Direct Taxes in India Explained

by
By Vasundhara Rastogi

In India, there are two types of taxes levied by the government: Direct taxes and indirect taxes. Indirect taxes are levies imposed on goods and services, whereas direct taxes are levied on the income and profits of individuals and organizations. Direct taxes are directly paid to the government by the tax payer.

Income tax is a direct tax, paid on personal income by an individual or a company, to the federal government.

Professional Service_CB icons_2015 RELATED: Tax Compliance Advisory

Who are tax payers in India?

Every individual, company, or business operating within India is liable to pay income tax. The scope of income tax is determined by the tax slab and rates provided annually by the Union Budget. Income tax slabs and rates for the financial year (FY) 2016-17 and 2017-18 are available here.

According to the Income-tax Act of 1961, there are seven categories of persons liable to pay income tax:

  • An individual;
  • A Hindu undivided family (HUF);
  • A company;
  • A firm;
  • An association of persons (AOP) or body of individuals (BOI);
  • A local authority, and;
  • Every artificial Juridical Person not falling within any of the preceding categories.

Income heads for calculating income tax

Income tax in India is levied depending on the person’s source of income and his/her residential status.  All sources of income are classified under the following five heads:

Salaries

The term ‘salary’ is defined to include the following:

  • Wages;
  • Any annuity or pension;
  • Any gratuity;
  • Any fees, commissions, perquisites, or profits in lieu of or in addition to any salary or wages;
  • Any advance of salary;
  • Any encashment of leave salary, and;
  • Any amount of credit in a recognized provident fund of an employee to the extent that it is taxable.

For income to be treated as salary, the following conditions should be noted:

  • There must be an employer-employee relationship between the payer and receiver of income;
  • Salary income must be real and there must an intention to pay and receive salary, and;
  • Salary may be received from more than one employer; it may be received from the present employer as well as from a prospective employer, and in some cases even from a former employer, such as pensions.

Capital gains

Capital gains taxation applies to earnings from the sale of capital assets held by the tax assessee. Capital assets refer to the properties such as buildings, lands, bonds, equities, debentures, and jewelries etc. Taxes are levied on the income of the assesse when such properties are sold.

Related Link Icon-IB RELATED: Income Tax Return Forms in India 

Income from house property

Income tax is levied on house property if the house is given out on rent by the owner. However, under this income head, the property cannot be used for business or professional purposes, which will otherwise be subject to a different tax rate.

Profits and gains of business or profession

According to the Income-tax Act, the profits earned from businesses or by providing professional services are considered taxable as per applicable rates. This income head is also known as ‘profits and gains of business or profession’.

Income from other sources

Income from any sources – other than the four listed above – are categorized under this category. Some of these are listed below:

  • Lottery/horse race winnings;
  • Income from dividends;
  • Pension received after the pensioner’s death;
  • Rental income (other than house properties);
  • Gifts received, and;
  • Interest on government securities, debentures and bonds.

Related Link Icon-IB RELATED: Filing Income Tax Returns in India 

Income tax collection

There are primarily three ways in which income taxes are collected by the federal government.

Tax Deducted at Source (TDS)

TDS is a means of collecting income tax directly from the individual’s source of income on a periodical or occasional basis. All entities in India (including foreign representative offices and Indian setups like wholly owned subsidiaries) are required to deduct tax (withhold tax) on employees’ salaries on behalf of the income tax department. An employer may also deduct TDS on various other payments including rent, interest, dividend, and royalty. The Finance Act of each financial year specifies the rates in force for deduction of tax at source as per the Indian Income-tax Act, 1961.

Selected TDS rates for the FY 2016-17 are shown in the table below.

Tax Deducted at Source (TDS) India

TDS Deduction Days India

The recipient whose income tax has been deducted at source, is entitled to get credit of the deducted amount in his/her personal assessment. This credit is given on the basis of the TDS certificate issued by the deductor. The certificate is issued within 15 days from the due date for furnishing the statement of tax deducted at source.

Tax Collected at Source (TCS)

TCS is to be collected by the seller from the buyer at the time of sale of goods, which are classified into respective categories. The TCS rate is different for each of these categories, and the TCS collected by the seller must be deposited with the federal government.

Voluntary payment by tax payers into designated banks

Every taxpayer, who earns a taxable income, is required to pay income tax in India. A person who has an independent income can deposit self-assessment tax or advance tax to the credit of government by using a tax payment form or challan (ITNS 280). The form is available at the income tax department’s website and tax can be paid at designated banks through either physical mode, that is, in cash or check or via e-payment. After making the tax payment, the Challan Identification Number (CIN) is generated, which is to be cited on the income tax returns forms.

 

About Us 

India Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, Indonesia, Russia, the Silk Road, & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout India and the Asian region. We maintain offices in Delhi and Mumbai and throughout China, South-East Asia, India, and Russia. For assistance with India investment issues or into Asia overall, please contact us at india@dezshira.com or visit us at www.dezshira.com.

 

Related Reading-IB

dsa brochure

Dezan Shira & Associates Brochure

Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.


 An Introduction to Doing Business in India 2017

An Introduction to Doing Business in India 2017 is designed to introduce the fundamentals of investing in India. As such, this comprehensive guide is ideal not only for businesses looking to enter the Indian market, but also for companies who already have a presence here and want to stay up-to-date with the most recent and relevant policy changes.


Payroll processing and compliance in India

Payroll Processing and Compliance in India

In this issue of India Briefing Magazine, we discuss payroll processing and reporting in India, and the various regulations and tax norms that impact salary and wage computation. Further, we explain India’s complex social security system and gratuity law, and how it applies to companies. Finally, we describe the importance of IT infrastructure, compliance, and confidentiality when processing payroll in India.

Leave a Reply

Your email address will not be published. Required fields are marked *

Never miss an update

Stay ahead of the curve in emerging Asia by subscribing to our regional publications. Subscribers take full advantage of all our website features and receive regular updates from our local experts on doing business in Asia.

Subscribe
India Briefing