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How does taxation work in India?

India, being the second most populous country and the most populous democracy in the world, has a well-structured tax system in place evolving over years. Tax being the largest source of revenue for the government is used for various purposes and in turn helps in the development of the nation.

Post its independence in 1947, India has been a federal republic governed under a parliamentary system. The Indian regulatory and tax authorities have been constantly working on making the taxation laws simple thereby reducing the burden on the common man. Being a federal structure, the tax system in India is managed by the central government, state governments and the local municipal bodies. No tax can be imposed unless it is passed by law.

The two main types of taxes in India are the direct and indirect tax. In simple terms, individuals and businesses pay direct tax on the income or profits earned by them. For example, salaried employees, individuals & companies carrying on business for profits etc. This is governed by the Income Tax Act 1962 wherein detailed provisions have been incorporated for each class of assesse for different modes of income. This includes capital gains, income from house property, profits and gains on business, salary income etc. 

Indirect tax, as the name suggests, is paid by the consumers of goods and services. The most recent example would be the levy of Goods & Services Tax which has subsumed all the earlier indirect taxes that were levied such as Central Excise Duty, Service Tax, VAT etc.

The government also imposes various cess and other taxes such as Health & Education Cess, stamp duty, professional tax etc. These are used for specific purposes and to improve the basic infrastructure in the country.

What is taxation and types of taxes in India?

Taxes are an important source of revenue for any government. This helps in the economic growth of a country along with infrastructure development in a country. The constitution of India give the authority to the government of India to collect taxes.

There are two types of taxes here in India, direct and indirect tax. Direct taxes are administered by the Central Board of Direct Taxes(CBDT) via the Income Tax Act 1961 and are levied directly on the income of the individual.

Unlike Direct Taxes, Indirect taxes are not levied on individuals but on goods and services. This tax is not levied on profit, income or the revenue of an individual or an entity but rather it is applied on the sale of goods or rendering of services. In current scenario, Goods and Services Tax(GST) is levied on the sale of goods and services and is administered by Central Goods & Services Tax Act 2017, respective State Goods & Services Tax Laws, Integrated Goods & Services Tax 2017.

How is the tax calculated?

As per the current tax laws, individuals have been given an option to choose between the old tax regime or the new tax regime. The taxpayer can choose between following the old tax regime or the new tax regime. Below are the income tax slab rates under both regimes. It is to be noted that there are certain deductions which are not allowed if the taxpayer opts for the new tax regime.

Income tax slab rates for individuals below the age of 60

Income Range Per AnnumTax Rate As Per Old RegimeTax Rate As Per New Regime
Up to ₹ 2.50 LakhNo TaxNo tax
₹ 2.50 Lakh – ₹ 5 Lakh5%5%
₹ 5 Lakh – ₹ 7.50 Lakh20%10%
₹ 7.50 Lakh – ₹ 10 Lakh20%15%
₹ 10 Lakh – ₹ 12.50 Lakh30%20%
₹ 12,50,000 – ₹ 15,00,00030%25%
Above ₹ 15,00,00030%30%

Income tax slab rates for individuals above 60 years but below 80 years

Income Range Per AnnumTax Rate As Per Old RegimeTax Rate As Per New Regime
Up to ₹ 3 LakhNo TaxNo Tax
Above ₹ 3 Lakh to ₹ 5 Lakh5%5%
Above ₹ 5 Lakh to ₹ 7.50 Lakh20%10%
Above ₹ 7.50 Lakh to ₹ 10 Lakh20%15%
Above ₹ 10 Lakh to ₹ 12.50 Lakh30%20%
Above ₹ 12.50 Lakh to ₹ 15 Lakh30%25%
Above ₹ 15 Lakh30%30%

Income tax slab rates for individuals above 80 years

Income Range Per AnnumTax Rate As Per Old RegimeTax Rate As Per New Regime
Up to ₹ 2.50 Lakh per annumNo TaxNo Tax
Up to ₹ 5 Lakh per annumNo TaxNo Tax
Above ₹ 5 Lakh to ₹ 7.50 Lakh20%10%
Above ₹ 7.50 Lakh to ₹ 10 Lakh20%15%
Above ₹ 10 Lakh to ₹ 12.50 Lakh30%20%
Above ₹ 12.50 Lakh to ₹ 15 Lakh30%25%
Above ₹ 15 Lakh30%30%

Apart from the tax, Health & Education Cess at 4% is applicable to all citizens. Moreover, a surcharge at 10% for income above INR 50 Lakh. And for income above INR 1 Cr, at 15%

Let’s take an example of an individual who is 30 years old and has an annual income of INR 20,00,000. Let’s assume an investment has been made in Section 80C of INR 1,50,000. The tax payable for this individual under the old and new tax regime will be INR 3,82,200 and INR 3,51,000 respectively.

One can always use an Income Tax Calculator to estimate their tax liability.

Which tax is highest in India?

Since there are different taxes levied in India, the tax collection varies across  both direct and indirect taxes. However, the corporate tax rate in India may reach upto 48% which is the highest. 

In India, corporate taxpayers are liable to pay higher of the following:

Tax liability computed under the normal provisions computed @ 15%/25%/40% of the taxable income of the corporate or

Minimum alternate tax computed @15% of the book profits of the company.

How much income is tax free in India?

As per Income Tax Act, income up to INR 2,50,000 is tax free in India for an individual taxpayer. No such exemption has been provided in the case of corporates. Some of the other tax-free sources of income are:

  • Agricultural income: Income from agricultural land is tax free under section 10(1).
  • Scholarship income: Income earned from a scholarship is tax free under section 56(ii).
  • Interest on EPF and PPF: Interest that one earns on EPF and PPF interests are completely tax free.
  • Tax free bonds: Interest that one earns on a specific category of tax free bonds is tax free under section 10(15)(iv)(h).