Tax: Basics, Types, Tax Rates, and Tax Filing in India

Understanding Taxes in India

Taxes are one of the inevitable sources of earnings for the Indian government. The Indian Tax System is a well-structured framework determining different types of taxes on earning individuals and entities depending on their range and sources of income. Neglecting tax obligations can have serious consequences for the taxpayers, from missed savings opportunities to applicable penalties.

But, with a little knowledge and proactive planning, individuals can navigate the complex concept of taxes. Further in this article, we discuss the key concept of tax, its types, updated tax rates, and the essentials of tax planning and preparation.

What is Tax?

Tax is the mandatory contribution to the Government of India made by individuals or organisations falling under the tax slab – whether local, state level or national. Taxes are one of the major sources of revenue generation for the government to boost India's economy. Further, the government provides the best facilities and infrastructure to the citizens. 

The Indian tax system is well structured into three major federal structures: central government, state government, and local municipal bodies. The tax collected by the government is further used to produce income for various business projects, enhance the economy of India, and raise the living standards of its citizens. 

Payment of taxes at the defined tax rates levied by the Indian government is compulsory, and any failure to do so is punishable by law.

What are the Different Types of Taxes Applicable in India?

On a broader outlook, two types of taxes apply to Indian citizens or organizations– direct and indirect taxes. The implementation of both types of taxes differs in nature. Let’s look at some of the main types of taxes levied by the Indian government:

What is Direct Tax?

Direct tax is the tax levied by the Indian government directly on the taxpayer (corporate or non-corporate). The payable taxes depend on the overall income of the taxpayer. Those with higher income or valuable assets are liable to pay more taxes. It is to be noted that these types of taxes are not transferable to any other entity or individual. The Central Board of Direct Taxes (CBDT), governed by the Department of Revenue, is responsible for formulating assessment policies and collecting direct taxes. 

What are the Different Types of Direct Taxes?

The following direct taxes are levied on the eligible taxpayers in India. 

Income Tax Act

The Income Tax Act, of 1961, outlines the comprehensive set of rules and regulations upon which the Income Tax Department levies, functions, and collects taxes. Being the direct tax, the taxpayer pays a definite percentage of their income based on their income tax slab. 

The Income Tax Act also outlines the tax benefits taxpayers can avail of on life insurance premiums and fixed deposits. The new tax regime was announced in Budget 2023, and the tax slab and rates were updated to provide maximum benefits to the taxpayer. 

Securities Transaction Tax (STT)

Securities transaction tax is a tax charged on purchasing and selling securities, like stocks, equities, mutual funds, or recognized stock exchanges in India. Being the direct tax, the STT is levied directly on the transaction value of securities. The STT is governed by the 

Securities Transaction Tax Act, which entails various types of securities and applicable tax rates. 

Wealth Tax Act

The wealth tax is levied on the net worth of an individual or entity. Individuals with a net worth of more than 30 lakhs (as of FY 2014-15) must pay wealth tax at a rate of 1% on the net worth exceeding Rs. 30 lakhs. Individuals having an income of more than 1 crore per annum are liable to pay a surcharge of 12%.

Gift Tax Act

The gift taxation rules are listed under Section 56 (2) (vi) of the Income Tax Act. According to the Gift Tax Act, any gift received with or without consideration of more than Rs. 50,000 in a financial year is added to your ‘income from other sources’ and is taxed as per the tax slab. The gifts from the family members and local authorities are exempted from tax. 

Corporate Tax

The corporate tax is levied on the income made by a company registered in India. Domestic and foreign companies are liable to pay corporate tax as per the provisions of the Income Tax Act. The current corporate tax in India is 30% for companies registered in India and 40% for foreign companies. However, companies can avail of various deductions and exemptions to reduce tax liabilities. 

Capital Gains Tax (CGT)

Any profits earned from the sale of ‘capital assets’, such as bonds, stocks, real estate, or other investments, are listed under the ‘income from capital gains’. The taxes are levied on such income in the financial year in which the transfer of assets is completed. The rate of CGT depends upon the type and holding period of assets. The CGT rate on short-term capital gains is 15% (when STT is applicable), and for long-term capital gains is upto 20%. 

What is Indirect Tax?

The government levies indirect taxes on the goods and services the taxpayers consume. The indirect taxes are not directly levied on the income or revenue generated within a financial year but are imposed on the products and intermediaries at the time of sale of the product. The indirect taxes can be passed from one individual to another. The different types of indirect taxes may include service tax, excise tax, VAT, customs duty, etc.

What are the Different Types of Indirect Taxes?

The following indirect taxes are levied on the eligible taxpayers in India.  

Sales Tax

Sales tax is the charge levied on the customer to consume goods and services. Simply, it is the percentage of the retail price of the goods or services purchased or utilized. The retailer of the goods or the service collects the tax at the time of sale and remits it to the government.

Goods and Service Tax (GST)

GST is an indirect tax that has replaced many taxes in India, like excise duty, VAT, etc. The GST is a consumption-based tax levied on the supply of goods and services. GST is applied to every point of sale, including intra-state sales.

Service Tax

The service tax is applicable to the services provided by the companies in India. The service tax announced is only applicable to service-based companies (not goods) on a monthly or quarterly basis. The current service tax rate in India is 15%.

Excise Duty

Excise duty is applicable on all the goods manufactured in India. The government of India collects taxes from the manufacturers of goods. The excise duty is also applicable to the entities receiving manufactured goods by employing people to transport goods from the manufacturer to them. If the excise duty is not paid on time, the moving of goods is restricted from where it is produced. 

Value Added Tax (VAT)

VAT is the commercial tax applicable on certain goods at all supply chain stages, from manufacturer to retailer/ dealer to customer. The VAT levied on goods sold in the state is only decided by the state government. 

Custom Duty & Octroi

When any goods are imported from outside India, customs duty applies to them irrespective of the medium, whether it be air, sea, or land. The custom duty ensures that all goods entering India are taxed and paid for. In the same way, octroi is charged on the goods crossing the state border.

What are the Advantages and Disadvantages of Different Taxes in India?

Since paying tax is mandatory for those who are eligible for it and, at the same time, very crucial for the growth and development of the country. However, there might be some advantages and disadvantages of different types of taxes. Some of them are mentioned below:

Why is it Important to Pay Taxes?

An individual filing for taxes on time can avail of many benefits listed below:

• The taxpayers who have paid more taxes than the eligibility can simply file for the tax returns. 
• At the time of obtaining a loan for the purchase of a home, vehicle, or for medical purposes, the bank requires income tax returns from the last 3 years. Based on the details, the bank decides whether to sanction the loan and the right amount. 
• While applying for a VISA, certain countries are required to submit income tax return receipts to process. This is mandatory to ensure that individuals can care for themselves in a foreign country. 
• Income tax returns work as proof of the income of an individual from salary and other income sources. 
• If an individual has faced losses in a financial year, they can carry it forward to the next year and claim for the losses. 
• From a business perspective, if a person applies for taxes timely, they can apply for government tenders. 
• The taxpayers can file for any due refunds from the IT Department. 
• Self-employed individuals can also file for compensation in case of an accidental disability. 
• For higher income brackets, individuals can apply for life insurance with high coverage. 

Learn about what tax exemption you can claim under Section 10

What Tax Regimes Can I Opt for to Pay Taxes in India?

Depending on the investment choices of the taxpayer, they can select from the old tax regime and the new tax regime. The tax slabs and rates for each slab are applicable in the following manner: 

* The income tax rates are subject to change every year and announced before the starting of next financial year by the Ministry of Finance. 

How is Tax Calculated in India?

In India, taxes are calculated based on the individual's income and the tax rates set by the government. The Indian tax system follows a progressive structure, which means that the tax rate increases as income increases. Here's a general overview of how tax is calculated in India:

1. Income Classification: The first step is to classify your income into various categories. The major sources of income are typically categorized into five heads: 

• Income from salary
• Income from house property
• Profit and gains from business or profession
• Capital gains
• Income from other sources

2. Deductions and Exemptions: After determining your total income from all sources, you can claim deductions under Sections 80C to 80U of the Income Tax Act to reduce your taxable income. These deductions can include expenses like investments in certain savings schemes, insurance premiums, education loan interest, and donations to eligible charitable institutions.

3. Tax Slabs and Rates: Once deductions are applied, the remaining income is subject to tax at eligible tax rates, depending on the individual's age and income level. India has a slab-based tax system, with different tax rates for different income ranges, which are updated timely.

4. Calculation of Tax Liability: The total tax liability is calculated after applying the applicable tax rates to the taxable income. Additionally, a cess is levied on the total tax payable to fund specific government initiatives.

5. Applying Rebates and Credits: Individuals may be eligible for rebates or tax credits under certain circumstances. For example, individuals with a total income below a specified threshold may be eligible for a rebate under Section 87A of the Income Tax Act.

6. Payment of Taxes: Finally, taxpayers must pay their taxes to the government within the specified due dates. This can be done through various modes such as online payment, physical payment at authorized banks, or through tax deducted at source (TDS) for certain types of income.

You can also use a tax calculator to make the tax calculation process more convenient. We suggest you consult a tax professional or refer to the latest tax guidelines issued by the Income Tax Department for accurate information and guidance.

Learn about what tax exemption you can claim under Section 10 (10D).

How do We File for Taxes in India?

Filing taxes in India involves several steps, and the process can vary depending on your income sources, deductions, and other factors. Here's a general guide on how to file taxes in India:

1. Gather Required Documents: Before you begin filing your taxes, gather all necessary documents for tax filing, including:

• Form 16 (for salaried individuals)
• Form 16A/16B/16C (for income from other sources)
• Bank statements
• Investment proofs (such as receipts for insurance premiums, mutual funds, etc.)
• Details of any other income sources

2. Choose the Right Form: Select the appropriate income tax return (ITR) form based on your income sources and eligibility. The different types of ITR forms cater to various categories of taxpayers, including individuals, Hindu Undivided Families (HUFs), companies, and more.

3. Prepare Your Tax Return: Fill out the selected ITR form accurately and completely. Provide details of your income, deductions, and tax payments for the relevant financial year. Many taxpayers opt to file their taxes electronically using the tax e-filing portal provided by the Income Tax Department.

4. Calculate Your Tax Liability: Once you've filled out the necessary information, calculate your tax liability using the applicable tax rates and deductions. The Income Tax Department provides tax calculators and tools to assist taxpayers in determining their tax liability.

5. Verify and Submit Your Return: Review your tax return carefully to ensure accuracy and completeness. While e-filing taxes, you may need to digitally sign the return using a digital signature certificate (DSC) or electronically verify it using Aadhaar OTP, net banking, or other methods. If filing a physical return, sign and submit it along with any required documents to the designated income tax office.

6. Receive Acknowledgment: After successfully filing your tax return, you will receive an acknowledgement from the Income Tax Department. This acknowledgement serves as proof that your return has been filed. Keep it safe for future reference.

7. Monitor Tax Refund Status (if applicable): If you are eligible for a tax refund, you can track the status of your refund online through the Income Tax Department's website. Depending on various factors, refunds are typically processed within a few weeks to months after filing.

8. Pay Any Remaining Tax Due: If you have any outstanding tax liability after considering deductions and tax payments, ensure timely payment to avoid penalties and interest.

9. File Revised Return (if necessary): If you discover any errors in your original tax return after filing, you can file a revised return within the prescribed time limit to rectify the mistakes.

* Disclaimer: The information provided here regarding insurance products, companies, and other schemes is for general informational purposes only and is subject to change according to the specific terms without prior notice.

Final Words

Filing taxes may seem tough for a beginner, but it can be a manageable process with the right knowledge and guidance. You can easily file your taxes by understanding the tax slab rates, tax filing steps, and documents required.

Remember, timely and accurate tax filing ensures compliance with the law and helps you take advantage of available tax deductions and credits, ultimately reducing your tax burden.

If stuck, don't hesitate to contact a tax advisor or financial planner for guidance tailored to your specific needs and circumstances.

Frequently Asked Questions

What is tax in simple words?

1. Tax is a mandatory charge levied by the government on the earning individuals and organizations to collect the revenue to develop infrastructure and facilities. The government incorporates the applicable penalties if the taxpayer fails to pay taxes.

What is the full form of tax?

1. Taxation is the full form of tax. Taxation refers to the process by which governments impose charges on individuals, entities, or transactions to raise revenue for public expenditures and to develop the economy of the nation.

What is India’s tax rate?

1. As per the budget announced in 2023, the new tax rates for FY 2023-24 for every earning individual are as mentioned:

Can tax regime be changed?

1. Yes, the taxpayer can switch between the old and new tax regime every financial year while filing for ITR. Even if an individual has opted for the new or old tax regime throughout the year, the taxpayer can change the regime at the time of tax filing. Individuals or businesses can only switch between the regimes once in their lifetime. 

How to file income tax return?

1. Here are the simple steps for filing the income tax return:

• Visit the income tax e-filing website 
• Register or login to the website
• Select the ‘File Income Tax Return’ option from the menu
• Enter the required details
• Select the filing mode as ‘online’
• Choose from the applicable status from the list
• From the ITR Forms available, select the appropriate
• Select the suitable reason for filing ITR
• Submit the bank account details and other information 
• Tax computation summary
• Proceed for e-verification
• Submit the ITR

What tax deductions can I claim?

1. The taxpayer can claim the following deductions as per the applicability of their income and investment types:

• Premiums falling under Section 80C, 80CCC, 80CCD(1)
• Premium paid for medical and health insurance (under Section 80D)
• Retirement contributions
• Deduction on higher studies loan
• Donations under Section 80G
• Saving account interest
• Health savings account (HSA) contributions
• Stamp duty and registration 
• Preventive health checkups
• House rent deduction

Which tax is applicable on interstate sales?

1. Goods and Services Tax (GST) is applicable to the interstate supply of goods. Both Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) are applicable as per the nature of supply.

Will tax be deducted every month?

1. Only TDS is deducted every month by the employer when making the payment to the employee, as per Section 192. 

How are taxes calculated?

1. Taxes are calculated based on various factors such as income level, type of income, deductions, credits, and tax rates determined by the government.

What are the different types of taxes?

1. The taxes are categorized into two major categories- direct and indirect tax, which cover various types of taxes in India, including income tax, sales tax, property tax, corporate tax, excise tax, and estate tax, among others.

Why do we pay taxes?

1. Taxes are paid to finance government operations, infrastructure, public services, and social welfare programs.

What will happen if I don't pay taxes?

1. Failure to pay taxes on time may result in penalties, fines, legal action, and, in extreme cases, imprisonment.

How can I reduce my taxes?

1. Taxpayers can reduce their tax liabilities through various methods, such as claiming deductions and credits, contributing to retirement accounts, and utilizing tax planning strategies.

Where do taxes go?

1. Taxes paid by the citizens in India are allocated towards various government expenditures, including education, healthcare, defence, infrastructure, social security, and other public services.

What is the difference between tax avoidance and tax evasion?

1. Tax evasion is the illegal act of deliberately avoiding paying taxes owed, often by falsifying information or hiding income. Tax avoidance, on the other hand, is the legal practice of arranging one's financial affairs to minimize tax liability within the boundaries of the law.