Direct and Indirect Taxes, Perquisites & Income Tax Deductions in India
Direct Tax
A direct tax is paid directly to the government by the person on whom it is imposed. The burden of this tax cannot be shifted to someone else.
Examples:
- Income tax
- Wealth tax
- Property tax
- Corporate tax
Indirect Tax
An indirect tax is paid by one person but the burden can be passed on to another person. It is collected when people buy goods and services.
Examples:
- GST (Goods and Services Tax)
- Customs duty
- Excise duty
Merits and Demerits of Direct Tax
Merits
- Equitable: Direct taxes are based on the ability to pay. People with higher incomes pay more, ensuring fairness.
- Reduces inequality: Since the rich pay higher amounts, it helps reduce the gap between rich and poor.
- Certainty: The taxpayer knows the rate and the amount of tax to be paid, and the government can estimate revenue accurately.
- Economical: The cost of collection is low because taxes are collected directly from individuals and firms.
- Controls inflation: By increasing direct taxes, the government can reduce purchasing power and help control inflation.
Demerits
- Burden felt directly: People feel the tax burden since it is deducted directly from income.
- Tax evasion: Individuals may hide income or provide false information to escape tax.
- Reduces incentive to work: High tax rates may discourage extra work, saving, or investment.
- Inconvenient: Filing returns and maintaining documents may be difficult for many.
- Affects productivity: Heavy taxation may reduce motivation and productivity of workers.
Merits of Indirect Taxes
- Convenient to pay: People pay indirect taxes automatically while buying goods and services (like GST). No need for separate paperwork.
- Easy to collect: The government collects tax from manufacturers or sellers, not directly from millions of individuals. This makes collection easier and cheaper.
- Wide coverage: Everyone who buys goods/services pays indirect tax, so the revenue base is large.
- Helps control consumption: Higher taxes on harmful goods (like tobacco, alcohol) help reduce their use.
- Non-evadable at point of sale: Difficult to avoid because tax is already included in the price of products.
Demerits of Indirect Taxes
- Regressive in nature: Indirect taxes affect rich and poor equally, making them unfair. Poor people suffer more as they spend a larger portion of their income on taxed goods.
- Increase prices: Tax is added to the price of goods/services, leading to inflation and higher cost of living.
- No certainty: Revenue from indirect taxes depends on consumption. If people buy less, government revenue falls.
- May encourage black marketing: High indirect taxes sometimes lead to illegal production or smuggling to avoid tax.
- Burden on consumers: The final burden of tax falls on consumers because sellers transfer the tax to buyers by increasing prices.
Perquisites
Perquisites, commonly known as perks, are additional benefits or advantages provided by an employer to an employee apart from the regular salary or wages. These benefits may be given in cash, in kind, or in the form of services.
Perquisites are offered to improve the standard of living, job satisfaction, and motivation of employees. They form an important part of the compensation package and may be taxable or non-taxable depending on the nature of the benefit and income tax rules. Some common examples include rent-free accommodation, company car, free medical facilities, free meals, and telephone facilities.
Features of Perquisites
- They are extra benefits given over and above salary.
- Provided due to the employer–employee relationship.
- Can be monetary or non-monetary.
- Provide a personal benefit or comfort to the employee.
- May be taxable or exempt depending on government rules.
Free Perquisites
Free perquisites are those perks given to an employee without charging any amount. The employee does not pay anything for receiving or using these facilities; the full cost is borne by the employer. These perquisites directly increase the financial benefit to employees and are often used to attract and retain skilled workers.
Examples of Free Perquisites
- Rent-free accommodation – house or apartment provided at no cost.
- Free electricity, water, or gas – utility bills paid entirely by the employer.
- Free medical treatment – hospitalization and treatment provided without charges.
- Free company car – car provided for personal or official use without payment.
- Free meals or canteen facility – food provided free at the workplace.
- Free telephone / internet facility – communication services at no cost.
- Free education facility – children of employees studying free in employer-run schools.
- Free domestic servants – cooks, gardeners, or watchmen provided without cost.
Resident, Non-Resident, and Not-Ordinarily Resident
1. Resident
A person is treated as a resident in India if he satisfies any one of the following basic conditions in a financial year:
- He stays in India for 182 days or more, or
- He stays in India for 60 days or more in that year and 365 days or more in the preceding four years.
2. Non-Resident (NR)
A person is considered a non-resident if he does not satisfy any of the basic conditions for being a resident.
3. Resident but Not Ordinarily Resident (RNOR) / Non-Ordinary Resident
A person becomes not ordinarily resident (RNOR) if:
- He is a resident, but does not satisfy both additional conditions.
- He has been a resident of India for at least 2 out of 10 previous years;
- He has stayed in India for 730 days or more in the last 7 years.
Deductions Under the Income Tax Act (Chapter VI-A)
While computing total income, an assessee is allowed several deductions under Sections 80C to 80U. These deductions reduce the taxable income and are available only when the assessee opts for the old tax regime.
- Section 80C – Deduction for investments and payments.
- Section 80CCC – Contribution to pension funds.
- Section 80CCD – Contribution to NPS. Deduction for employee/self-contribution to NPS.
- Section 80D – Medical insurance. Deduction for health insurance premium: Self + family: ₹25,000.
- Section 80DD – Maintenance of disabled dependent.
- Section 80DDB – Treatment of specified diseases (e.g., cancer, neurological disorders).
- Section 80E – Interest on education loan. Deduction for interest paid on loan for higher education.
- Section 80G – Donations. Deduction for donations to approved charitable institutions.
- Section 80GG – Rent paid (if HRA not received).
- Section 80TTA / 80TTB – Savings interest. 80TTA: Deduction up to ₹10,000 for savings bank interest (non-senior citizens). 80TTB: Deduction up to ₹50,000 for senior citizens on bank/post office interest.
Not Included in Total Income
- Agricultural income: Income from agricultural land in India is fully exempt.
- Share of profit from partnership firm: Partners’ share of profit from a partnership firm is not taxable.
- Scholarships: Scholarships received for education purposes are fully exempt.
- Gifts from relatives: Any amount received from specified relatives is completely exempt from tax.
- Amount received from HUF: A member receiving money from a Hindu Undivided Family is exempt.
- Provident fund receipts: Amounts received from statutory, public or recognized provident fund after retirement are exempt.
- Gratuity: Government employees get full exemption; others get exemption up to a limit.
- Commuted pension: Fully exempt for government employees; partially exempt for others.
- Leave encashment: Fully exempt for government employees; partly exempt for others.
- Life insurance policy proceeds: Amount received on maturity or death claim is exempt if conditions are satisfied.
- Voluntary Retirement Scheme (VRS) compensation: Exempt up to ₹5,00,000 under Section 10(10C).
- Amount received on retirement (government employees): Pension, gratuity, and leave encashment under government service norms.
- House Rent Allowance (HRA): Exempt up to the limit prescribed under Section 10(13A).
- Interest on PPF (Public Provident Fund): Fully exempt from tax.
- Interest on Sukanya Samriddhi Account: Entire interest earned and maturity amount are exempt.
Not Included in Total Income
- Agricultural income: Income from agricultural land in India is fully exempt.
- Share of profit from partnership firm: Partners’ share of profit from a partnership firm is not taxable.
- Scholarships: Scholarships received for education purposes are fully exempt.
- Gifts from relatives: Any amount received from specified relatives is completely exempt from tax.
- Amount received from HUF: A member receiving money from a Hindu Undivided Family is exempt.
- Provident fund receipts: Amounts received from statutory, public or recognized provident fund after retirement are exempt.
- Gratuity: Government employees get full exemption; others get exemption up to a limit.
- Commuted pension: Fully exempt for government employees; partially exempt for others.
- Leave encashment: Fully exempt for government employees; partly exempt for others.
- Life insurance policy proceeds: Amount received on maturity or death claim is exempt if conditions are satisfied.
- Voluntary Retirement Scheme (VRS) compensation: Exempt up to ₹5,00,000 under Section 10(10C).
- Amount received on retirement (government employees): Pension, gratuity, and leave encashment under government service norms.
- House Rent Allowance (HRA): Exempt up to the limit prescribed under Section 10(13A).
- Interest on PPF (Public Provident Fund): Fully exempt from tax.
- Interest on Sukanya Samriddhi Account: Entire interest earned and maturity amount are exempt.