Direct Taxes in India

Tax Deducted at Source (TDS)

India’s domestic tax law requires any person or establishment responsible for making salary payments to obtain a Tax Deduction Account Number (TAN) and withhold tax at appropriate rates on the salary remunerated to the employees.

Contributing Advisor

Krishan Aggarwal

Senior Manager, International Business Advisory

The tax deducted (TDS) has to be deposited with the tax authority within seven days from the end of the month of deducting the tax. For March, the tax needs to be deposited by April 7, in case where taxes on non-monetary benefits are borne by employer or April 30 in other cases.

The employer must file quarterly returns (e-TDS return) of withholding tax on salaries paid in the prescribed form (Form No.24Q) with Indian tax authorities on the prescribed due dates (July 31, October 31, January 31, and May 31). A certificate (namely Form No. 16 and Form 12BA) must be issued to the employee for the tax deducted by June 15.

Minimum Alternate Tax (MAT)

All companies, whether domestic or foreign, are obligated to pay MAT.

MAT is exclusively applicable to companies and does not extend to individuals, HUFs, partnership firms, and similar entities. For foreign companies that generate profits through business operations in India, the provisions of Section 115JA apply.

As per the concept of MAT, the tax liability of a company will be higher of the following:

• Tax liability of the company computed as per the normal provisions of the Income-tax Act, that is, tax computed on the taxable income of the company by applying the tax rate applicable to the company. Tax computed in above manner can be termed as normal tax liability.
• Tax computed at 15 percent (plus surcharge and cess as applicable) on book profit (manner of computation of book profit is discussed in later part). The tax computed by applying 15 percent (plus surcharge and cess as applicable) on book profit is called MAT.

Features of MAT

Taxation on dividends

The taxation of dividends has now shifted to the ultimate shareholders from the earlier responsibility of the company under Dividend Distribution Tax (DDT).

Companies are required to deduct tax at the rate of 10 percent before paying dividends to their resident shareholders. However, if the dividend payment doesn't exceed INR 5,000 in a financial year and is not made in cash, the company is not required to deduct tax at source.

Similarly, a person is required to deduct TDS at the rate of 10 percent before paying income to a resident investor in mutual funds or specified companies. However, TDS is not required to be deducted if the income paid or likely to be paid in a financial year is below INR 5,000 or is in the nature of capital gains.

Individuals earning dividend income exceeding INR 5,000 in a financial year and whose total income does not exceed the Basic Exemption Limit (BEL) must file an income tax return to claim a refund of TDS on dividends.

Resident individuals with estimated annual income below the BEL can submit Form 15G to the company or mutual fund to avoid deduction of TDS. Senior citizens can apply in Form 15H for the same purpose.

For non-resident taxpayers, companies must withhold tax at 20 percent (plus surcharge and cess) before remitting dividend under Section 195 read with Section 115A of the Income-tax Act. Taxpayers can choose between the beneficial TDS rate under the Income-tax Act or relevant Double Taxation Avoidance Agreement (DTAA) under section 90(2) of the Income-tax Act.

Buy-back tax

The Income Tax Act levies a buy-back tax at the rate of 20 percent (plus applicable surcharge and cess) on the company’s (both listed and unlisted) shares bought back on or after July 5, 2019, where the public announcement for buy-back has been made after this date. Such tax is to be paid by the company while buying back its own shares. Income from buy-back of shares is exempt in the hands of the shareholders.

Corporate Income Tax

Corporate tax is levied on the income earned by companies at a rate varying between 20-40%, depending on the companies’ particulars.

Any company registered under the Companies Act, or any foreign company that has its place of effective management in India will be considered as a domestic company. All income earned by a domestic company is taxed under corporate income tax. For foreign companies, only the income received or accrued in India is taxed under corporate taxation.

Withholding Tax

The applicable withholding tax rate is the rate prescribed in the Income Tax Act, 1961 or relevant Double Taxation Avoidance (DTA) Agreement, whichever is lower. Non-residents are liable to pay taxes in India on source income, including:

• Interest, royalties, and fees for technical services paid by a resident
• Salary paid for services rendered in India
• Income arising from a business connection or property in India.

Withholding tax (WHT), also called retention tax, is an obligation on the individual (either resident or non-resident) to withhold tax when making payments of a specified nature - such as rent, commission, salary, for professional services, to satisfy contract provisions, etc. – at rates specified in India’s tax regime.

Advance tax

Advance tax is a pay-as-you-earn system where taxpayers estimate their total income and tax payable for the year, and make advance tax payments at specified intervals during the financial year itself, as required by the Income-tax Act, 1961.

Although tax is deducted at source by the taxpayer in several cases, it may not cover the final tax amount that needs to be paid. Therefore, it's crucial for taxpayers to understand their obligation to pay advance tax and the consequences of non-payment or insufficient payment.

Who needs to pay advance tax?

Advance tax is payable during a financial year in every case where the amount of such tax payable by the taxpayer during that year is INR 10,000 or more.

Individuals not liable to pay advance tax

A resident senior citizen (an individual of the age of 60 years or above during the relevant financial year) not having any income from business or profession is not liable to pay advance tax.

While salaried taxpayers are also covered for payment of advance tax, they are generally not required to pay advance tax as their employers are obligated to deduct withholding tax or TDS on their salaries. However, such a salaried person would still be liable to make advance tax payment on income under other heads such as dividend income, interest income, rental income, shortfall of TDS for salary income, etc.

Due dates to pay advance tax

The due dates for payment of different instalments of advance tax for both corporate as well as non-corporate assessee are as follows:

Capital gains tax

It is levied on the transfer of a capital asset.

Capital gains are computed by deducting the cost of acquisition/improvement from the sale consideration. Capital gains are categorized into short-term capital gain (STCG) and long-term capital gain (LTCG) depending on the period of holding of the transferred asset.

Capital gains will be computed by reducing the cost of acquisition of the debenture and the expenditure incurred wholly or exclusively in connection with the transfer or redemption of such debenture from the sales consideration. Furthermore, no deduction is to be allowed for STT.

Short-term gains on certain financial assets will now be taxed at 20%, while the tax rate for all other assets remains the same.

Previously, different capital assets required varying holding periods to qualify as short-term or long-term gains. For instance, long-term gains were from listed equity shares held for over 12 months and unlisted bonds held for over 36 months.

Under the Union Budget 2024-25, there are now only two holding periods—12 months and 24 months—to classify capital gains as long-term or short-term. All listed assets must be held for at least 12 months to qualify as long-term gains.

This change will apply to:

• Listed stocks
• Listed bonds
• Equity exchange-traded funds (ETFs)
• Gold ETFs
• Bond ETFs
• Real estate investment trusts (REITs)
• Infrastructure investment trusts (InvITs)

Revised rate of taxation

The new changes in capital gains tax include:

• The long-term capital gains exemption on financial assets has been raised from INR 100,000 (US$1194.3) to INR 125,000 (US$1492.9) per year.
• Listed financial assets held for more than a year are now considered long-term.
• Unlisted financial assets and all non-financial assets must be held for at least two years to be considered long-term.
• Unlisted bonds, debentures, debt mutual funds, and market-linked debentures will be taxed on capital gains at the applicable rates, regardless of the holding period.

Notes:

• Income-tax at the rate of 10 percent (without indexation benefit and foreign exchange fluctuation) to be levied on long-term capital gains exceeding INR 100,000 provided transfer of such units is subject to Securities Transaction Tax (STT).
• Surcharge to be levied at:

• 37 percent on base tax where specified income exceeds INR 50 million
• 25 percent where specified income exceeds INR 20 million but does not exceed INR 50 million
• 15 percent where total income exceeds INR 10 million but does not exceed INR 20 million; and
• 10 percent where total income exceeds INR 5 million but does not exceed INR 10 million
  In case total income includes income by way of dividend on shares and short-term capital gains on units of equity oriented mutual fund schemes and long-term capital gains on mutual fund schemes, the rate of surcharge on the said type of income not to exceed 15 percent. In case investor is opting for ‘New Regime’, the rate of surcharge not to exceed 25 percent.
• Further, Health and Education Cess to be levied at the rate of four percent on aggregate of base tax and surcharge.
• Surcharge at seven percent on base tax is applicable where total income of domestic corporate unit holders exceeds INR 10 million but does not exceed INR 100 million and at 12percent where total income exceeds INR 100 million. However, surcharge at flat rate of 10 percent to be levied on base tax for the companies opting for lower rate of tax of 22percent/15percent.
• Further, “Health and Education Cess” to be levied at the rate of four percent on aggregate of base tax and surcharge.
• Short term/ long term capital gain tax (along with applicable Surcharge and Health and Education Cess) will be deducted at the time of redemption of units in case of NRI investors. Tax treaty benefit can be claimed for withholding tax on capital gains subject to fulfilment of stipulated conditions.

Notes:

(a) These rates will further increase by applicable surcharge and health and education cess.

(b) Income-tax rate of 20 percent with indexation and 10 percent without indexation.

(c) LTCG arising to a non-resident from transfer of unlisted securities or shares of a company, not being a company in which the public are substantially interested, subject to 10 percent tax (without benefit of indexation and foreign currency fluctuation).

(d) If total turnover or gross receipts in the FY 2021-22 does not exceed INR 4 billion.

(e) This lower rate is optional and subject to fulfilment of certain conditions as provided in section 115BAA.

(f) This lower rate is optional for companies engaged in manufacturing business (set-up and registered on or after 1 October 2019) subject to fulfilment of certain conditions as provided in section 115BAB.

(g) Co-operative societies have the option to be taxed at progressive slab rates or 22 percent subject to fulfilment of certain conditions as provided in section 115BAD.

(h) This lower rate is optional for co-operative societies engaged in manufacturing or production business (set-up and registered on or after 1 April 2023) subject to fulfilment of certain conditions as provided in section 115BAE.

Taxation of virtual digital asset in India

India has a 30 percent tax rate on income from virtual digital assets, such as cryptocurrency and NFT. Income from transfer of VDA is taxable without deduction of any expenditure, allowance or set-off of loss, except cost of acquisition of such virtual asset, if any. Further, loss on the transfer of VDA can neither be carried forward nor be set off against any other income.

The virtual digital assets attracting the new tax liability include crypto assets like Bitcoin, Dogecoin, etc., Non-Fungible Tokens (NFTs), and any such assets that might be developed in the future.

Features of cryptocurrency tax in India

• High tax rate: From April 1, 2022, any gains made from the sale of crypto assets are be taxed at a 30 percent rate, which is higher than other assets. This has impacted smaller investors and students who were earlier enjoying tax-free returns on crypto investments.
• One percent TDS on transfers: From July 1, 2022, there is one percent tax deducted at source (TDS) in case of a resident seller for the transfer of virtual digital assets, which is irrespective of gain or loss.
• No basic exemptions or deductions: No deduction towards any expenditure, except the cost of acquisition, is permissible while paying tax on virtual digital assets in India, and no exemptions are considered while taxing individuals making gains from the transfer of such assets, irrespective of their income levels or age.
• Losses from virtual digital assets can't be set-off: Unlike assets like equity, property, gold, and debt funds, losses from crypto assets cannot be set off against gains from other assets and can't even be carried forward to subsequent years.
• No indexation benefits: No indexation benefits are extendable to virtual digital assets, irrespective of the holding period.
• Tax on gifts: Crypto assets acquired either as gifts or through inheritance are also taxed at a 30 percent rate, irrespective of the income level of the recipient.

Calculating capital gains for NRIs

Taxable income for NRIs includes:

• Salary received in India or for services provided in India;
• Income from house property in India;
• Capital gains from transferring assets situated in India; and,
• Interest from fixed deposits or savings accounts in India.