Types of Taxes in India FY 2026-27: Direct Tax vs Indirect Tax – Complete Guide
India’s tax system is broadly classified into Direct Taxes (where the burden falls directly on the taxpayer) and Indirect Taxes (where the burden is passed on to the consumer). Understanding these helps you plan your finances better and understand the full tax impact on your income and spending.
Direct Tax vs Indirect Tax – Key Difference
| Feature | Direct Tax | Indirect Tax |
|---|---|---|
| Who pays | Taxpayer directly to government | Collected by seller, passed to consumer |
| Can be shifted? | No – borne by taxpayer only | Yes – shifted to end consumer |
| Examples | Income Tax, Corporate Tax, Capital Gains Tax | GST, Customs Duty, Excise Duty |
| Governed by | CBDT (Central Board of Direct Taxes) | CBIC (Central Board of Indirect Taxes) |
| Progressive? | Yes – higher income, higher rate | No – same rate for all (regressive in effect) |
Types of Direct Taxes in India
1. Income Tax
The most significant direct tax – levied on income earned by individuals, HUFs, firms, companies, and other entities during a financial year. Governed by the Income Tax Act, 1961 (being replaced by Income Tax Act, 2025 effective April 2026). Tax rates vary by taxpayer category and income level. India has two tax regimes: new (default, lower rates, fewer deductions) and old (higher rates, more deductions).
2. Corporate Tax
Levied on net profits of domestic and foreign companies operating in India. Rates for FY 2026-27: Domestic companies: 22% (new regime under Section 115BAA) or 25% (turnover ≤ ₹400 crore) or 30% (old rate). New manufacturing companies: 15% (Section 115BAB). Plus applicable surcharge and cess.
3. Capital Gains Tax
Tax on profits from sale of capital assets (property, shares, mutual funds, gold). Divided into STCG (Short-Term) and LTCG (Long-Term) with different rates. Key rates after Budget 2024: STCG on equity: 20%, LTCG on equity: 12.5% above ₹1.25 lakh annually.
4. Securities Transaction Tax (STT)
Levied on purchase and sale of securities (shares, futures, options) on recognized stock exchanges. Rates range from 0.001% to 0.125% depending on transaction type. STT is deducted by brokers automatically from trading accounts.
5. Wealth Tax (Abolished)
Wealth tax was abolished from FY 2015-16. It was previously levied on net wealth above ₹30 lakh at 1%.
Types of Indirect Taxes in India
1. GST (Goods and Services Tax)
The largest indirect tax – introduced in July 2017 replacing VAT, Service Tax, Excise Duty etc. GST is a destination-based, multi-stage tax with four rates: 5%, 12%, 18%, and 28% (with compensation cess for luxury/sin goods). Governed by the GST Council. Divided into CGST (Central), SGST (State), and IGST (Inter-state).
2. Customs Duty
Tax on import and export of goods across India’s borders. Includes Basic Customs Duty (BCD), Agriculture Infrastructure Development Cess (AIDC), and Social Welfare Surcharge. Rates vary by product and are set by the Finance Ministry annually through the Customs Tariff Act.
3. Excise Duty
Central Excise Duty (now largely subsumed into GST) continues for petroleum products, alcohol, and tobacco – which are outside GST’s purview. These remain under state excise or central excise as applicable.
4. Stamp Duty
Levied on legal documents – particularly property transactions. Rates are set by individual states, typically ranging from 3% to 8% of the property’s market value or circle rate (whichever is higher).
Other Significant Taxes
- Professional Tax: Levied by state governments on salaried individuals – maximum ₹2,500 per year. Deductible from income under Section 16(iii)
- Property Tax: Municipal tax on ownership of property – determined by local municipal corporations
- TDS and TCS: Advance collection mechanisms for income tax and indirect taxes respectively
- Dividend Distribution Tax (DDT): Abolished from FY 2020-21 – dividends are now taxable in shareholder’s hands at their applicable slab rate
Income Tax Act 2025 – What Changes?
The Income Tax Act 2025 (passed by Parliament) is effective from 1 April 2026 (FY 2026-27). It replaces the Income Tax Act, 1961 with simplified, restructured language – but the tax rates, slabs, and core provisions remain the same. Key changes:
- Simplified language – legal jargon replaced with plain language
- Structural reorganisation – chapters and sections renumbered
- No change to existing tax rates or deductions for FY 2026-27
- Effective AY 2027-28 (income earned in FY 2026-27) – AY 2026-27 returns still use Act 1961
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