Direct Tax - Comprehensive Step-by-Step Guide

What is a direct tax?

In the simplest terms, a direct tax is directly paid from the hands of the taxpayer to the government reserves. It is levied on the income of the individual who pays it. The direct tax is levied according to the taxable capacity of the people in the country.

This is favorable to the government, as the time involved in estimating the tax value of an individual is largely reduced. This isn't imposed on goods or services; however, the direct tax levied on an individual of a country cannot be passed on to any other person or entity i.e its burden cannot be shifted to another person.

How is your direct tax determined?

The Indian Taxation System follows a fixed calculating method called Slab Rates. Your income tax is determined based on these income slab rates. This slab rate is subject to change from year to year. It is, however, calculated in accordance with the provisions provided under the Income Tax Act 1961. Presently, we have two regimes for taxation, i.e., New tax regime and the Old tax regime. A person can opt as per his/her requirement.

These provisions are also subject to frequent updations under the supervision of the Indian Central Board of Direct Tax. The most popular forms of direct tax include Income Tax and Wealth Tax.

Income tax slab rates for AY 2023-24 and AY 2024-25

For resident individuals and Hindu Undivided Families (HUFs) who are below the age of 60 years:

For individuals aged between 60 and 79 years, the basic exemption limit stands at Rs 3 lakhs, and for those aged 80 years and above, the basic exemption limit is set at Rs 5 lakhs.

What are the different types of Direct Taxes?

• Income tax: Income tax is levied by the government on income generated by businesses and individuals within the jurisdiction. In India, The Income Tax Act of 1961 and its provisions govern the entire taxation system of India.
• Wealth Tax: A Wealth-tax or capital tax is levied by the government on an individual's total or market value of personal assets. Such personal assets include land, buildings, luxury vehicles such as aircraft or yachts, jewelry, etc. This tax must be paid regardless of whether the said property generates income. Wealth tax was abolished in budget 2015 ( From FY 2015-16)
• Estate Tax: The value of assets that pass to the heirs after the death of their owner is subject to estate taxes, which are based primarily on the overall value of the assets. Cash, property, stocks, and other movable and immovable assets can constitute such assets. It was abolished w.e.f. 1985.
• Corporate tax: Corporate Income Tax (CIT) is a tax levied by companies on the profits they earn in a financial year, regardless of whether they are domestic or foreign.
• Capital gains tax: Capital gains are taxed as either long-term or short-term capital gains based on the income or profits made from the sale of assets or investments such as bonds and securities.

What is the role of Direct Tax?

Direct Tax is levied on individuals, HUFs (Hindu Undivided Families), companies, firms, etc.

• It helps reduce the inflation rates of the country.
• It is progressive as it is mostly imposed on the rich.
• The liability of the tax cannot be shifted.
• The direct tax rates don’t vary frequently. It may change when the budget is released.

Is the collection of direct tax detrimental?

• Evasion of tax is easily possible in case of ineffective administration, which fails at the honest and diligent collection of the tax from the people.
• Direct tax entirely depends on the honesty of the taxpayers and thus is uncertain.
• The government doesn't entirely rely on direct tax and thus resorts to safety with indirect tax.
• Enormous time and financial resources are required to collect and maintain this tax.
• This psychologically reduces the willingness to work in an individual as the more one earns, the greater he must pay towards direct tax.

Considering the above-mentioned terms and elaborated concepts, create a strong idea about direct taxes in your mind and approach this year's tax filing with clarity.

A-Z list of key terms related to Direct Taxes

There are a multitude of terms that you, as a taxpayer, should be familiar with. Below is a table including all the terminology relevant to direct taxes:

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