Taxes provide the foundation to the economy of any nation and, in that respect, also for India. These are imperative to finance the country's infrastructure, healthcare, education, defense, and schemes for welfare. Tax collection guarantees that the revenue flows steadily in order to help economic growth and ensure social equilibrium as well as provide a sturdy infrastructure. Tax and structure knowledge, therefore, helps an individual as well as the corporate world maintain their compliance levels while helping their nation move ahead.
A tax is a legal financial levy that the state imposes on persons, organizations, and other bodies to raise revenue. Taxes are indispensable for the economic prosperity of the economy, because the government can distribute resources for the development of infrastructure, acquisition of essential public services, and direct and indirect welfarism.
In India, the Constitution gives both the central and state governments the power to collect taxes. The legal framework governing taxation includes laws like the Income Tax Act, 1961, Goods and Services Tax (GST) Act, and various state-level legislations. The Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) administer taxes.
India's tax system is divided between direct taxes and indirect taxes for a balanced tax collection. All these are targeted at different spheres of the economy to ensure both fairness and efficient collection.
Direct taxes are those levied directly on an individual's or entity's income or wealth. These taxes are paid directly to the government and are non-transferable. They are progressive in nature, meaning higher income attracts higher tax rates.
Income tax is governed by the Income Tax Act, 1961, and is levied on the taxable income of individuals, Hindu Undivided Families (HUFs), and other entities. The types of income considered taxable include salaries, profits, capital gains, and income from other sources. For an individual, the tax liability depends on the amount of income earned. For instance, if an individual earns ₹6,00,000 in a financial year, they would fall under the applicable tax slabs, which could result in a tax payable amount depending on their income category.
Corporate tax is levied on the profits of companies. Companies can avail themselves of deductions and exemptions such as depreciation, research and development (R&D) expenses, and tax holidays to reduce their tax burden. For example, if a company generates ₹50,00,000 in profits in a given financial year, they will be taxed based on the corporate tax rate, which can vary depending on the company's size, sector, and eligibility for tax reliefs.
Capital gains tax is charged on income generated from the sale of assets like property, stocks, or bonds. It is divided into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), each with its own tax rates. For example:
Short-Term Capital Gains (STCG): If an individual sells a stock within 1 year of purchase for ₹5,00,000, the gain will be - classified as STCG and taxed at a rate of 15%.
Long-Term Capital Gains (LTCG): If the same stock is held for more than a year and sold for ₹5,00,000, the gain would be taxed at 10%, provided it exceeds ₹1 lakh in a financial year.
The Securities Transaction Tax (STT) is levied on securities trading, including shares, derivatives, and mutual funds. The rate of STT varies depending on the type of security being traded. For example, if an individual trades ₹10,00,000 worth of stocks in a year, they would pay STT based on the rate applicable to the specific type of stock transaction (buying or selling).
Wealth tax, though replaced with a surcharge in recent years, was previously charged on the net wealth of individuals, HUFs, and companies above a specific limit. For example, an individual with a net wealth exceeding ₹30 lakh would have been liable to pay wealth tax on the value of assets like real estate, gold, and other valuable items over this threshold. This has now been replaced by a surcharge on higher income earners.
The Gift Tax Act has made all gifts above ₹50,000 from non-relatives taxable as income.
Indirect taxes are levied on goods and services and collected by intermediaries like retailers before passing it on to the government.
GST is a consumption-based tax charged on the supply of goods and services. It offers input tax credits throughout the supply chain, thus allowing businesses to recover taxes paid on inputs, thereby reducing the cascading effect of tax. The GST structure has been categorized into:
CGST (Central GST): This is a central government tax.
SGST (State GST): This is a state government tax.
IGST (Integrated GST): Tax on inter-state supply of goods and services.
The different types of GST are charged depending on the good or service:
Customs Duty: This is the tax on importation of goods into India. The rate depends on the goods imported and may range from 5% to 100%, depending on the product.
Octroi: This was the state-level tax imposed on entry of goods in a specific municipality or state. Octroi is mostly replaced by GST, however in some areas the rate was 1% to 5%.
Excise duty was charged on the manufactured goods in India, but it has been mainly superseded by GST. Before GST, the rates of excise duty were in the range of 1% to 12.5% depending upon the class of the goods. Excise duty is still applicable on goods like petroleum products and alcohol that are out of the purview of GST.
VAT was a state-based tax levied on the value added at every stage of production. The VAT rates varied from state to state, but generally, the rates were:
Sales tax applied to goods and services. Tax rates were specific to states; usually:
Service tax was levied on some services before GST replaced it. The rate of service tax was 15% and also included cess for Swachh Bharat and Krishi Kalyan, making the effective rate 15.5%. This tax was levied on a host of services in hospitality, telecommunication, and professional services, among others.
Income tax in India is income slab-based and therefore progressive in nature. One can choose to go for either the old or the new tax regime, as per the requirements of the individual for his/her financial goals and deductions.
The new tax regime is less in rates but has lesser deductions. The old regime, on the other hand, is rich in deductions and exemptions.
Rs. 3,00,001 to Rs. 6.00,000: 5% tax on income exceeding Rs. 3,00,000.
Rs. 6,00,001 to Rs. 7,00,000: Same 5% rate applies to income exceeding Rs. 3,00,000.
Rs. 7,00.001 to Rs. 9,00,000: Rs. 20,000 plus 10% tax on income exceeding Rs. 7,00,000.
Rs. 9,00,001 to Rs. 10,00,000: Follows the same formula as the previous slab: Rs. 20,000 plus 10% tax on income exceeding Rs. 7,00,000.
Rs. 10,00,001 to Rs. 12,00,000: Rs. 50,000 plus 15% tax on income exceeding Rs. 10,00,000
Rs. 12,00.001 to Rs. 15,00,000: Rs. 80,000 plus 20% tax on income exceeding Rs. 12,00,000.
Above Rs. 15,00,000: Rs. 1,40,000 plus 30% tax on income exceeding Rs. 15,00,000.
The new tax regime is open to individual taxpayers and HUFs. It is not open to senior citizens above 60 years of age or very senior citizens above 80 years of age, as they have a different tax regime under the old tax system.
This new tax regime does not apply to companies, firms, or LLPs, but strictly for individual and HUF taxpayers only.
New Tax Regime discusses income tax slabs, which differ and are, on a general basis, lesser than the old tax regime. Some of the exemptions and deductions that an assessee is deprived of in this new regime include:
The new regime of tax as well as the old regime are open for an assessor's option. The mode once adopted in any assessment year should be adopted continuously in later years also, except to some conditions mentioned by the law on subsequent options to shift between regimes, namely from new to old or vice versa, between the same set of incomes.
This new tax regime shall apply to all these types of income, be it salaries, business incomes, or capital gains.
Assess your income, deductions, and financial goals to choose the most advantageous regime.
Paying taxes benefits both the individual and the nation, enabling:
Paying taxes not only supports the national economy but also provides various benefits to individuals. Here's how paying taxes can benefit you in specific areas:
Loan Approvals: The more one pays taxes consistently, the better a financial record he creates for lenders to evaluate his loan worthiness. For proof of income, banks and other financial institutions need taxable returns, which is duly verified; paying tax helps increase credibility and trustworthiness, and subsequently enhances loan approvals.
Tax payments: can be crucial when applying for visas, particularly when the country has to assess whether you are stable financially. Taxes paid on a regular basis portray financial responsibility as well as consistent income, a requirement for approving a visa. It demonstrates your compliance with the laws of your country and has a good standing in terms of the economy.
Proof of Income for the Self-Employed: It is a very difficult task for the self-employed to prove their income, but tax filings give clear and documented evidence of earnings. Thus, by paying taxes, the self-employed can demonstrate their income history, which would make it easier to apply for loans, mortgages, or any other financial needs that require proof of steady income.
Eligibility for Government Tenders: Government tenders often require companies or individuals to present their tax returns as part of the eligibility criteria. Paying taxes ensures one is in line with government regulations and increases one's chances of winning public contracts or tenders. This is particularly important for businesses that are looking to expand their operations.
Carrying Forward Losses: Taxpayers who incur business or investment losses can carry forward those losses to future years, which helps reduce tax liabilities in those years. By filing tax returns accurately, you can offset future taxable income with previous losses, thus lowering your overall tax burden and improving your financial situation in the long term.
Tax Refund: Paying taxes periodically helps to remain in the system, making it easier to get a refund for tax paid in case excess tax has been deducted or paid. You are eligible for a refund if you have paid more tax than required on account of TDS or advance tax. After filing your tax return, you can get such relief. Hence, it can be claimed quickly.
High-Cover Life Insurance: While applying for life insurance, the companies will ask for income proof and tax records to analyze your financial situation. Paying taxes regularly reflects that you have a stable source of income and you are financially disciplined.
Therefore, it makes you eligible for high-coverage life insurance plans. Taxpayers with verified incomes get lower premiums from insurance companies.
Access to Compensatory schemes: Some forms of government compensation schemes or cash assistance programs do not qualify if not proven to pay taxes. It is only with the payment of tax that you make yourself eligible to access such programs and benefits, unemployment benefits, or disaster relief funds, which always link their eligibility assessments to tax documents.
Investments in Health, Car, Bike, and Term Insurance: Investment in all types of insurance policies, be it health, car, bike, or term insurance, helps in saving on taxes and financial protection. For example:
Also the investments taken from here guarantee that your fiscal life is risk-proof and saves taxable income or say, creates probable tax savings.
In addition, investments in health, car, bike, and term insurance provide both financial protection and tax benefits.
Common Deductions Under the Income Tax Act
The Income Tax Act, 1961, offers several deductions that help reduce the taxable income of an individual, thus lowering their tax liability. These deductions are available under various sections of the Act, allowing taxpayers to claim them by making eligible investments or incurring eligible expenses. Here are some of the most common and beneficial deductions available to taxpayers:
Section 80C is one of the most widely used tax deductions, offering a maximum deduction of ₹1.5 lakh per year for investments made in specified financial instruments. Some of the key instruments eligible under Section 80C are as follows:
Public Provident Fund (PPF): A long-term savings scheme with attractive interest rates and tax-free returns. The amount invested in PPF is eligible for tax deduction under Section 80C.
Employee Provident Fund (EPF): A saving scheme compulsorily offered by the employer for salaried employees, where both the employee and employer contribute a portion of the salary.
National Savings Certificates (NSC): Government-backed instruments that offer fixed returns, eligible for tax deduction under Section 80C.
Tax-saving Fixed Deposits: These are 5-year fixed deposits with banks that are eligible for a tax deduction under Section 80C.
**Life Insurance Premiums: Premiums paid on life insurance policies for yourself, your spouse, children, or parents qualify for tax benefits under Section 80C.
**Senior Citizen Savings Scheme (SCSS): A government-approved savings scheme specifically designed for senior citizens that offers higher interest rates, eligible for tax benefits under Section 80C.
Investments in these schemes reduce your taxable income, help you meet your financial goals, and ensure you do not pay unnecessary income tax.
Section 80D provides deductions for premiums paid towards health insurance policies. It is an excellent way to protect your health and reduce your tax liability. The main provisions under Section 80D are as follows:
Health Insurance for Self, Spouse, and Children: Deduction of up to ₹25,000 for premiums paid. If you or your family members are senior citizens (aged 60 years or more), the deduction limit increases to ₹50,000.
Health Insurance for Parents: Deduction of up to ₹25,000 for premiums paid for parents under 60 years of age. If parents are senior citizens, the limit increases to ₹50,000.
Preventive Health Checkups: The cost of preventive health checkups can be claimed under the total deduction limit, up to ₹5,000.
These provisions ensure that individuals are rewarded for investing in health insurance and are provided with tax relief while securing their health and financial future.
Section 24(b) allows individuals to claim a deduction of up to ₹2 lakh on the interest paid on a home loan. This deduction applies to both self-occupied and let-out properties:
Self-Occupied Property: For properties that you reside in, you can claim a deduction of up to ₹2 lakh per year on the interest paid on a home loan.
Let-Out Property: If the property is rented out, there is no cap on the amount of interest that can be claimed as a deduction. The full interest paid on the home loan can be deducted from your taxable income.
Construction Period: If the property is under construction, interest paid during the construction period can be claimed in five equal installments after the property is completed.
This deduction helps reduce the taxable income of homebuyers and encourages homeownership.
Section 80E provides deductions for interest paid on loans taken for higher education, offering significant tax relief for students or their families. The key characteristics of this deduction are:
This deduction makes education more affordable and helps manage the financial burden of pursuing higher studies while encouraging investments in knowledge and skills.
Section 80G allows deductions for donations made to eligible charitable institutions and causes, promoting social welfare and encouraging charitable giving. The deductions under this section depend on the type of donation and the recipient organization:
100% Deduction: Donations made to specific organizations like the National Defence Fund, Prime Minister's National Relief Fund, or government-approved charitable institutions are eligible for a 100% deduction.
50% Deduction: Donations to other charitable institutions or trusts that focus on poverty relief, education, or public welfare activities are eligible for a 50% deduction.
Limit: The total deduction for donations is limited to 10% of your gross total income, reducing your taxable income.
This deduction not only encourages charitable giving but also helps reduce your tax liability while contributing to social welfare.
Proportional by Nature In the case of direct taxes, the tax paid is directly proportional to the individual's income or wealth. This means that a person with more income or wealth pays more taxes. Thus, those who have the capacity to pay more shall pay a higher share of the total tax collected.
Direct taxes help reduce income inequality as higher income groups are taxed at higher rates. This progressive tax system helps redistribute wealth and, therefore, support social welfare programs and poverty alleviation initiatives.
Direct taxes usually involve detailed documentation and regular compliance by individuals or businesses. Taxpayers have to file returns, maintain records, and comply with complex tax laws, which can be burdensome, especially for smaller taxpayers or businesses.
High direct taxes, especially on high incomes or corporate profits, could discourage productivity and entrepreneurship. The perception of a high tax burden could make people and businesses less enthusiastic about working hard or investing.
Indirect taxes, including sales tax or GST, are relatively painless for consumers as they are included in the cost of goods and services. Thus, compliance becomes easier as well since the government collects the tax through businesses and not through filing returns by the individual taxpayers themselves.
Since indirect taxes are applied to a wide range of goods and services, the government is able to draw from a much wider tax base. It means that those who are not subjected to direct taxes, for example, the poor, also contribute to the tax pool in case they need to buy something or receive some service.
Indirect taxes are always regressive; that is, they take a larger share of income from poor individuals than from wealthy individuals. As these taxes are levied on consumption, the poor, who spend a higher percentage of their income on goods and services, end up paying a higher relative amount compared to the rich.
Under the new tax regime for FY 24-25, there are a few specific exemptions and deductions available to taxpayers, despite the broad scope of eliminating several popular tax-saving provisions. These exemptions are specifically aimed at particular categories of taxpayers and certain types of income, making it essential to understand what still applies.
Contributions made by an employer on behalf of an employee to the National Pension Scheme are exempted in the new tax regime. The facility is still available and builds the retirement corpus.
The new tax regime provides standard deduction on rent, where one can claim deduction on the whole rental income through a certain percentage, and reduces the taxable amount of the rentals earned on a property by reducing the total tax burden of property owners.
Home loan interest is deducted in the new tax regime. But this will be available only if the home loan is taken for the purpose of purchasing or constructing a residential property.
Transport allowance for employees with disabilities (Divyang) is exempt, as it helps cover travel-related expenses, making it beneficial for employees with special needs.
Conveyance allowance, which is used to pay for the cost of commuting from home to office, is also exempt, which helps employees a little.
These allowances, which are used to help employees with official travel and transfers, are exempt under the new tax regime.
A daily allowance, which is used to pay for daily expenses such as food and other incidentals during official travel, is also exempt under the new tax regime.
Though the new tax regime comes with a lower tax rate, it does not offer several exemptions and deductions available under the old regime. Thus, taxpayers must be aware of the changes to understand if the new system works for them.
The new tax regime does not permit HRA exemptions. Thus, the people who are living in rented accommodation and are receiving HRA as part of their salary will not be able to claim the exemption under the new tax structure.
LTA, which provides exemptions for travel expenses incurred by employees and their families, is not available under the new tax regime.
Some of the perks provided by employers, including free rent, car benefits, and stock options, were tax-free or partially exempt and are now taxed under the new scheme.
The deductions available under Chapter 4A of the Income Tax Act, like donations to charity under Section 80G, are not available in the new tax regime. This is a reduction in the tax relief on charitable donations.
The deduction on home loan interest, which was available under Section 24(b) of the old tax regime, is not available under the new regime. This means that homeowners cannot claim this deduction against their income, which was a key benefit in the old tax structure.
Taxes lay the foundation stone of the sound economy of India, funding strategic infrastructure and social welfare schemes. Compliance with taxation laws enables one to participate in national development alongside enjoying monetary benefits and social perks.
Ans: Not everyone in India is required to pay tax. Tax liability depends on the individual's income level, age, and residency status. For example, people below the taxable income threshold (₹2.5 lakh for individuals below 60 years) are not required to pay income tax.
The income tax rate in India depends on the taxpayer's income slabs and his choice of regime. For the financial year 2024-25, the new tax rates for individuals will be as follows:
These are for individuals below 60 years. For seniors and very senior citizens, the tax slabs might change.
Ans: The tax rates in India are regarded as relatively modest compared to many developed countries. However, for those with higher income levels, the total tax burden can be more substantial. The tax system is also rather complex, and exemptions and deductions can impact how much one finally pays.
Ans: GST is the biggest indirect tax levied on India, as the supply of goods and services will be subjected to it. Corporate income tax and individual income tax are the major contributors for the income tax in India.
Ans: The tax rates are determined by the Government of India through the Ministry of Finance. These rates are proposed in the Union Budget and approved by the Parliament.
Ans: The government imposes taxes to generate revenue, which is used to fund public services such as education, healthcare, infrastructure, defense, and social welfare programs.
Ans: Calculate Your Gross Income Add all your gross income to begin with, including your salary, profits from business, rental income, and so on.
Other applicable deductions according to your case.
