Any tax imposed directly on your income, assets or wealth is known as a direct tax. Individuals are required to pay taxes to the government for salaries, earnings from a business or gains from the sale of property or any other asset. The primary feature of direct taxes is that they are paid directly by the taxpayer to the government, without the involvement of any intermediary.
Income tax, corporate tax, and capital gains tax are common types of direct taxes, calculated based on your income. The higher your income, the greater your tax liability will be.
How does direct tax affect your income and investment?
1. Impact on Income
The government taxes individuals based on their income, with high earners typically facing higher tax rates. In India, the income tax is calculated based on the slab your earnings fall into. These tax rates and slabs are sometimes revised in the Union Budget.
You can lower your tax liability by claiming deductions under various sections of the Income Tax Act 1961. Tax deductions for investments in PF, PPF, life insurance premiums, etc. can be claimed under Section 80C while those for health insurance premiums and similar expenses can be claimed under Section 80D.
2. Investments
Profits from the sale of investments like stocks, mutual funds units, or property are subject to capital gains tax. Gains on the sale of stocks or mutual fund investments within a year attract a 20% tax (for equity assets). However, if you sell equity assets after one year, the profit is taxed at 12.5%, but only if the gains exceed Rs 1.25 lakh.
Gains made via the sale of property are subject to capital gains tax. If you sell a property within 24 months of buying it, you will have to pay a tax on the gains in line with your current income tax slab. If a property is sold after 24 months of acquisition, a 12.5% long-term capital gain tax is applicable. However, certain exemptions under Sections 54 and 54F of the Income Tax Act can help reduce this tax liability if you reinvest the proceeds in another property.
In Budget 2024, Finance Minister Nirmala Sitharaman announced changes to the income tax slabs under the new tax regime.
As per the revised structure, income up to ₹3,00,000 remains tax-free. Earnings between ₹3,00,001 and ₹7,00,000 are taxed at 5%, while income between ₹7,00,001 and ₹10,00,000 falls under the 10% tax bracket.
For those earning between ₹10,00,001 and ₹12,00,000, the tax rate is 15%. The next slab, covering income between ₹12,00,001 to ₹15,00,000, attracts a 20% tax rate. Any income exceeding ₹15,00,000 is taxed at 30%.
Additionally, a tax rebate under Section 87A is available under the new tax regime for people with a total income of up to ₹7,00,000, effectively making their tax liability zero.
