Seeing hard-earned money going into taxes does not always feel fair. While taxes are important, as an individual, one must be aware of where their money is going. People have to pay tax to the government in two different ways - indirect taxes and direct taxes. One must always keep an account of the tax they are being charged in order to not get unnecessarily overtaxed.
What are direct taxes?
As the name suggests, a direct tax is when an individual pays taxes directly to the government. While in indirect taxes, the tax that is imposed by the government is paid to the tax collector. Taxes like Goods and Services Tax (GST), Value Added Tax (VAT), and retail taxes fall under indirect taxes.
A direct tax is generally calculated based on the taxpayers paying capabilities. The higher their capability, the larger is the tax levied upon them. Some different types of direct taxes are,
Income tax: Income tax is calculated based on an individual’s income. The taxpayer’s total annual salary determines which tax bracket they would fall under.
Corporate tax: Taxes such as DDT (Dividend Distribution Tax), FBT (Fringe Benefit Tax), and STT (Securities Transaction Tax) are charged to companies. These taxes are called corporate taxes.
Wealth tax: These taxes are levied upon land and buildings. The government uses this money to sustain public services such as schools, roads, fire departments, and the police.
Corporate gains tax: Individuals who earn profits through stocks and investments are charged with corporate gains tax.
Estate tax: Estate taxes are levied upon property or money that a deceased individual has left behind after their demise.
How to avoid being overtaxed?
Taxes are the backbone of any country, and individuals must abide by the taxes that the government imposes on them. However, the government also facilitates taxpayers with multiple provisions that they can utilize to minimize the amount they pay in taxes.
Tax scheme selection:
The most recent provision by the government was made in the Budget in 2020. Now taxes payers have the option to choose between a new tax scheme, where tax slabs are relatively lower than their former counterparts.
People can also choose to stay with the old tax scheme. However, taxpayers who wish to transfer to the new scheme will have to give up all the tax exemptions they enjoyed under the previous scheme. So, an individual must choose a scheme that is financially the most beneficial to them.
The old tax regime comes with several tax-deductibles. Taxpayers can claim rents, loans, and even donations as tax-deductibles from their annual income. But one must ensure that they have the proper documentation and receipts of all their deductibles when filing for taxes. These deductions are applicable under various Sections of the Indian Income Tax Act.
Some of the popular Sections for tax savings are:
Section 80C – Life Insurance, ELSS, ULIP, NPS, NSC, PPF, EPF, Home Loan Principal repayment, etc.
Section 80D – Health Insurance premiums paid
Section 80EE – Home loan interest paid
Section 80GG – House rent paid in the absence of HRA
Section80G – Donations made to charitable organizations
Making the right type of investment can make a huge difference to the taxpayer’s final tax amount. The taxpayer must make sure that they invest in schemes that offer tax benefits. Different types of investment schemes offer varied tax-saving options which might be subject to a certain lock-in period.
Investments like a debt fund are some of the more tax-efficient options that an individual can opt for in order to defer taxes.
At the end of the day, it is highly recommended that taxpayers keep a complete account of their taxes and make smart choices when it comes to their money.