How to understand Direct tax Easily? Briefly explain.

Direct tax

Direct taxes, such as income tax, poll tax, land tax, and personal property tax, are one kind of taxes that people pay directly to the government. These direct taxes are calculated based on the taxpayer’s capacity to pay, so the greater their capacity to pay, the higher their taxes are.

For example, in the case of income taxation, an individual who earns more pays higher taxes. It is computed as a percentage of the total income. Additionally, direct taxes are the responsibility of the individual and should be fulfilled by no one else but him.

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Example of Direct Taxes

A person’s income tax is one excellent example of a direct tax, as was previously mentioned. Income tax returns are typically submitted yearly, while monthly wage deductions are also an option. For instance, if an individual pays $120,000 in annual salary and pays $30,000 in direct taxes, that is his direct tax.

Types of Direct Taxes

1. Income tax

It is determined by a person’s income. Depending on how much a worker makes, a set proportion of that salary is deducted. The government is also interested in listing credits and deductions that help reduce one’s tax obligations, which is a good thing.

2. Transfer taxes

The estate tax is the most typical type of transfer tax. This kind of tax is imposed on the taxable portion of a decedent’s assets, such as trusts and bank accounts. Another way to collect money from persons who are passing their property to another person is through a gift tax.

3. Entitlement tax

People benefit from social programmes like Medicare, Insurance, and Social Security because of this kind of direct tax. The Federal Insurance Contributions Act, which collects the entitlement tax through payroll deductions, is the umbrella name for this legislation.

4. Property tax

In order to sustain public services like the police and fire departments, schools and libraries, as well as roads, property tax is levied on assets like land and buildings.

5. Capital gains tax

When a person sells assets like stocks, property, or a company, this tax is levied. By calculating the difference between the acquisition amount and the selling amount, the tax is calculated.

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Read also: What is the difference between direct and indirect tax?

Benefits of Direct Taxes:

There are actually a lot of benefits to paying taxes directly, even though it is strongly enforced on everyone who is not exempt. They include:

1. Promotes equality

Since direct taxes are based on the ability of a person to pay, it promotes equality among payers and citizens. Depending on their income, each person is assessed a different fee.

2. Increases stability

Direct taxes have the advantage of being decided and made final before they are ever paid. As long as the wage does not change, the annual tax in the case of income tax is the same every year.

3. Increase flexibility

Taxes are the government’s source of income, and as they vary, so do the government’s revenues. They can move up or down.

4. Saves time and money

Since taxes are already collected at the point of revenue, the government does not need to spend money on their collection. Some businesses use time and money-saving automatic payroll deduction systems.

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