Direct Taxes in India
What is Direct Tax? The tax paid to the government directly by the tax-payer (like the Capital Gains Tax and the Income Tax) are called Direct Tax. In other words, it can be stated direct tax is taken away from ones salary or wages directly. However, the property tax which is imposed by the government is also called direct tax. In India, the collections which are clubbed under direct taxes are Banking Cash Transaction, Securities Transaction Tax, Personal Income Tax, Corporate Tax and Fringe Benefit Tax. The collections of Direct Taxes in India are increasing smoothly over the years.
Income Tax in India: The income earned during a financial year (April 1st till March 31st) is taxable as per the prescribed rates for that year. Here, a resident based tax paying system is followed. The taxes are charged keeping in view the residential status (not citizenship). The categories are resident, resident but not ordinarily resident, and nonresident. In case of Indian sourced income- all the three categories are taxable in India. However, for the foreign sourced income of only the residents are charged. The foreign sourced incomes of the resident but not ordinarily resident and the non-resident are not taxable in India. The Indian companies are always categorized under Indian resident. Moreover, the companies which are controlled from India are also categorized as Indian. The rest of the companies are non-resident.
The Central Board of Direct Taxation (CBDT) takes care of the Direct Taxation in India. The CBDT is a division of revenue which is a part of the Ministry of Finance. It creates and regulates the direct taxes in India. It manages the direct tax law according to the rules of the Income Tax department. The revenue act of 1963 is utilized to govern the proceedings of CBDT.
The tax structure in India is divided amongst the local government, the state government and the central government. The central government charges taxes for income, service tax, central excise and custom duties. The state government charges taxes like professional tax, land revenue, VAT (value added tax), stamp duty and state excise. The civic (local) bodies charge taxes of properties and octroi. The capital gains, tax incentive, corporate and personal income tax also fall under this category.
In India, the following heads of income are taxed:
- Salaries: The payments received for rendering services, wages, pensions, fees, commissions, as well as the taxable amount of all prerequisites are covered under this head. In India, the employers are provided with standard rules for making these deductions. The deduction depends on the salary of the tax-payer.
- The income from a house or property: The income earned by renting out premises for residential or commercial purposes are taxed under this category. There are two prescribed cuttings under this head.
- The profits or gains from any business or profession: The revenue (above a certain limit) generated from business are permissible for deduction under the tax guidelines of India. The revenue expenditures are also taxed under this head following the taxation rules.
- The capital gains: The capital gains which arise from the transfer of the capital assets. The capital assets which are held for 36 months or less are short-term assets. However, the income from shares and securities of 12 months or more are considered to be long-term capitals. The long-term interests have a lower rate of interest.
- The income from other sources: The other sources of incomes cover any income which is not specified under any of the above heads. The expensed incurred while investing for this income is taken into consideration, and tax benefits are provided accordingly.
Changes in the direct tax slabs in India in the budget 2011-12: The exemption limit was increased from 1.6 lakhs to 1.8 lakhs. However because of inflation over 10 percent this has hardly benefited anybody. The minimum age to qualify as a senior citizen has been reduced from 65 to 60. Exemption limit for the senior citizens have been raised from 2.4 lakhs to 2.5 lakhs. The very senior citizens are exempt from paying taxes till the annual income of 5 lakhs. The salaried people need not file return for income tax if TDS is being deducted from their salary. If the tax is directly deducted from the salary then it is direct tax.
Analysis of the tax incidence on different investment tools:
Pays and Perks: The idea of bringing in the government provided accommodation as a part of the salary has been dropped. The perks of government staff will continue as before. The initial draft of the plan was confronted by the salaries class of government servants.
Income Tax Slabs: The draft states that there will be a 10 percent tax for the slab 1.8 lakhs to 10 lakhs, and 20 % for the others.
Home Loans: The government has planned to continue the major tax incentive on the housing loans. The tax payers will get benefit till the loan of 1.5 lakhs per annual but the rental income will be taxed.
Insurance and ULIPs: The new life insurance products do not have any tax proposed. These fall under the exempt-exempt-exempt rule. The new ULIPs issued after DTC can be taxed only after maturity. The existing ones will be relieved from tax only on midway withdrawal and maturity.
Equity Mutual Funds: The long-term capital gain tax on the unit of equity fund is proposed. It is planned to calculate the long-term gain on equity funds and equity only after the deduction of a certain percentage of the capital gains irrespective of any indexation.
Stocks Investment: In stock investment the difference between the long-term and short-term capital gains have been removed. These gains will be considered as income from the ordinary sources and will be taxed accordingly.
Provident Fund: All saving plans (inclusive of the PF’s) will be taxed or deducted at the time of withdrawal. The PPF (public provident fund), (GPF) government provident fund, and pension fall under the EEE benefit.
Furthermore, the pension products also received special facilities.