Direct Taxes: How to minimise direct tax and overpayment?

Types of taxes in India

Tax is a legal obligation enforced by the state and the central government of India, and it is eventually one of the country's biggest sources of income. The taxation system in India involves two types of taxes: direct and indirect.

 

Indirect taxes

Indirect taxes are paid to intermediaries like sellers, service providers, and businesses by the consumer. Finally, these intermediaries pay the tax to the government of India. Indirect taxes include GST (Goods and Services Tax), retail taxes, etc. Here, the tax can be shifted from one tax-paying individual to another. For instance, the wholesaler passes the tax burden to retailers, who then pass it to consumers. Central Board of Indirect Taxes and Customs (CBIC) governs and manages indirect tax.

 

Direct taxes

Direct taxes refer to the tax that the government levies on the income and profit of individuals. People pay direct taxes straight to the government. CBDT (Central Board of Direct Taxes) is the governing authority for direct taxes. Direct taxes have to be paid by the taxpayer, and unlike indirect taxes, the burden cannot be passed on to someone else.

There are majorly four types of direct taxes:

 

Income tax

Income tax is levied on the income and profit of an individual that is earned around the year. The central government levies this tax, and people pay income tax based on their tax slab.

 

Wealth tax

Wealth tax was abolished in 2016. It was levied on the net wealth of HUFs (Hindu Undivided Families) and individuals.

 

Capital gain tax

Profit from capital assets is taxed under the capital gain tax. It includes jewellery, land, houses, vehicles, patents, etc. There are two types of capital gain tax: STCG (Short-Term Capital Gain) and LTCG (Long-Term Capital Gain) tax

 

Corporate tax

Corporate companies are liable to pay corporate tax in India. For Indian companies, tax is levied on universal income, while foreign companies are only taxed for their income in India

 

Securities Transaction

Securities Transaction Tax (STT) is somewhat like TCS (Tax Collected at Source). It is levied on transactions of securities that are listed on the recognized stock exchanges in India and is governed by the STT Act

 

Gift Tax

If individuals receive gifts of over ₹50,000 in a year, it is taxed as income from other sources, and one has to pay tax on it as per their tax slab

 

Tips to smart tax payment planning:

Smart financial planning ensures you make the most of deductions and exemptions while paying only what is due. Without it, you might end up paying more than necessary. To avoid direct tax overpayment, follow practical strategies such as investing in eligible schemes, tracking expenses, and staying updated on income tax rules.

 

Choose the right tax regime

When planning your taxes, one of the most important decisions is selecting between the old and the new tax regime. Each comes with different rules on deductions and exemptions. You can compare your tax liability, exempted allowances, and deductions under both systems.

The old regime allows you to claim several exemptions and deductions, while the new regime offers lower tax rates but fewer deductions. Analysing both options can help you choose a regime offering the lowest tax liability.

 

Pick some tax-saving instruments

One basic way of reducing tax burden is investing and saving in tax-saving schemes and policies. The best way is to start planning at the start of the financial year to maximize tax efficiency.

 

Old tax regime

You can claim deductions of over 70 exemptions under the old regime.

1. Section 80D deductions for premiums paid for health insurance plans.
2. Purchasing life insurance, investing in ELSS (Equity-Linked Savings Schemes), contributing to PPF (Public Provident Fund), Senior Citizens Savings Scheme (SCSS), or purchasing NSC (National Savings Certificate) can let you save up to ₹1.5 lakhs tax under Section 80C (in case of old tax regime) of the Income Tax Act of 1961.

 

New tax regime

The Budget 2020 introduced a new tax regime with revised slabs and lower tax rates. However, taxpayers choosing this regime forgo multiple exemptions and deductions, including HRA, LTA, Section 80C, Section 80D, and others. However, the New Tax Regime has streamlined tax rates. To stimulate household spending and overall demand, it was announced in the Union Budget 2025 that incomes up to ₹12 lakhs will be tax-free. With the ₹75,000 standard deduction under the New Tax Regime, the effective tax-free income now extends to ₹12.75 lakh.

 

Guidance from professionals

Taxation systems can be complex at times. So, instead of taking a confused step, you may also contact a professional who can help you out. You may consult a chartered accountant or a fund manager who can guide you through more efficient financial planning for the year.

 

File ITR on time

Make sure to file Income Tax Returns within the deadline to avoid any penalty and to make the most of your tax benefits.

 

How to claim a deduction/exemption on Direct Tax?

Deductions and exemptions help reduce your taxable income and overall direct tax liability. Knowing the right provisions ensures you save legally while maximising benefits.

 

Choose the Right Tax Regime

Selecting between the old and new regimes directly impacts your direct tax outflow. The old regime allows deductions Under Sections 80C, 80D, home loan interest under Section 24(b), etc. The new regime offers simplified slabs with no deductions. Evaluate your income, expenses, and savings under each regime and choose one that offers a lower tax outgo.

 

Utilise Tax-Saving Investment Options

One of the most effective ways to reduce direct tax liability is to leverage tax-saving investment options. Investments under Section 80C, 80D, and 80CCD allow deductions from your taxable income. Popular choices include life insurance premiums, National Pension Scheme (NPS) contributions, ELSS, PPF, etc. Choosing suitable tax-saving investment avenues can help reduce your overall direct tax liability while also creating a financial corpus for the future.

 

Claim Deductions on Rent Paid

If you live in a rented property, you may be eligible for House Rent Allowance (HRA) exemptions. Claiming HRA can help reduce your direct tax burden. Ensure you have valid rent receipts and follow the applicable rules.

 

Claim All Eligible Deductible Expenses

You can reduce direct tax liability by claiming all eligible deductible expenses under the Income Tax Act,1961. This includes professional expenses, education loan interest, tuition fee for children, home loan interest under Section 24(b) of the Income Tax Act , 1961 , etc. Maintaining proper documentation and receipts ensures you can fully utilise these deductions, thereby lowering your direct tax liability.

 

Avail Tax Benefits on Insurance Premiums

Paying premiums for life and health insurance policies can provide significant tax benefits. Under Sections 80C and 80D, premiums paid reduce your taxable income, helping you reduce direct tax liability while securing financial protection for yourself and your family.

 

Key Takeaways

1. Reduce direct tax liability by understanding your income sources and applicable tax slabs.
2. Plan your finances early to make use of all available deductions and exemptions.
3. Choose the right tax regime based on your income and eligible benefits.
4. Utilise tax-saving investments such as life insurance, ELSS, NPS etc.
5. Claim deductions on rent, insurance premiums, and other eligible expenses.
6. Maintain proper documentation to ensure smooth processing and minimise errors.
7. Review your tax plan annually to continue optimising and reduce direct tax liability efficiently.

 

Conclusion

The tax system in India remains a primary source of revenue for both the central and state governments, supporting welfare schemes and infrastructure development. It is important for every taxpayer to fulfil their obligations while staying within legal limits. At the same time, it is prudent to evaluate all lawful options for tax planning, so as to legitimately reduce taxable income and optimize overall tax liability.

Fortunately, the Indian taxation framework provides multiple opportunities to plan finances efficiently, from choosing the right tax regime to claiming eligible deductions and exemptions. Strategic use of tax-saving instruments such as life insurance premiums, ELSS, NPS, and eligible expenses can help build a stable financial corpus while staying compliant. With recent updates in the Union Budget 2025 offering additional rebates and relief, taxpayers have further scope to optimise their tax payments. By following smart financial planning, you can ensure you pay only what is necessary and effectively reduce direct tax liability.

 

FAQs

 

1. What are direct taxes?

Direct taxes are the ones that are levied on the income and profit of an individual. Taxpayers directly pay their taxes to the collecting authority. Examples are income tax, capital gain tax, etc.

 

2. How much tax can I save?

Total tax deductions and exemptions depend on the income tax slab and individual investments/savings. Different sections of the Income Tax Act offer different benefits and exemptions.

 

3. Is direct tax compulsory?

Yes, paying direct tax is compulsory for all eligible individuals and entities in India earning an annual income. It is mandated by the Income Tax Act, 1961, and non-compliance can lead to penalties or legal action.