Direct taxes in India

Detail

Basic ideas: what a direct tax is

• Direct tax is a tax paid directly to the government by the person or company it is charged on. That person cannot pass the burden on to someone else. Examples are income tax, corporate tax and capital gains tax.
• Indirect tax is charged on goods and services, for example GST. The seller collects it, but the buyer finally bears it.
• Progressive tax: the rate goes up as income goes up. Richer people pay a larger share of their income. Personal income tax works this way.
• Proportional tax: one flat rate applies at every level of income. Corporate tax works this way.
• Class 12 NCERT (Government Budget and the Economy) places direct taxes under tax revenue receipts, which form part of revenue receipts.

Personal income tax: history and law

• Income tax is a direct tax on the income of individuals, charged at progressive rates.
• Origin: James Wilson introduced it in 1860. The British needed money to meet the costs of the 1857 revolt.
• Income-tax Act 1961 → Income-tax Act 2025
• The new Act came into force on 1 April 2026. It replaced the Act of 1961 [4].
• The 2025 Act is on the official site in a version "as amended by Finance Act, 2026" [9].
• "Tax year" is one 12-month period (1 April to 31 March). It replaces the old pair of "previous year" (the year you earn the income) and "assessment year" (the next year, when that income is assessed). One term now covers both.
• The section numbers used in this note (115BAC, 115BAA, 115JB and others) are from the 1961 Act. Exam questions still usually use them.

Old regime vs new regime

• Old regime: higher slab rates, but you can claim many deductions, such as the Sec. 80C investment deduction and the HRA exemption. A deduction is an amount you subtract from income before tax is worked out.
• New regime (Sec. 115BAC): lower rates, but almost no deductions.
• It has been the default since FY 2023-24. If you do not choose, the new regime applies.

New-regime slabs (from FY 2025-26; unchanged in 2026-27 [5])

Income (₹)	Rate
0-4 lakh	Nil
4-8 lakh	5%
8-12 lakh	10%
12-16 lakh	15%
16-20 lakh	20%
20-24 lakh	25%
Above 24 lakh	30%

• Rebate (Sec. 87A): a rebate is an amount taken off the tax you owe (not off your income).
• No tax is payable on income up to ₹12 lakh under the new regime [2][3].
• This zero-tax income limit does not apply to special-rate income such as capital gains [2].

• For salaried people, the limit is ₹12.75 lakh because of the ₹75,000 standard deduction [2]. A standard deduction is a flat amount cut from salary income, with no proof needed.

• Worked example: income ₹12 lakh (new regime)

• ₹0-4 lakh at nil = ₹0
• ₹4-8 lakh at 5% = ₹20,000
• ₹8-12 lakh at 10% = ₹40,000

• Tax before rebate = ₹60,000. The rebate cancels it, so tax payable = ₹0.

• Worked example: income ₹16 lakh

• ₹20,000 + ₹40,000 + (15% × ₹4 lakh = ₹60,000) = ₹1,20,000, plus 4% health and education cess (an extra levy charged on the tax amount).

• Worked example: salaried, gross salary ₹12.75 lakh

• ₹12.75 lakh − ₹75,000 = ₹12 lakh taxable → nil tax.

Collection and administration

• Tax Deducted at Source (TDS): the payer cuts tax when making a payment and deposits it with the government. Example: your employer cuts tax from your monthly salary.
• Tax Collected at Source (TCS): the seller collects tax from the buyer at the point of sale and deposits it with the government.
• Why TDS and TCS matter
• Tax comes in early and steadily through the year.

• Each deduction leaves a digital record → it is harder to hide income → the tax net grows wider.

• TCS on LRS remittances: the Liberalised Remittance Scheme (LRS) is the RBI scheme that lets residents send money abroad up to a yearly limit.

• Budget 2026-27 cut TCS on remittances for education and medical purposes (amounts above ₹10 lakh) from 5% to 2% [5][6]. (NCERT scaffold: 2%, confirmed.)

• TCS on overseas tour packages was cut from 5% and 20% to a flat 2%, with no amount limit [5][6].

• Faceless assessment (2020)

• Assessment is the tax officer's check of your return.
• In faceless assessment this is done fully online. The taxpayer and the officer never meet.
• Aim: less personal discretion (officer's own choice) and less corruption.

• It was launched together with the Taxpayers' Charter, which lists the rights and duties of taxpayers.

• Scale of direct tax collections (example period)

• For FY 2024-25 up to 17 June 2024, gross direct tax was ₹5,15,986 crore, up 22.19% year on year [7].
• Of this, Corporation Tax was ₹2,26,280 crore and Personal Income Tax (including STT) was ₹2,88,993 crore [7].
• Personal income tax now brings in more than corporate tax [7].

Paper taxes: wealth, estate and gift taxes

• Paper taxes: Class 12 NCERT calls these direct taxes that "never brought in large amount of revenue". They existed on paper but earned little.
• Wealth tax was abolished in Budget 2015-16. An additional surcharge on the super-rich replaced it. A surcharge is an extra tax charged on the tax amount.
• Estate duty ran from 1953 to 1985.

• Gift tax was abolished in 1998.

• Definitions

• Wealth tax is charged on net assets (what you own minus what you owe).

• Inheritance tax (estate duty) is charged on property passed on when a person dies.

• Today India has neither tax. The inheritance-tax debate came back in 2024.

Corporate tax

• Corporate tax is charged at a proportional rate on company profits.
• It does not reach households. So in National Income Accounting (Class 12) it is subtracted from National Income to get Personal Income:

Personal Income = National Income − Undistributed profits − Net interest payments made by households − Corporate tax + Transfer payments to households

• September 2019 cut
• Sec. 115BAA: an existing domestic company may choose 22% if it gives up all incentives and deductions [8].
  • It was added by the Taxation Laws (Amendment) Act, 2019, with effect from 1 April 2020 [8].
  • Effective rate ≈ 25.17%. This is 22% × 1.10 (10% surcharge) = 24.2%, then × 1.04 (4% cess) = 25.168%.
• Sec. 115BAB: 15% for new manufacturing companies that started production by March 2024.

Minimum Alternate Tax (MAT)

• Definition: MAT is a minimum tax on a company's book profits. Book profits are the profits shown in the company's own accounts. MAT applies when the company's normal tax is lower than this minimum.
• Aim: it targets "zero-tax" companies. These firms use deductions to show nil taxable income but still pay dividends (a share of profit paid to shareholders).
• History: introduced in 1987; it now sits in Sec. 115JB.
• Rate: 15% since 2019 (NCERT scaffold).
• Update: Budget 2026-27 cut MAT from 15% to 14% [5].
• From 1 April 2026, no new MAT credit can build up [5].

• Old MAT credit can reduce tax only up to 25% of the tax owed under the new regime [5].

• MAT is not levied on firms taxed under Sec. 115BAA.

• Worked example
• Book profit ₹100 crore; normal tax after deductions ₹10 crore.
• MAT at 14% = ₹14 crore (₹15 crore at the old 15% rate).
• The company pays the higher amount, so it pays ₹14 crore.

Market taxes

Capital gains tax

• Capital gains tax is the tax on the profit from selling a capital asset (shares, land, gold and similar assets).
• Rules from 23 July 2024
• Short-term gains on listed equity: 20%.
• Long-term gains on listed equity: 12.5% on gains above ₹1.25 lakh in a year.
• Holding period to count as long-term: 12 months for listed assets, 24 months for others.

• Indexation removed. Indexation meant raising the purchase price in line with inflation, which lowered the taxable gain.

• Worked example: long-term gain on listed shares of ₹3 lakh → taxable part = ₹3 lakh − ₹1.25 lakh = ₹1.75 lakh → tax = 12.5% × ₹1.75 lakh = ₹21,875.

• Share buybacks: a buyback is when a company buys back its own shares from shareholders.
• From 2026-27, buybacks are taxed as capital gains for all shareholders [5][6].
• Promoters (the owners who control the company) pay an extra buyback tax. This makes the effective rate 22% for corporate promoters and 30% for non-corporate promoters [5][6].
• Stated aim: to protect minority shareholders [6].

Securities Transaction Tax (STT)

• STT (introduced 2004) is a tax on the value of securities bought and sold on stock exchanges, including derivatives.

• Derivatives are contracts whose value comes from another asset. F&O means futures and options.

• F&O rates were raised in 2024.

• Budget 2026-27 raised them again [5][6]:
• Futures: 0.02% → 0.05%
• Options (sale): 0.1% → 0.15%
• Options exercised: 0.125% → 0.15%

• (Scaffold figures confirmed.)

• Why: to cool speculative F&O trading, in which most small traders lose money, and to raise revenue.

Angel tax

• Angel tax (Sec. 56(2)(viib), 2012) taxed the premium an unlisted company, usually a start-up, received above fair market value when it issued shares.
• The premium was treated as the company's income.

• Aim: to stop money laundering through shares priced far too high.

• It was extended to non-resident investors in 2023.

• It was abolished from AY 2025-26, to support start-up funding.

Prelims Hooks

• Income tax in India was introduced in 1860 by James Wilson, after the 1857 revolt.
• The Income-tax Act 2025 came into force on 1 April 2026 and replaced the 1961 Act. "Tax year" replaces "previous year" plus "assessment year" [4].
• Under the new regime, income up to ₹12 lakh is tax-free (₹12.75 lakh for salaried people, because of the ₹75,000 standard deduction). This does not cover special-rate income such as capital gains [2].
• Trap: income tax = progressive; corporate tax = proportional. Corporate tax is subtracted from NI to get Personal Income.
• Sec. 115BAA = 22% (effective ~25.17%, no exemptions); 115BAB = 15% for new manufacturing firms; 115JB = MAT, not applied to 115BAA firms.
• MAT was cut from 15% to 14% in Budget 2026-27, and no new MAT credit builds up from 1 April 2026 [5].
• Budget 2026-27 STT: futures 0.05%, options 0.15% [5][6].
• TCS under LRS for education and medical purposes is now 2% (was 5%) [5][6].
• Paper taxes: Estate duty (1953-1985), Gift tax (abolished 1998), Wealth tax (abolished in Budget 2015-16).
• Long-term capital gains on listed equity: 12.5% above ₹1.25 lakh, with a holding period of 12 months. Indexation was removed from 23 July 2024.

Mains Points

• Simplification versus fairness
• The default new regime, the ₹12 lakh zero-tax limit and the 2025 Act's single "tax year" make compliance easier and leave more money with the middle class to spend [2][4].

• But a very high zero-tax limit shrinks the base of people who actually pay tax. Having almost no deductions also weakens the push to save (for example through Sec. 80C).

• Corporate tax design

• Low rates without exemptions (115BAA), plus a MAT being slowly phased down (14%, no new credit) [5][8], move India toward a "low rate, wide base" system that invites investment.

• This must be weighed against the global minimum tax (Pillar Two, 15%), which limits how low effective rates can go.

• Taxing wealth and inequality

• Wealth tax and estate duty were dropped as "paper taxes" because they cost a lot to collect and earned little.

• Rising inequality has revived the 2024 inheritance-tax debate. One middle path is to tax capital gains, buybacks (with extra promoter levies [6]) and surcharges instead.

• Technology-led administration

• TDS and TCS, faceless assessment and the Taxpayers' Charter reduce officer discretion and corruption, and widen the tax net through digital records.
• Personal income tax now earns more than corporate tax [7], a sign that formalisation of the economy is working.