What is Direct Tax and Its Types?

There are different types of taxes in India, like direct and indirect taxes. The indirect taxes are transferred to another person after it is initially levied as a direct tax. Common examples of indirect taxes are GST (Goods and Service Tax), VAT (Value Added Tax), etc. On the other hand, a direct tax is levied on the person’s income, and it is paid by an organisation or individual to the Government of India.

The organisation or the individual cannot transfer this type of tax to another person. Some of the common examples of direct tax include corporate and income tax.

Let of look at the types of direct taxes in India

Wealth Tax

Individuals must pay this type of direct tax every year, and the taxable amount may differ based on the type of property they own and the market value of the property. Individuals must pay wealth tax on the properties they own, irrespective of whether the property generates income or not.

Wealth tax is exempt on assets like gold deposit bonds, house property, commercial property that has been rented for more than 300 days and stock holdings.

Estate Tax

Estate Tax is also commonly referred to as inheritance tax, and it is based on the value of the money or estate that an individual leaves behind after his demise.

Capital Gains Tax

This is another common form of direct tax levied by the Government of India. It is paid on the income individuals may earn from selling their assets or investments in businesses, art, farms, bonds, etc. Depending on how long the individual held the asset, Capital Gains Tax is divided into short-term capital gains and long-term capital gains.

If the individual sells any asset except securities within 36 months of acquiring the asset, short-term capital gains are levied on the gains they earn. Long-term capital gains are levied if the asset is sold after 36 months.

Corporate Tax

Corporate entities based in India and foreign corporations that earn an income in India must pay corporate tax. Any income earned by the corporates through technical service fees, royalties, dividends, selling assets, etc., are taxable. There are different types of Corporate Tax, which are:

  • Securities Transaction Tax – The tax is paid on income earned through security transactions that are taxable.
  • Dividend Distribution Tax – If any domestic companies distribute, declare or pay any amount as a dividend, they must pay DDT. However, DDT is not applicable to foreign companies.
  • Minimum Alternate Tax – Corporate entities that have accounts prepared as per the Companies Act; minimum alternate tax is levied on them.

Income Tax

Income tax is the most common type of direct tax. The government of India levies income tax on the individual’s annual earnings. It varies from one person to another based on their age and earnings.

The government of India has determined different types of income tax slabs that determine the amount of tax individuals must pay. The taxpayers must file ITR (Income Tax Returns) annually. They may get a refund or pay additional taxes depending on their ITR.

Final Word

The taxes are the government’s earnings, which they use for the benefit of the citizens. Now that you know the various types of direct taxes, make sure you pay the applicable taxes diligently. After all, the taxes you pay are used for the betterment of the citizens and the nation’s development.

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