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Direct Tax: Meaning, Types & Examples

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Created on
May 3, 2023

Summary

What’s Inside

Taxes are expected to be paid by individuals and entities to ensure that the government has funds to execute administrative and developmental initiatives. However, when you pay your taxes, do you know what category they fall under? For example, do you know what is a direct tax or indirect tax?

A direct tax is a type of tax that is paid directly to the government’s coffers. Unlike an indirect tax, such as GST or VAT levied on goods and services, it cannot be transferred to any other person or entity. The Income Tax Act of 1961, governs the applicability, implementation, and deduction of direct taxes in India. This article will explore the different types of direct taxes, including some examples.

Types of direct taxes

The Indian tax system has been in place for a long time and has undergone various updates to keep it relevant with changing times. The recently introduced new tax regime is one of the most significant reforms to date. However, in either case, India has two main types of direct taxes. These are:

Income Tax

The tax levied on the income of individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities is known as income tax.

Corporate Tax

The corporate tax is levied on the net profit of domestic firms. Foreign companies who earn a direct income through their presence and operations in India are liable to pay taxes to the Government of India.

Direct tax examples

Now that you know the meaning of direct tax, it will be easier for you to understand its different examples and categories. Here are some of the commonly levied direct taxes.

Income Tax

Income tax is levied on salary, rent, interest, and other sources of income for individuals and business entities.

Advance Tax

Freelancers, consultants, and people engaged in applicable businesses are required to pay an advance tax on their estimated income for the year.

Capital Gains Tax

Short-term Capital Gains Tax (SCGT) and Long-term Capital Gains Tax (LCGT) are levied on profits earned from the sale of assets such as property or shares or redemption of mutual fund units.

Minimum Alternate Tax

Minimum Alternate Tax (MAT) is to be paid by companies without tax due to various deductions and exemptions.

Dividend Distribution Tax

Whenever a company pays out dividends or a bonus to its shareholders, it is expected to pay the Dividend Distribution Tax (DDT) amount distributed.

Fringe Benefits Tax

The tax imposed on fringe benefits like drivers and domestic helpers provided/paid for by companies to their employees is known as a Fringe Benefits Tax (FBT).

Securities Transaction Tax

Securities Transaction Tax (STT) is imposed on a company that earns income by trading taxable securities.

In Conclusion

To ensure compliance with the rules and as a financial best practice, you should keep a tab of your direct tax liabilities and regularly track your expenses. With Ask.Fi, you can review your spending patterns and see your money grow. With the 360-degree view of your expenses, you can filter your spending by category and time. Moreover, through the Fi app, you can invest the money you save in Smart Deposits and commission-free mutual funds.

Frequently Asked Questions

1. What are direct taxes in India?

When you pay tax directly to the government for income earned or gains accrued, it is known as a direct tax. For example, income tax or property tax need to be paid directly to the IT department and cannot be passed on to another person or entity. This process is regulated by the Central Board of Direct Taxes (CBDT).

2. Is GST a direct tax?

No, GST is a form of indirect tax levied on goods produced and services offered in the country and passed on to the final consumer by the manufacturer/provider.

3. Why is it called direct tax?

Since the tax is paid directly by the impacted person or organisation to the regulatory authority like the Income Tax Department or CBDT, it is known as a direct tax.

4. Is TDS a direct tax?

No, TDS fits the definition of indirect tax. TDS – tax deducted at source – is levied when a payer makes a payment to the payee and deducts the tax at the source of the payment. This tax is then deposited with the government, and proof is furnished during the filing of the returns. Since depositing the tax is the payer’s responsibility, TDS is an indirect tax.

Disclaimer

Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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