Income Tax Is a Direct Tax (Complete Guide)

Income tax is a direct tax since it is paid straight to the government or other governing body that levies it directly on your salary. 

A direct tax is a specific taxation category in which the impact and the incidence are classified as belonging to the same general group. The individual or the organization is responsible for directly paying the tax to the government agency that levied the tax. The tax can only be paid to the government, not to any other entity, and no other option is available.

What Is Called Direct Tax?

A direct tax is paid straight to the government or other governing body that levied it. The government receives revenue from various sources, and citizens pay their fair share through taxes on income, real estate, personal property, and assets.

What Are the Types of Direct Tax?

Indian direct taxes include the following:

Revenue Tax: Income tax responsibilities vary for people in various age groups and income ranges. The Indian government establishes multiple tax rates to calculate the income tax due. The taxpayer must file a federal income tax return (ITR) annually. A person may be entitled to a refund or liable for taxes depending on their tax return (ITR). If individuals fail to submit their ITR, they risk receiving heavy fines.

Income Tax: The market value and ownership of the property affect the annual tax amount. Whether or not a property generates income for its owner is irrelevant when determining whether wealth tax is due. Corporations, Hindu Undivided Families (HUFs), and individuals are all liable to wealth tax, depending on their nation of residency.

Capital Gains Tax: This direct tax is imposed on income derived from the sale of investments or other property in India. Property, artwork, businesses, shares of stock, bonds, and farms are a few examples of capital assets. Subtracting the latter from the former yields gains or losses on the sale of capital assets. Depending on how long an investment is held, this tax may be categorized as either short- or long-term.

If an asset (besides security) is traded within 36 months of purchase, the gain is seen as short-term. Investments that generate income through a sale after more than 36 months are considered long-term.

Profits from Direct Income Taxes: Equity: A person must pay direct taxes on all of their income. As a result, taxpayers with higher incomes pay a more significant proportion of their income in taxes, whilst taxpayers with lower incomes pay little to no taxes. It guarantees that direct taxes are levied fairly and equally on most Indians.

Social and financial stability: To promote equitable income distribution, the government has outlined tax slabs and exemptions based on each individual’s wages and the state of the economy.

Progressive: Every government should have as its primary objective to ensure that everyone benefits from the country’s prosperity. Direct taxes significantly contribute to this parity in India—these progressive taxes aid in distributing economic opportunities among various groups of people. The government increases taxes on the wealthiest to reduce income inequality and directs the proceeds to aid the underprivileged.

Productive: These tax systems are flexible and advantageous to the economy. It is because tax revenue fluctuates inversely with the nation’s gross domestic product.

What Are the Characteristics of a Direct Tax?

Direct and indirect taxation have different qualities from one another. Many instances of how

The Amount of Tax That Will Be Paid: You must pay direct tax on your income. As a result, it varies for each taxpayer and thus is related to their income level.

As an alternative, consumables like food and clothing are subject to indirect taxes. Your money has nothing to do with this in any way.

Amount of Tax Direct: The amount of taxes is determined by the annual income of an individual. Because of the progressive nature of the tax rate, the tax burden grows as income does.

Customers of all income levels often pay the same indirect tax. Therefore, different pricing systems might be necessary for goods and services with varying levels of complexity.

A Job Change Is An Option: No taxpayer shall bear the direct tax liability of any other taxpayer. Yet, a taxpayer may transfer their indirect tax responsibility to another. For instance, the expense is passed to the client if a business pays GST.

Tax evasion as a Practice: You can avoid paying direct taxes if you don’t disclose all of your income or attempt to hide it. But it’s impossible to escape paying indirect taxes.

Tax Collecting Period: Direct taxation on earnings is levied at a fixed rate for each fiscal year. There is a deadline by which direct taxes must be collected.

It’s yet to be discovered when indirect taxes are collected. Whenever anything is bought or sold, they are gathered.

Taxation’s Qualities: Direct taxes have a distinct progressive structure. If the taxpayer’s income increases, the tax liability will also increase proportionally. Indirect taxes, however, are regressive. If an individual’s income increases, their tax burden will drop.

Techniques for Delaying Direct Taxes

Direct taxes reduce your after-tax income and restrict your spending. However, the Income Tax Act of 1961 offers several organic tax relief possibilities. Here are some illustrations of such techniques:

Buying a Life Insurance Policy

A life insurance policy that safeguards one’s financial security may result in a reduction in taxable income. According to Section 80C of the Indian Income Tax Act, you may subtract the premium you pay up to INR 1.5 lakh.

Your maturity benefit is not taxable under Section 10 if your premiums do not exceed 10% of the amount insured (10D). Insurance contracts qualify as EEE since the death benefit is never taxed.

Is Income Tax a Direct Tax or Indirect Tax?

Direct taxes are those levied on individuals and paid to the government immediately. These taxes can be anything from income taxes to poll taxes to land taxes to taxes on personal property. When it comes to earnings taxation, for instance, those who bring in a more significant sum of money will pay a higher percentage of their earnings in taxes than those who make less. It is often determined as a percentage of total income. Direct taxes should be paid by no one other than the taxpayer.

Taxing an individual’s income is a fantastic example of the type of taxation just explained. Every year, taxpayers must report their income and pay their taxes. Payroll deductions, though, could happen more frequently. For example, a man’s annual salary is $120,000, and his direct tax rate would be 30%.

FAQs: Income Tax Is a Direct Tax

Which are direct and indirect taxes in India?

You pay some taxes directly, such as the earned income, corporate, and wealth tax, while you pay others indirectly, such as sales, service, value-added, etc.

What are the two types of income tax?

There are two distinct sorts of taxes: direct tax and indirect tax. Direct tax refers to taxes levied on income earned.

Which type of tax is income tax?

Direct tax. Individuals (or their families) and businesses are subject to income tax. A person’s taxable income is the starting point for calculating income tax. It is regarded as a direct tax since the burden is assumed to be borne by those who pay it.

What is an example of direct income tax?

The taxpayer cannot shift the burden to another party’s indirect tax. They are primarily income or wealth taxes. Direct taxes include income tax, corporate tax, property tax, inheritance tax, and gift tax.

Conclusion

When paying a direct tax, an individual or organization sends their payment directly to the government agency that assessed the tax. Direct taxes can be broken down into three categories: income taxes, property taxes, and asset taxes. There are also indirect taxes, like sales taxes, in which a tax is assessed on the supplier, but the consumer is the one who pays the tax. One example of an indirect tax is the value-added tax.

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