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Tax Laws and Practice · Direct Tax at a Glance

Overview of Direct Tax and the Income-tax Act, 2025

Updated 11 October 2026 · Fact-checked

A direct tax is levied on a person's income or wealth and is borne by that same person, such as income-tax. An indirect tax is collected through the price of goods or services and passed on to the buyer. The Income-tax Act, 2025 is the Act that governs direct tax on income for June 2027. Learn its scheme: charge, income, computation, procedure.

Understand Overview of Direct Tax and Income-tax Act, 2025

A direct tax is paid by the person on whom it is imposed. The burden cannot be shifted to someone else. Income-tax is the main example. If you earn ₹10,00,000, you are taxed on your income and you pay it yourself.

An indirect tax is imposed on a transaction, such as a sale of goods or supply of services. The seller collects it from the buyer and deposits it with the government. The person who pays to the government is not the person who finally bears it. GST and customs duty are examples. This split between the person who pays and the person who bears is the core test in exam answers.

The income-tax law of India is now the Income-tax Act, 2025. For the June 2027 session you study this Act as amended by the Finance Act, 2026, for tax year 2026-27. The old Income-tax Act, 1961 is relevant only if the question asks you to contrast the two. Do not quote old section numbers as current law.

The Act follows a logical flow. First comes the charge of tax and the meaning of terms. Then you decide residential status, because that fixes which income is taxable in India. Then income is classified under heads, deductions and set-off of losses are applied, and total income is arrived at. After that come tax rates, and the procedure: returns, deduction and payment of tax, assessment, appeals, and penalties.

The Act also contains the rules on specific topics inside this flow. For example, section 33 deals with depreciation on business assets. Section 159 lets the Central Government enter into agreements with other countries or specified territories for relief from double taxation, exchange of information and recovery of tax. Such an agreement applies to the extent it is more beneficial to the assessee, except that Chapter XI applies even if it is not beneficial. Treat these as examples of how the Act is organised, not as a list to memorise.

Key rules to remember

Direct tax test
Person who pays to government = Person who bears the burden
This identifies a direct tax. In an indirect tax the burden is passed on to the buyer.
Flow of the Act
Charge → Residential status → Heads of income → Deductions and set-off → Total income → Tax → Procedure
Use this sequence to structure any answer on scheme of the Act.
Depreciation on a block (section 33(3)(a))
Depreciation = prescribed percentage × written down value of the block
Applies to a block of assets. Half the prescribed rate applies if the asset is acquired in the tax year and used for less than 180 days (section 33(4)).
Treaty relief (section 159(4))
Provisions of the Act apply to the extent they are more beneficial to the assessee
Applies where an agreement is in force. Under section 159(6), Chapter XI applies even if it is not beneficial.
Non-resident claiming treaty relief (section 159(8))
Residency certificate from the foreign Government + other prescribed documents and information
Both are needed before the relief can be claimed.

How to solve Overview of Direct Tax and Income-tax Act, 2025 questions

Use this method for any theory question on the nature of direct tax or the structure of the Act.

  1. 1Read the question and mark the keyword: define, distinguish, explain scheme, or state features.
  2. 2Start with a one-line definition of the concept, for example direct tax as a tax whose burden stays on the person taxed.
  3. 3If asked to distinguish, give points side by side in sentences: who bears the burden, what is taxed, examples, and who collects.
  4. 4Name the governing law: the Income-tax Act, 2025 for direct tax on income. Cite a section only if you are sure of it.
  5. 5Walk through the scheme in order: charge, residential status, heads, deductions and losses, total income, tax, procedure.
  6. 6Add one example with rupee figures or a named provision, such as section 33 or section 159, if the question allows.
  7. 7End with a one-line conclusion that answers the exact question asked.

Quickest way: Four-point distinction in under two minutes

When to use it: Use when time is short and the question asks you to compare direct and indirect tax or list features of the Act.

  1. Write the burden test first: direct tax cannot be shifted, indirect tax can.
  2. Write the base: income or wealth for direct tax, transaction or supply for indirect tax.
  3. Give examples: income-tax versus GST and customs duty.
  4. State the law: Income-tax Act, 2025 for income-tax.
  5. Close with the flow of the Act in one line, from charge to procedure.

Common mistakes in Overview of Direct Tax and Income-tax Act, 2025

  • Calling GST a direct tax because the seller deposits it with the government.

    Students look at who pays the government instead of who bears the burden.

    Fix: Apply the burden test. The buyer bears GST, so it is indirect.

  • Quoting Income-tax Act, 1961 sections as current law.

    Most older books and notes still use the 1961 Act.

    Fix: Use the Income-tax Act, 2025 for June 2027. Mention the 1961 Act only when contrasting.

  • Writing only a definition for a 'scheme of the Act' question.

    Students do not see the Act as a sequence.

    Fix: Give the flow from charge to procedure, with a line on each stage.

  • Claiming a treaty always overrides the Act.

    Students remember the 'more beneficial' rule but drop its exception.

    Fix: State that the Act applies to the extent more beneficial, and that Chapter XI applies even if not beneficial (section 159(6)).

  • Allowing depreciation in full for an asset used for a few weeks.

    Students forget the 180-day rule.

    Fix: If an asset is acquired in the tax year and used for less than 180 days, allow only 50% of the prescribed rate (section 33(4)).

Worked examples

Example 1

Distinguish between direct tax and indirect tax with examples. Why is income-tax a direct tax?

Show the solution
  1. Direct tax: imposed on income or wealth. The person taxed bears the burden and cannot pass it on. Example: income-tax.
  2. Indirect tax: imposed on a transaction such as a supply of goods or services. The seller collects it from the buyer and deposits it with the government. Examples: GST and customs duty.
  3. Income-tax is charged on the income of the person. If Rahul earns ₹8,00,000 from business, he pays the tax on that income himself and cannot recover it from a customer as tax.

Answer: Income-tax is a direct tax because the person on whom it is levied also bears it. GST and customs duty are indirect taxes because the burden is passed on to the buyer.

Example 2

Sunrise Ltd, a manufacturer, bought machinery on 10 March in the tax year and used it from 20 March. The prescribed rate is 15% and the machinery forms a block with opening written down value nil, with the machinery's actual cost of ₹10,00,000 added during the year. Compute depreciation under section 33(3) and (4), ignoring any additional depreciation.

Show the solution
  1. The machinery is acquired in the tax year and put to use from 20 March, which is fewer than 180 days before the year end.
  2. So section 33(4) restricts the deduction to 50% of the prescribed rate: 50% × 15% = 7.5%.
  3. Written down value of the block = ₹10,00,000.
  4. Depreciation = 7.5% × ₹10,00,000 = ₹75,000.

Answer: Depreciation allowable is ₹75,000, subject to profits being sufficient under section 33(11).

Exam tips

  • For 'scheme of the Act' questions, answer in the order charge, residential status, heads, deductions, total income, tax, procedure.
  • Always write Income-tax Act, 2025 as the governing law. Use the 1961 Act only for contrast.
  • Use side-by-side points in distinction questions and add one example for each side.
  • Do not attach a section number unless you are certain of it. A correct provision in words earns marks.
  • Keep a rupee example ready, as short numerical illustrations make theory answers stronger.

Practice questions from Direct Tax at a Glance

Overview of Direct Tax and Income-tax Act, 2025: frequently asked questions

What is the main difference between direct and indirect tax?

In a direct tax the person taxed bears the burden. In an indirect tax the burden is passed on to the buyer. Income-tax is direct, while GST and customs duty are indirect.

Which Act should I study for direct tax in June 2027?

Study the Income-tax Act, 2025 as amended by the Finance Act, 2026, for tax year 2026-27. The December 2026 session is different and examines the Income-tax Act, 1961.

Does a tax treaty always give the assessee a better result than the Act?

No. Under section 159(4), the Act applies to the extent it is more beneficial to the assessee. Section 159(6) says Chapter XI applies even if it is not beneficial.

Can a non-resident claim treaty relief without a residency certificate?

No. Section 159(8) requires a certificate of residence from the Government of the other country or territory, along with other prescribed documents and information.