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Difference Between Direct and Indirect Tax with Examples

By admin
23 October 2025
3 mins read

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Difference Between Direct and Indirect Tax with Examples

Taxation plays an important role in fuelling a nation's development. It supports public infrastructure, education, healthcare, and welfare services. In India, the government collects revenue primarily through two types of taxes: direct and indirect taxes. Understanding the difference between them is important to make smart financial decisions.

In this article, we’ll break down the differences between direct and indirect taxes, exploring what they mean and when they apply.

What Are Direct And Indirect Taxes?

To define what is direct and indirect tax, we need to understand how they are imposed. A direct tax is levied on a person or organization and is paid directly to the government. On the other hand, an indirect tax is levied on goods and services. While it is paid to the government by sellers or service providers, the ultimate cost is borne by consumers.

Let’s look at the types of these taxes and understand them with a direct and indirect tax example.

Types of Direct And Indirect Taxes

Here are some common types of direct tax and indirect tax:

Direct taxes:

- Income Tax: Charged on individual earnings.

- Corporate Tax: Paid by companies on net profits.

- Capital Gains Tax: Levied on profits earned from selling assets.

Indirect taxes:

- Goods and services tax (GST): Levied on most goods and services.

- Customs duty: Imposed on imported goods.

- Excise duty: Once charged on manufactured items, now largely merged into GST.

Let’s understand this with a direct tax and indirect tax example. When you receive a salary, you pay income tax to the government. This is direct tax. But when you buy clothes, GST is added to the bill, which is an indirect tax.

Difference Between Direct Tax And Indirect Tax

The difference between direct tax and indirect tax is as follows:

Category	Direct tax	Indirect tax
Levied on	Income, wealth, profits	Goods and services
Paid by	Taxpayer themselves	Consumer via the seller
Burden transfer	Not transferable	Passed to the end user
Nature	Progressive	Regressive
Collection	Directly by the government	Collected through intermediaries

This is where the difference between direct and indirect tax becomes evident — one is income-based, the other consumption-based. Direct & indirect tax systems work best when used in tandem for balanced fiscal growth.

Wrapping Up

Understanding the difference between direct and indirect taxes is essential for making sound financial decisions. It helps you stay compliant and plan your investments smartly. Since various investment instruments attract different types of taxes, such as TDS on interest income (a direct tax) or GST on certain financial services (an indirect tax), knowing these nuances can help optimize returns and reduce liabilities.

Download the Tata Capital Moneyfy app or visit the official website to explore tax-saver investment options and begin your investment journey.

FAQs

When are direct and indirect taxes imposed in India?

Direct taxes are charged on income or profits earned by individuals or businesses, while indirect taxes are imposed when goods or services are consumed or sold.

Which is better: direct or indirect tax?

Both direct & indirect taxes serve distinct purposes. Direct taxes promote fairness, while indirect taxes are easier to administer and harder to evade.

Why is GST an indirect or direct tax?

GST is an indirect tax because it is levied on the consumption of goods and services, and the final tax burden is borne by the consumer.

Is TDS a direct or indirect tax?

TDS is a direct tax because it is deducted from an individual’s income and paid to the government.

What are the seven indirect taxes?

The seven indirect taxes in India include the Goods and Services Tax (GST), service tax, central excise and customs duty, Value Added Tax (VAT), entertainment tax, Securities Transaction Tax (STT), and stamp duty.

Why is it important to understand taxation?

Understanding taxation is crucial for effective financial planning because it helps you make informed decisions about how to save, invest, and spend. By knowing how different taxes impact your income and expenses, you can better estimate your real earnings and costs, set realistic financial goals, and take advantage of available deductions or exemptions. A good grasp of taxation also helps you stay compliant with the law and avoid unnecessary penalties or surprises during tax season.

What is the rate of direct tax?

Direct taxes in India follow a progressive structure, which means the tax rate increases as your income or profits rise. Broadly, there are two main types of direct taxes: income tax (for individuals and HUFs) and corporate tax (for companies).

The income tax rates for the financial year 2025-26 are as follows:

Annual income	Tax rate
Up to Rs. 4 lakh	Nil
Rs. 4 lakh to Rs. 8 lakh	5%
Rs. 8 lakh to Rs. 12 lakh	10%
Rs. 12 lakh to Rs. 16 lakh	15%
Rs. 16 lakh to Rs. 20 lakh	20%
Rs. 20 lakh to Rs. 24 lakh	25%
Above Rs. 24 lakh	30%

These slabs apply to individuals under the new tax regime. The rate you pay depends on your income bracket, and higher earnings attract higher tax rates.

In the case of corporate tax, the rates applicable depend on whether the company is of domestic or foreign origin.

Corporate tax rates for domestic companies are as follows:

Section	Tax rate	Surcharge
Section 115BA	25%	7% or 12%
Section 115BAA	22%	10%
Section 115BAB	15%	10%
Any other case	30%	7% or 12%

For foreign companies, the tax rates are:

Nature of income	Tax rate
Royalty or fees for technical services under approved agreements made before April 1, 1976	50%
Any other income	35%

What is the indirect tax rate?

The indirect tax rate in India depends on the respective product or service instead of your income level. For example, the rate for the most common indirect tax in India, the GST, is divided into multiple slabs of 3%, 5%, 12%, 18%, and 28%, depending on the item. These taxes are levied on the price of the product or service, which means that everyone pays the same rate, regardless of their income.

How are direct and indirect taxes paid?

Direct taxes, such as income tax, corporate tax, and capital gains tax, are payable directly to the government through periodic return filing. For example, you need to pay your income tax annually at the time of Income Tax Return (ITR) filing. Indirect taxes, on the other hand, are levied on the prices of goods and services, and collected by sellers at the time of purchase.