax (DDT) :

Indian companies have to pay taxes for dividends distributed to their shareholders.

3. Securities Transaction Tax (STT) :

This is paid on the purchase and sale of securities done at stock exchanges.

4. Fringe Benefit Tax

This tax is paid by companies for facilities such as drivers, maids, etc provided to their employees.

What are the Advantages of Direct Taxes in India?

The types of direct taxes in India are as follows:

a. Curbs Inflation

Taxes are increased during inflation. As a result, demand for goods and services falls and inflation level is controlled.

b. Just Distribution of Taxes

Taxes are charged based on income tax slabs. People with higher income have to pay higher taxes. Hence, it helps in equal distribution of wealth among the people in the country.

c. Certainty of Collection of Taxes

Due to direct taxes, there is certainty of income to the government. Such income helps in the growth of the country.

d. Productive

As the working class of the country increases, collection of direct taxes increases. Hence, direct taxes are very productive for revenue generation by the government.

How can I Save on my Taxes?

The below mentioned ways can help in saving on taxes. This list is not exhaustive and just shows a few ways on saving the taxes.

1. Deductions under Section 80C*:

  • Premiums for life insurance plan
    Buying a life insurance plan helps you secure your family’s financial future while the premiums paid on the life insurance policy can be claimed as deduction under Section 80C of the Income Tax Act, 1961.
  • Repayment of home loan
    Deduction can be claimed on principal repayment of home loan under Section 80C.
  • Investments in tax saver mutual funds
    Buying a tax saver mutual fund (also called as ELSS – equity linked savings scheme) can help to claim deduction under section 80C. However, there is a lock in period of 3 years for the same.
  • Investing in tax saver fixed deposits
    Deduction can also be claimed by investing in tax saver fixed deposits of banks. It has the lock in period of 5 years.
  • Investing in public provident fund (PPF)
    Investment made in public provident fund (PPF) can be claimed as deduction under Section 80C. Interest earned on PPF investment is tax free.

2. Deduction under Section 80D*:

  • Premiums for health insurance plan
    Premiums paid on health insurance plan are allowed as deduction from taxable income under Section 80D of the Income Tax Act, 1961.

3. Deduction under Section 80G* :

  • By making a charitable donation in mode other than cash to organizations specified under section 80G.

4. Deduction under section 24 :

  • By taking home loan, deduction can be claimed on interest payment of the loan under Section 24.

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*Tax benefits under the policy are subject to conditions under Section 80C, 80D, 80G and other provisions of the Income Tax Act, 1961. Goods and Services Tax and Cess, if any, will be charged extra as per prevailing rates. Tax laws are subject to amendments made thereto from time to time. Please consult your tax advisor for details, before acting on above.

COMP/DOC/Jan/2020/241/3146

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