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What are Direct Taxes? How to Avoid being Overtaxed?

What are Direct Taxes? How to Avoid being Overtaxed?
  • 10th Mar 2021 |
  • 1,700

Taxes are the funds that are collected by the government to fund a country’s growth and development. Paying taxes is an integral part of everyone’s life. The state or the central governments are the authorities that levy the taxes, which can be collected either as direct or indirect taxes. Indirect taxes are the ones which are levied on the services and goods that are sold to consumers while direct taxes are directly paid to the government by the citizens. Read on to understand direct taxes in detail.

What is the meaning of Direct Taxes?

A direct tax is levied on an individual’s income and is paid directly by an individual or an institution to the tax authorities. The individuals and the institutions that pay this tax cannot transfer the responsibility for the payment to another entity.

Some types of direct taxes are:

1.Income tax:

The tax that an individual, the member of a HUF (Hindu Undivided Family), or a business firm pays, based on the income tax slab they come under. This is a mandatory tax levied on one’s income from a business, capital gains and salary.

2.Corporate tax:

This is the tax levied on companies and business ventures that have generated earnings in the Indian market. Corporate taxation involves taxes like FBT (Fringe Benefit Tax), STT (Securities Transaction Tax) and DDT (Dividend Distribution Tax).

3.Capital gains tax:

A capital gains tax is levied on the profits or gains made through different investment instruments and value holdings. The holding period classifies this tax as either long-term capital gains tax or short-term capital gains tax and differs for different assets. This tax is due once the investment is sold.

4.Wealth tax:

The tax is levied on individuals, members of a HUF (Hindu Undivided Family) and corporate establishments on the profits or returns from real-estate ownership. Indian residents pay this tax on their global assets, whereas NRIs pay this tax for assets held in India.

While these are the different types of direct taxes levied on taxpayers, let’s look at how you can avoid being overtaxed.

Save Tax Now

Some ways you can avoid being overtaxed are:

1.Tax-saving investment options:

Investment options like fixed deposits, while being the conventional investments choices, attract taxes on the interest. The interest earned is taxed as income at the rate that is applied to the investor. Instead, you could look at more tax-efficient instruments like debt mutual funds. Debt funds provide you with the option to put off the tax payment until you withdraw your investment. If you hold them for three years, you also get the advantage of low tax. The income earned from these funds is treated as long-term capital gains after a span of three years and therefore, attracts less tax.

2.Deduction on rent:

You have the option of claiming a tax deduction on the House Rent Allowance (HRA) if you stay on rent and fulfil all the requirements for getting tax benefits. While there is no upper limit for this, there are some rules that cap maximum HRA deduction.

3.Growth option instead of dividend mutual funds:

Dividend distribution tax is a tax that a lot of investors pay without realising. These are levied on the dividends paid by mutual fund schemes other than equity and equity-related instruments. Here, a growth option is much more tax-efficient because the entire sum is not subject to taxation; only the capital gains are taxed.

4.Insurance:

Apart from the coverage you get with an insurance policy, insurance plans are also great tax-saving options. Under Section 80C of the Income Tax Act, the premiums paid on a life insurance policy are eligible for a tax deduction. Similarly, you can avail tax deduction for health insurance premiums under Section 80D of the Act.

If you are looking for better ways to handle your taxes, you can consider the Kotak Life tax-saving guide. Crafted by experts, you can use this guide to get crucial information on filing and saving taxes. Additionally, this guide aims to facilitate informed investment decisions that are based on personalised insurance needs of the policyholder.

Summing it up

A direct tax is levied on an individual or institution’s earnings, including capital gains, income, wealth and corporate tax. However, some of the ways you can reduce the amount of tax you pay are tax-saving investments, rent deduction, growth options and insurance policies. To conclude, one cannot avoid the responsibility of paying direct taxes. However, there are provisions to save money on direct taxes, which can lessen individuals’ financial burden.

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