What is Tax - Meaning, Type of Taxes in India

Every government imposes taxes on its citizens and on the organisations that run within the country to maintain economic transparency and collectively work for the welfare of society. Taxes are governed by laws passed by the Central or State Legislatures. Taxes are ultimately paid to the Government (Central or State Governments), which is responsible for the judicious distribution of these taxes in a manner that benefits the citizens of the nation.In India, there are two kinds of tax - direct tax and indirect tax . Direct tax is levied on the income earned by taxpayers and follows a progression where those that earn more are liable for higher taxes. Indirect taxes are levied on the consumption of goods or services, and the rate of tax depends on the regulations around the particular goods and services consumed.

Direct tax in India has been split into different types of taxes for different taxpayers. This tax is directly paid to the government. Direct taxes help in controlling inflation by increasing the tax liability to reduce the amount that can be spent on purchasing other commodities, thus reducing demand. Direct taxes also follow a progressive theme where taxpayers with a higher income are charged more to maintain stability and economic equality. Taxpayers can compute the tax and make strategic investments to reduce their tax liability because of its certain nature.

India has two broad categories of Direct Taxes - income tax and corporate tax . Other taxes like Wealth Tax , Securities Transaction Tax , Dividend Distribution Tax, Minimum Alternative Tax (MAT), Property Tax, and Capital Gains Tax are ancillary taxes that taxpayers may have to be based on the type of transactions they enter into. Cess and surcharge are also additional taxes which may be added to income tax based on the existing tax regulations in that tax period.

Income Tax

Income tax is the most widespread tax in India, with extensive regulations. Governed by the Income Tax Act of 1961, the income tax regulations are primarily the same but may be updated by the government from time to time, like during the annual Budget. This is to ensure that the tax regulations are keeping up with the nation’s economic progress.

Taxpayers under Income Tax

The Income Tax regulations cover categorises different taxpayers based on which the regulations differ. These include:

1. Resident Individuals - below 60 years, between 60 to 80 years and above 80 years.
2. Non-resident Individuals - ruled by the residential status regulations
3. Hindu Undivided Family (HUF)
4. Association of Persons (AOP)
5. Body of Individuals (BOI)
6. Artificial Judicial Person
7. Partnership Firm
8. Companies (that pay corporate tax)

Tax Periods under Income Tax

For the purpose of calculating income taxes, there are two tax periods. One is the financial year which refers to the year in which the taxpayer earns the income. It is from April 01 to March 31 of the next year. The assessment year refers to the year following the financial year. It is the year in which the income tax returns are filed. Therefore, if a taxpayer has earned income from April 01 2022 to March 31 2023, the financial year will be FY 22-23, and the AY will be 23-24.

Tax Rates under Income Tax

The Income Tax Act has tax slabs for some categories of taxpayers that are updated during the annual Budget every year. These slabs define the net taxable income and the corresponding rate of tax that the taxpayers will have to pay.Currently, the income tax regulations have two regimes, simply called the old tax regime and the new tax regime. As per the new tax regime, the following tax slabs will apply to individuals of all age groups and HUFs.

Tax Slabs as per the New Tax Regime

However, there is a rebate available if the income of the taxpayer is less than Rs. 7 lakhs. Salaried employees opting for the new tax regime also have a standard deduction of Rs. 50,000. This is common between the old and new regimes. The major difference between the two regimes is that taxpayers cannot opt for the common deductions in the new tax regime. Therefore, if a taxpayer cannot capitalise on the benefits of investing the income in tax-saving instruments to claim deductions, the new regime will work better.

Tax Slabs as per the Old Tax Regime

For partnership firms, a flat rate of 30% is charged on the net taxable income of partnership firms.

Additional Charges on Tax

Cess - this is an additional charge which is calculated on the income tax amount. At present, there is a health & education cess of 4% applicable to all taxpayers. Cess is added to the income tax amount plus a surcharge wherever applicable. Surcharge- this is an additional charge for high-income taxpayers. It is applied to the income tax amount, not the net taxable income. The surcharge also has slabs for different taxpayers, based on which the surcharge rate differs.For individuals, HUFs, AOPs, BOIs

For Partnership Firms, if the net taxable income is above Rs 1 crore, a 12% surcharge is applied.For Domestic and Foreign Companies

1. Actual HRA received
2. 50% of the basic salary for those living in metro cities (40% for others)
3. Actual rent paid (if it is less than 10% of basic salary)

1. Basic Salary - This fixed component of the salary is typically 50% or above of the total CTC. It is fully taxable and an integral component because PF is computed on this component alone.
2. House Rent Allowance (HRA) - It is a variable component which is not taxable. It is available on the rent that the salaried individual might pay. HRA can be claimed up to the lower of the following:
3. Leave Travel Allowance (LTA) - The taxpayer can claim this deduction for expenses incurred on domestic travel for themself and their family. It can only be claimed twice in four years. The deduction allowed is the lower of LTA allowance or actual expense incurred. This deduction can only be claimed by the employer on behalf of the employee after verifying the documents.
4. Bonus - This component is fully taxable.
5. Employee Provident Fund - This component is a valuable investment for employees. It is exempt from tax.
6. Food Allowance - If the company provides this as a salary component, it is exempted up to the limit of Rs. 26,400 per year.
7. Special allowance - This component is fully taxable.
8. Professional Tax - This is a charge collected by different states and does not depend on the salary. It is allowed as a deduction.

1. Engineering
2. Legal
3. Architectural profession
4. Accountant
5. Medical
6. Technical consultant
7. Interior decoration

• A physical property that may or may not be related to the taxpayer's business, including personal effects like artwork, jewellery or motor vehicle for personal use.
• Financial assets like stocks that fall under SEBI regulations.
• Stock in trade, personal effects or movable property used in personal use other than those mentioned above, and most agricultural lands are not considered to be Capital Assets for the purpose of computing Income Tax.

1. Income from Salaries This is applicable to salaried individuals. Companies are required to deduct TDS from the employers based on the tax computations that they do. Salaried individuals must submit proof of investment to their employers to claim the necessary deductions. A standard deduction of Rs. 50,000 is allowed for all salaried individuals. Salaries have different components that are taxed differently, and some carry exemptions as follows:
2. Income from Business or Profession The taxability of income from business or profession has many different elements to it. The taxpayer must maintain proper books of accounts of the business or profession. Professions under the Income Tax regulations include
3. These taxpayers also have an option of paying tax as per the presumptive taxation scheme where the profit will be considered as 8% for non-digital transactions and 6% for digital transactions. This profit will be the net taxable income on which the tax will be easily calculated. Those opting for presumptive taxation don’t have to maintain their accounts and don’t have to get their book audited.However, only small businesses with an income of less than Rs. 2 crores (Rs. 3 crores from FY 23-24) or professionals like doctors, lawyers, etc., with an income of less than Rs. 50 lakhs (Rs. 75 crores from FY 23-24) are allowed to opt for presumptive taxation.
4. Income from Capital Gains This covers the capital gains tax. Capital gains tax in India is divided into two parts – long-term capital gains and short-term capital gains.The following assets are called Capital Assets for the purpose of computing Income Taxes:
5. For equity shares, Short-term Capital Gains are attracted if the asset is sold within 12 months of purchase.For an immovable property like a house or land, Short-term Capital Gains are attracted if the asset is sold within 24 months of purchase.For all other Capital Assets, Short-term Capital Gains are attracted if the asset is sold within 36 months of purchase.Capital gains are entirely taxable except for a Rs. 1 lakh exemption available on long-term capital gains that arise from the sale of equity shares or units of an equity-oriented mutual fund.However, there are some deductions allowed on long-term capital gains that can help reduce the taxable gains. Typically, for assets that have been owned for a long time, an indexation benefit is allowed to be allowed to the cost of acquisition of the asset, increasing its value in order to match the effects of inflation.Additionally, short-term capital gains (where Securities Transaction Tax (STT) is not paid) are added to the income of the taxpayer and are charged as per the regular tax slabs. Therefore, if the total taxable income after including short-term capital gains is less than the basic exemption limit, it will be tax-free. Also Read - What Is Capital Gains Tax?
6. Income from House Property Income from house property covers the property in which the taxpayer is residing or a rented-out house property. The net annual value refers to the annual rent received. The municipal taxes paid are allowed as deductions in case the house property is rented or self-occupied. If the house property is rented out, the taxpayer gets a flat deduction of 30% on the net annual value towards maintenance charges.Income from house property also allows a deduction on the interest charged on a home loan towards the house property under Section 24. This is available in both cases as well, whether the house is self-occupied or rented out.
7. Income from Other Sources This includes interest from a savings bank account and even interest from winnings and lottery. Each case is taxed separately. While interest from a savings bank account below Rs. 10,000 comes with a deduction, interest from fixed deposits below Rs. 40,000 will not be taxable. Winnings of any kind, like a lottery, game shows, etc., are taxed at a 30% flat rate.

The Income Tax Act also lists down some common deductions that are allowed to taxpayers. These are listed down under Chapter VI and cover Section 80C to Section 80U. These are investments that taxpayers or essential expenses that taxpayers pay incur which are allowed as deductions from the net taxable income, regardless of the source of income. Some of the common deductions are:

1. Section 80C - Total exemption that can be claimed under this section is capped at Rs. 1.5 lakhs. Investments like contributions to PPF, EPF, LIC premium, ELSS , NSC, stamp duty charges, the principal component of a home loan, etc., are covered under this section.
2. Section 80CCC - covers investments in annuity pension plans and is clubbed with Section 80C to compute the capped limit of Rs. 1.5 lakhs
3. Section 80CCD - covers a contribution to NPS. This is also clubbed with Section 80C for the capped limit. However, an additional limit of Rs. 50,000 is allowed here.
4. Section 80D - deduction of Rs. 25,000 if the taxpayer has taken insurance for themselves, their spouse and dependent children. The maximum deduction allowed is the lower of the actual premium paid, or Rs. 25,000. An additional deduction of Rs. 25,000 is allowed for dependent parents (Rs. 50,000 for senior citizen parents).
5. Section 80G - donations made to registered NGOs are fully allowed as deductions.
6. Section 80GG - the HRA deductions are claimed here.
7. Section 80TTA - the deduction of interest from the savings bank account is claimed here.
8. Section 80E - deduction of interest paid on an education loan if it was taken from a financial institution can be claimed here.
9. Section 80U - if the taxpayer suffers from a permanent disability, deductions from Rs. 75,000 to Rs. 1,25,000can be claimed under this section.
10. Section 80RRB - deduction of income from royalty for a patent up to Rs 3 lakhs can be claimed here.

For the ease of collection of income tax from the taxpayers, regulations have been put in place for the tax to get a deduction at the source itself which is typically from one who pays the income. This includes employers, companies or buyers of a capital asset. TDS on Salaried is deducted under section 192B, TDS on professional services is deducted under Section 194J, and TDS from payments to contractors is deducted under Section 194C. The sale of a house property attracts TDS under section 194 IA.

If the expected tax liability of the taxpayer is more than Rs. 10,000, they have to pay advance tax as per the income tax regulations. The advance tax liability has to be paid in 4 instalments as per the following table.

Depending on the type of income, the taxpayers have to file their annual returns. Those who have income below the basic exemption limit do not have to file ITRs. The due dates for each are listed in Section 139. Here is a quick guide on which ITRs a taxpayer should file.

1. ITR-1 - Resident individuals with an annual income of less than Rs. 50 lakhs from salary, house property or other sources.
2. ITR-2 - NRIs for any amount of income or if the resident individual has income above Rs. 50 lakhs from salary, house property or other sources.
3. ITR-3 - if the taxpayer has income from business or profession
4. ITR-4 - if the taxpayer has presumptive income
5. ITR-5 - partnership firms, LLPs, BOIs, AOPs
6. ITR-6 - companies not claiming exemption under Section 11
7. ITR-7 - all other persons or companies

The due date is 31 July of the assessment year for individuals, HUF, AOP and BOI if books of accounts don’t have to be audited. The due date is 31 October of the assessment year when an audit is needed and 31 November for specific transactions. 31 December of the assessment year is the due date for revised or belated returns.

Not complying with the Income Tax Act regulations could lead to penalties, interest and severe punishment like imprisonment. The common penalties that taxpayers may attract are:

1. Default in making payment of taxes - the penalty amount is decided by the assessing officer, but it cannot be more than the tax liability. [Section 221(1)]
2. Not complying with TDS deductions - Rs 200 for every day of default. [Section 234E]
3. Failure to file the income tax return on time - Rs. 5,000 if a belated return is filed by 31 December of the assessment year. Rs. 10,000 if this due date is also missed. If income is less than Rs. 5 lakhs, then the penalty is limited to Rs. 1,000. [Section 234F]

Other heavy penalties for non-disclosure of income are also listed under the provisions of the Income Tax Act.

1. Corporate Tax The tax paid by the companies in India has its own set of regulations. Companies that had a turnover of less than Rs 400 crores in 2017-18 are allowed to pay 25% tax. Domestic companies fulfilling the conditions of Section 115BAA are allowed to by 22% tax, and Section 115BAB can pay 15% tax. All other companies pay 30% tax.
2. Wealth Tax Wealth Tax was introduced to charge the high network individuals. It has been abolished in India since 2016. Now, taxpayers with higher incomes might have to pay a surcharge if they cross an income threshold.
3. Property Tax House owners have to pay property tax to the state government for the maintenance and upkeep of the roads and utilities around their house property. This can be claimed as an income tax deduction.

Goods and Services Tax

The recently introduced indirect tax has replaced all the other indirect taxes. GST is levied on the consumption of goods and services. It is split between Central GST and State GST, where the GST is split between the Central and State governments for intra-state transactions or Integrated GST for inter-state transactions, where the Central government collects and distributes the GST between states. The supplier collects the GST from the consumer, and the consumer is allowed an input tax credit of the GST paid if they are registered under GST. GST registrations are mandatory if the business crosses a specific threshold which is as follows:For businesses engaged in the supply of goods, the exemption limit is Rs. 40 lakhs turnover per annum, except for the following states and UTs:

• Arunachal Pradesh
• Manipur
• Meghalaya
• Mizoram
• Nagaland
• Sikkim
• Uttarakhand
• Tripura

For businesses in these states, the exemption limit is Rs. 20 lakhs turnover per annum.Businesses engaged in the supply of services have an exemption limit of Rs. 20 lakhs turnover per annum, except for the following states and UTs:

• Manipur
• Meghalaya
• Mizoram
• Nagaland
• Arunachal Pradesh
• Sikkim
• Uttarakhand
• Tripura

For businesses in these states, the exemption limit is Rs. 10 lakhs turnover per annum.If a business provides a 100% supply of exempt goods or services, they are not required to be registered for GST even if they cross the threshold limit.GST is another extensive tax regime which has its own return-filing process and penalties that registered entities must know in detail. Also Read - All You Need to Know About Indirect Taxes

Customs Duty

Customs Duty is charged on the import or export of goods and services in India. The rates differ based on the country of origin and the nature of goods or services.

VAT and Excise Duty

Even though all indirect taxes have been replaced by GST , excise duty and VAT are still charged on alcohol and petroleum products.

Entertainment Tax

A tax levied on the gross collection from television series, movies, exhibitions and other similar forms of entertainment.

Entry Tax

A tax levied on goods that enter a state from a different state. This is levied on goods coming through an e-commerce channel.

Toll Tax

Paid for the maintenance of roads.

Gift Tax

A tax levied when some amount or an item is given as a gift to a taxpayer. The value of the item is subject to tax. However, exemptions are available for gifts of up to Rs. 50,000 and on gifts given by family members.Gifts given during a wedding to the bride or the groom is also exempt from gift tax.

Fringe Benefit Tax

A tax on the expenses that employers incur on behalf of the employee like accommodation, ESOPs (Employee Stock of Plan), Leave Travel Allowance, and other employee welfare expenses.

Dividend Distribution Tax

Though this is no longer applicable, earlier the tax on dividends distributed by companies had to be deducted by the company distributing the dividend. Now, the onus of paying tax on dividends is on the shareholder (taxpayer).

Securities Transaction Tax

A tax levied on transactions on the stock market. The tax is charged on the price of securities traded on the recognized stock exchanges of India.

Sales Tax

A tax levied on the sale of the product, charged to the seller.

Minimum Alternative Tax (MAT)

Companies pay income tax through MAT as per Section 115JA. Certain companies like those in the power and infrastructure industries are exempt from the provisions of MAT. Frequently Asked Questions

1. Is tax applicable if a business makes losses?

If a business makes losses, the net income is negative and therefore no income tax will be payable. The businesses can also carry forward the losses and set them off against the profits of the following year, subject to conditions. They will still have to file income tax returns to claim the carry forward of losses.

2. What are the advantages of filing income tax returns?

There are many advantages for a taxpayer to file income tax returns on time. Some of them are:

1. Loan approvals are easier to get with a proper ITR of the last 2 to 3 years since it acts as a strong proof of income.
2. ITRs also help as proof of income for visa applications.
3. A taxpayer cannot get a refund of excess taxes paid unless they file ITR on time.

3. Can a taxpayer get a refund of excess tax paid?

In some cases, TDS gets deducted or the taxpayer ends up paying excess tax through advance tax. The taxpayer can file their proper income tax returns at the end of the year and receive a refund of any excess tax paid. Citizens with net income below exemption limit for whom it is not mandatory to file income tax returns will also have to file income tax returns if they want to claim refund of any excess tax paid.

4. For how long should a taxpayer keep the proof of investments and expenses?

A taxpayer should maintain the proof of investments and expenses as well as any books of accounts for at least 7 financial years because an inquiry from the income tax department can be initiated for any of the last 7 financial years.

5. Which taxes did GST replace?

GST is charged on the consumption of goods and services. It replaced the following taxes:

1. Central Excise Duty - except on alcohol and petroleum products
2. Additional Duties of Customs - except the regular customs duty which is still applicable
3. Value Added Tax (VAT) - except on alcohol and petroleum products
4. Central Sales Tax
5. Purchase Tax
6. Taxes on advertisements
7. Taxes on lotteries, betting, and gambling
8. Luxury Tax
9. Entertainment Tax
10. Entry Tax

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.