Understanding Taxes in India: A Beginner's Guide

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FOR EVERY PURCHASE OF ? 2000 OR MORE, WE WIL
Finance July 5, 2024 Learn the Indian Tax System
and Taxation in India It goes without saying that
every person has at least some knowledge about
what a tax is, even if he or she does not
understand this concept completely. But why is it
important to understand the integrity of this
process? You need to know where your hard-earned
money, which you pay to the government, is going.
Is it really helping the development of the
country, or is it simply going in the wrong
direction? To find answers, you must first
understand the concept of taxation policies in
India. And for that, you have this blog, as today
we will discuss taxes and how they are
structured. What do You Understand by a Tax?
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In simple terms, a tax is the money collected by
the government from the people of a country and
used for its development. There are three levels
of government in India, which makes the indian
tax system very well defined. They include the
central government, state governments, and the
local municipalities. Central excise duty,
income tax, and service tax are some of the taxes
that are levied by Indias central government. On
the other hand, income from farming is subject to
state levies, as well as state alcohol duty,
professional tax, land revenue, and stamp duty.
Last of all, the local bodies demand Octroi
charges, property taxes, and other taxes on
services such as water and drainage. Types of
Taxes Commonly, there are two types of taxes in
India. One is the direct tax, and the other is
the indirect tax. The direct tax category
includes capital gain tax, income tax, gift tax,
etc., while indirect tax involves goods and
services tax, value-added tax, service tax, and
more.
Lets understand them individually. What is
Direct Tax?
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People and corporations both pay direct taxes. In
India, these taxes are administered by the
Central Board of Direct Taxes (CBDT) under the
Department of Revenue, Ministry of Finance.
Everyone is required to pay this each year, from
April 1st to March 31st. According to the Income
Tax Act of 1961, if your total annual income
exceeds the minimal exemption limit, you are
eligible to pay income taxes. You can also get
tax incentives available under several parts of
the Act. Types of Direct Tax The main types of
direct taxes are Income Tax Income tax is the
most common form of direct tax in India,
applicable to individuals, Hindu Undivided
Families (HUFs), companies, and other
entities. It is levied on the total income
earned during a financial year Tax rates vary
based on income slabs and taxpayer
category Includes various deductions and
exemptions under different sections of the Income
Tax Act Note Try learning how to calculate your
income tax to know more about it. Example
Rahul, a salaried employee earning ?8,00,000 per
annum, falls under the 20 tax slab. After
claiming deductions under Sections 80C and 80D,
his taxable income reduces, lowering his overall
tax liability. Corporate Tax This tax is levied
on the profits earned by companies operating in
India. Applicable to domestic and foreign
companies Rates vary based on company turnover
and other factors Subject to surcharge and
cess Example ABC Ltd., a domestic company with
an annual turnover of ?250 crores, is taxed at
25 (plus applicable surcharge and cess) on its
profits. Capital Gains Tax This tax is imposed
on the profits or gains arising from the transfer
of a capital asset.
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Divided into short-term (held for up to 36
months) and long-term (held for more than 36
months), capital gains Different rates apply
based on the type of asset and holding
period Example Priya sells shares she held for
two years, making a profit of ?1,00,000. This is
treated as a short-term capital gain and taxed at
15. Securities Transaction Tax (STT) STT is
levied on transactions involving securities
listed on recognized stock exchanges in
India. Applicable to the purchase and sale of
equity shares, derivatives, and units of equity-
oriented mutual funds Rates vary based on the
type of transaction Example When Amit buys
shares worth ?1,00,000 on the National Stock
Exchange, he pays 0.1 (?100) as STT. Gift
Tax While theres no separate gift tax in India
now, gifts above a certain value are taxable
under the Income Tax Act. Gifts exceeding
?50,000 in a financial year are taxable Certain
exceptions apply, such as gifts from
relatives Example Meera receives a gift of
?1,00,000 from a friend. This amount, being more
than ?50,000, will be added to her taxable
income. What is Indirect Tax? The indirect tax
is a tax imposed on the consumption of goods and
services. It does not directly apply toa persons
income. Instead, he or she must pay the tax based
on the price of the products or services
purchased by the seller. The person paying the
tax to the government and the person compelled to
pay the tax are thus two separate people. Types
of Indirect Tax The main types of indirect taxes
are Goods and Services Tax (GST)
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GST is a comprehensive, multi-stage,
destination-based tax that is levied on every
value addition. It has largely replaced many
indirect taxes in India. Implemented on July 1,
2017 Comprises CGST (Central GST), SGST (State
GST), UTGST (Union Territory GST), and IGST
(Integrated GST) Different tax rates 0, 5,
12, 18, and 28 Example When you buy a
smartphone for ?20,000, it typically includes 18
GST. The actual price of the phone is about
?16,949, and ?3,051 is the GST amount. Customs
Duty This tax is levied on goods imported into
India and, in some cases, on exported
goods. Includes basic customs duty, additional
customs duty, and other special duties Rates vary
based on the type of goods and country of
origin Example If you import a luxury watch
worth ?1,00,000, you might have to pay around
38.5 as customs duty, which amounts to
?38,500. Excise Duty While most excise duties
were subsumed under GST, they still apply to
certain goods like petroleum products and
alcohol. Levied on the production of goods, not
on sales Rates vary based on the type of
product Example When you buy petrol, a
significant portion of the price (around ?20-30
per liter) goes towards excise duty. Value Added
Tax (VAT) VAT has largely been replaced by GST,
but it still applies to a few items, like
petroleum products, in some states. Levied at
each stage of production and distribution Rates
vary by state and product Example In states
where alcohol is subject to VAT instead of GST,
you might pay around 20-25 VAT on your purchase.
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• How to Reduce Tax on Salary
• It is di?cult for many individuals to cope with
  large slashes in salary, and thus, they are
  always on the lookout for ways to cut their
  spending. In this section, we will provide some
  of the possible ways one can minimize the amount
  of salary tax.
• Pay the premiums for your health insurance.
• Request a reduction in the amount of interest you
  pay on your home loan.
• Get a reduction in the amount of your rent.
• Make a contribution to the National Pension
  System
• Use the limit of 1.5 lakh under Section 80C
• Quick Steps to Filing Taxes
• Gather the documents
• Read your Income Tax Return form
• Complete the online filing process, login, and
  register
• Navigate to the e-File page
• Select the assessment year and status
• Choose the Indian Tax Return form
• Fill out the ITR form
• Confirm the information that has been pre-filled
  in

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