Direct Tax, Gift Tax, Income Tax! Confused about the taxes you pay every year? Don’t worry we are here to help you understand the different taxes levied by our government.
Direct Tax, Gift Tax, Income Tax…. The list goes on. Confused about the taxes you pay every year? Don’t worry! Tax is one of the most complex topics of the Indian financial system. But we are here to help you understand the different taxes levied by our government and break it down for you.
Taxes represent the pool of money we pay to the government. They are the basic source of income for our government. This money is used for the development of our country by improving services across sectors. The different taxes levied by the government are classified under two types – Direct Taxes and Indirect Taxes.
What are Direct Taxes?
Direct taxes are those that are directly paid to the government by you. It is your responsibility to pay these taxes. Thinking of skipping paying your taxes? Bad idea. Non-payment or evasion of these taxes can incur a heavy penalty. Income tax, wealth tax, and corporate tax are some of the direct taxes we pay.
Here is a list of the different direct taxes that we pay.
Income Tax:
Income tax is imposed on the yearly income of an individual, whether he or she is a resident of the country or not. The income earned in the 12-month period from 1st April to 31st March (basically a financial year) is taken into account to calculate the income tax. The tax you pay depends on your annual income. Incomes are classified under five heads – salary, house property, business income, capital gains and others.
Income tax rates on different income slabs:
Income (For individuals below 60 years of age) |
Income (For individuals above 60 years of age) |
IT % |
| Up to Rs. 2,50,000 | Up to Rs. 3,00,000 | NA |
| Rs. 2,50,001 to Rs. 5,00,000 | Rs. 3,00,001 to Rs. 5,00,000 | 10 |
| Rs. 5,00,001 to Rs. 10,00,000 | Rs. 5,00,001 to Rs. 10,00,000 | 20 |
| More than Rs. 10,00,000 | More than Rs. 10,00,000 | 30 |
Let’s say, Mohan earns 6 lakhs per annum. For him, this is how income tax is calculated:
- No tax is levied on the first 2.5 lakhs
- 10% tax is levied on the income from 2.5 lakhs to 5 lakhs
- 20% tax is levied on the income from 5 lakhs to 6 lakhs.
Additional Reading: Your Income Tax Exemption Guide For The Financial Year 2016-17
Capital Gains Tax:
If you sell any capital asset like property, bonds, gold, land or machinery, you are liable to pay capital gains tax on the profit. The capital gains tax rate (whether it is short-term capital gains or long-term capital gains) depends on how long you hold the asset.
Property Tax:
A property tax, applied as per state rules, is paid on the value of your property. The tax amount depends on the size of the property, kind of property (commercial or residential), age of the property and is accompanied by a number of service taxes, like water tax, lighting tax, sanitation tax etc. all using the same tax base. It is levied on the owner of the property and he/she is liable to pay this tax every year.
Additional Reading: Pay Your Property Tax Online
Professional Tax:
Professional Tax is a part of income tax which is charged by some state governments in India. If you earn an income from a salary or if you are a professional such as a chartered accountant, lawyer, doctor etc, then you are required to pay this professional tax. Check your salary slip. You’ll see the amount deducted as ‘professional tax’.
Corporate tax:
One of the major income sources for the government, corporate tax is the tax paid by companies or firms on the incomes they earn. These are taxes against profits earned by businesses during a given taxable period.
Gift Tax:
Gifts exceeding Rs. 50,000 are taxable unless they are received from a blood relation, or on the occasion of marriage, or by inheritance. The gift value is added to your income under the head ‘income from other sources’ and is taxable. Re-gifted casseroles and tacky picture frames are, quite unfortunately, tax-free.
Stamp Duty and Registration:
At the time of purchase of a property, you need to pay stamp duty and registration fees to the state government. Stamp duty is a tax levied for the transaction performed by way of a document like Sale Deed, Conveyance Deed etc. The payment of proper stamp duty on the transfer documents confers legality on them. Once the stamp duty is paid, the document has to be registered under the Indian Registration Act. The registration fee is paid over and above the stamp duty and it varies from state to state.
Dividend Distribution Tax:
This is a type of direct corporate tax which is paid by companies on any amount declared, distributed or paid by way of dividend to its shareholders. The dividend distribution tax is 15% and is the final tax in respect of the dividend declared. The shareholders are not required to pay further tax on their dividend income.
If you hold shares of any Indian company and receive dividends, your dividend income is tax-free. The dividend declared by Indian companies is not taxable in the hands of the shareholders because tax on distributed profits have already been borne by the company.
What are Indirect Taxes?
Indirect taxes are those paid by an intermediary (such as a retail store) who usually collects it from a consumer or client (such as their customer). Have you seen the ‘Goods and Services Tax (GST)’ addition in your restaurant bills? This is an example of indirect tax. Though you pay this tax from your pocket, the government collects this tax from the restaurant. With indirect taxes, you don’t really feel the pinch as much as direct taxes.
Here is a list of the different indirect taxes we pay.
Value Added Tax (VAT):
Value added tax (VAT) was a multi-point tax which is applied at each stage of the sale of a product and the final tax is paid by the last consumer. VAT was paid at each production stage by the manufacturer and then the entire amount is collected from the end consumer. VAT rates differed between states. This has now been replaced by GST.
Goods and Service Tax:
GST, is a form of indirect taxation that was made applicable all across India as on July 1st, 2017. This tax replaced multiple taxes that were previously levied by different state and central governments. Taxation on various goods and services under GST is set at 0%, 5%, 12%, 18% and 28%, while an additional cess may be applicable to certain products.
Excise Duty:
Excise duty was levied and collected by the government on any good or commodity while it is being manufactured. This tax was usually borne by the manufacturer, but eventually, the consumer pays it back while buying the product. For the Indian Government, the excise duty levied on goods is one of the biggest revenue sources. This has now been replaced by GST.
Customs Duty:
Customs Duty is the charge levied when goods are imported into the country or exported out of the country. It is paid by the importer or exporter. If you’re travelling to India, then you’re allowed to carry goods worth up to Rs. 25,000 without paying customs duty. If the value of goods is above that, then you have to pay customs according to the duty rate of the products.
Entertainment Tax:
This tax is imposed by State Government on all the financial transactions related to entertainment like cinema, stage shows, entertainment events, amusement parks and sports events. Different tax rates are applicable for these services in various states. This explains why Bangalore moviegoers are unhappier than Chennai cinema buffs – the latter enjoy a very low entertainment tax.
Security Transaction Tax (STT):
Securities transaction tax is levied on all transactions done on a stock exchange. STT is applicable on purchase or sale of equity shares, derivatives, equity-oriented funds and equity-oriented Mutual Funds. STT was introduced to curb tax evasion on capital gains.
Tax Jurisdictions
In India, taxes fall under three jurisdictions – Central Government, State Government and Local Government.
Central Government Taxes – Income tax, Excise duty, GST, Customs
State Government Taxes – GST, Entertainment tax, Toll tax, Professional tax, Octroi duty, Stamp duty, Luxury tax and Capital Gains tax.
Local Government Taxes – Property tax
Disclaimer
All efforts are made to keep the content of this site correct and up-to-date. However, tax laws are changed by the Government on a periodic basis and the information provided may not hold true at a later point in time. Hence, the contents of this site cannot be treated or interpreted as a statement of law. Readers are advised to undertake their own research to ratify time-bound facts and tax laws. The website cannot be held responsible for any loss or damage due to the lack of vigilance from the reader.