Tax is an amount levied by the government for the development of the country’s financial operation. This is mainly charged on a product, income or an activity. The taxes are governed by different act stipulating the rules and regulations. By now, you would have been aware of the two broadly classified types of taxes.
A Direct Tax is a tax charged directly on the wealth or income of a person. The example of direct tax is an income tax. Income tax is levied on the total income/wealth of a person during the previous year. The word person is a comprehensive term which includes individual, business, companies, body corporate and so on. This type of tax concerns the majority of the population because a substantial amount of money earned by a person is deducted as tax.
Taxes levied on the product/activity are categorized under the indirect tax. Since these taxes are indirectly charged during different stages of production until the final sale of product/activity, they are called an indirect tax.
Below are some of the basic concepts of direct taxation that every person must learn, understand before paying the taxes.
1) Applicability: As mentioned earlier, direct taxes are charges on income/wealth of an individual during a previous year. Taxes are not always applicable to all the persons earning income. They are charged based on the physical presence in the country. This concept is called as residential status. Understand, whether you qualify for the residential status. Tax charges differ based on the residential status.
2) Legal Terms: Learn the legal terms in taxation. The words such as Assessee, Assessment Year, Previous Year, Person, Assessing Officer etc are commonly used taxation words. Even the word Income has a broad meaning and includes wide scope under its definition. Take an interest to read the terminology for better understanding.
3) Heads: Income in the Direct Taxes are classified under 5 different heads namely; Income from Salary, House Property, Business/Profession, Capital Gains and other sources. When you are employed under an employer/organization, you are taxed under income from salary. The taxation concept and rules under each head are distinct. Find out the appropriate income head for your income and analyze the taxation aspects.
4) Tax rates: Taxes are charged on a particular rate on the taxable income. This rate differs according to the income of individual, person, companies, business etc. The tax rates are fixed by the government every year. Taxes are charged only when the income crosses stipulated amount during the previous year. Hence, it is the responsibility of every individual who is eligible for tax payment to know their tax rates.
5) Filing: Income tax returns are to be filed within the deadline mentioned by the authority. You may incur penalties in case of delayed filing. Set a reminder for the filing dates in case you fail to remember. The filed tax returns are subject to scrutiny by income tax officers. Ensure your returns are authentic and filed within the due date.
6) Deductions: There are certain eligible expenses and allowances under the income tax act that can be deducted from the taxable income resulting in a reduction in your tax payment or at times zero tax payment. Do an intense research on the available deductions and try to utilize the same to reduce your tax liability.
As our tax payments are being utilized for the development of our country, it is our responsibility to pay the tax without any default. At the same time, it is our right to understand the taxation concepts before paying the tax. Learn tax before it is too late.