BAJAJ BROKING
August 06, 2025
7 mins read
Taxation in India involves a system where the government collects funds from individuals and entities to finance public expenditure. This system is structured to enable the government to support various development initiatives and public services. Taxes are broadly classified into direct and indirect taxes, each with distinct characteristics regarding how they are levied and collected. The Indian tax landscape has undergone changes over time, including recent reforms aimed at simplifying compliance and broadening the tax base. These changes influence how taxpayers calculate and manage their financial obligations.
The Indian taxation system consists of two primary categories:
Direct Taxes
Indirect Taxes
These classifications depend on whether the burden of the tax falls directly on the taxpayer or is passed on to another entity, such as a consumer.
Direct taxes are levied directly on the income or wealth of individuals and corporate entities. The individual or entity on whom the tax is imposed bears the burden directly. This means the liability for paying the tax rests solely with the taxpayer and cannot be transferred to another party. The Central Board of Direct Taxes (CBDT), operating under the Department of Revenue, governs direct taxes in India.
Examples of direct taxes include:
Income Tax: This tax is imposed on the annual income of individuals and Hindu Undivided Families (HUFs). The rates of income tax vary based on income slabs, which means the tax rate increases as income levels rise. This structure is often referred to as a progressive tax system.
Corporate Tax: This is a direct tax levied on the profits earned by companies incorporated in India. Corporate tax rates are generally applied at a flat rate on the net profit of the business for the relevant financial year.
Securities Transaction Tax (STT): STT is a direct tax applied to transactions involving the purchase and sale of equity securities listed on recognised stock exchanges.
Capital Gains Tax: This tax is imposed on the profits realised from the sale of capital assets, such as real estate, shares, or mutual funds. Capital gains are categorised as either short-term or long-term, and different tax rates apply based on the holding period of the asset.
Wealth Tax: (Note: Wealth tax was abolished in India from April 1, 2015.) Prior to its abolition, wealth tax was charged based on the net wealth of an assessee.
Indirect taxes are levied on goods and services, and the tax burden is typically passed on from the manufacturer or service provider to the end consumer. These taxes are not paid directly by the consumer to the government but are collected by an intermediary, who then remits the tax to the government. The Central Board of Indirect Taxes and Customs (CBIC) oversees indirect taxes.
Before July 1, 2017, India had multiple indirect taxes, including:
Service Tax: A tax on taxable services provided by service providers.
Value Added Tax (VAT): A multi-stage tax on goods, levied at each stage of production and distribution, with provisions for input tax credit.
Excise Duty: A tax on goods manufactured or produced within the country.
Customs Duty: A tax imposed on goods imported into India and, in some cases, on goods exported from India.
Sales Tax: A tax levied on the sale of goods.
Entertainment Tax: A tax on various forms of entertainment.
A significant reform in India's indirect tax system was the introduction of the Goods and Services Tax (GST) on July 1, 2017. GST subsumed many of the existing indirect taxes, creating a unified tax structure across the country. GST aims to simplify compliance and mitigate the cascading effect of taxes (tax on tax). GST is applied at every stage of the supply chain, from manufacturing to consumption. It is categorised into:
Central GST (CGST): Levied on intra-state sales and collected by the Central Government.
State GST (SGST): Levied on intra-state sales and collected by State Governments.
Integrated GST (IGST): Levied on inter-state sales and collected by the Central Government.
GST rates are structured into slabs, including 0%, 5%, 12%, 18%, and 28%, depending on the goods or services.
The taxation system in India operates through a framework established by laws and regulations. The primary law governing income tax return filing is the Income Tax Act, 1961. For indirect taxes, the Goods and Services Tax (GST) Act, 2017, and the Customs Act, 1962, are key legislations. The government collects taxes to generate revenue, which is then used to fund public services and infrastructure projects.
For direct taxes, individuals and entities are generally required to calculate their taxable income based on their earnings from various sources, such as salary, business profits, capital gains, or other income. They then apply the applicable tax rates to determine their tax liability. This process often involves considering deductions and exemptions allowed under the tax laws. Taxpayers file an Income Tax Return (ITR) annually, providing details of their income, deductions, and the tax paid. The Income Tax Department assesses these returns.
For indirect taxes, particularly GST, the tax is levied at each stage of the supply chain. Businesses collect GST from their customers and then remit it to the government. A mechanism known as Input Tax Credit (ITC) allows businesses to claim credit for the GST paid on their inputs, which helps to avoid double taxation and reduces the overall tax burden for the end consumer. Customs duties are levied on goods crossing India's borders, and these are collected by the Customs Department.
The tax authorities, such as the Income Tax Department and the Central Board of Indirect Taxes and Customs, are responsible for administering and enforcing tax laws, ensuring compliance, and collecting taxes.
Taxation provides the government with the necessary resources to fund a range of public goods and services. Without tax revenue, the government would be unable to provide these services.
The funds collected through taxes are used for:
Public Infrastructure Development: A portion of tax revenue is allocated for the construction and maintenance of essential infrastructure, such as roads, railways, bridges, airports, and urban development projects.
Government Welfare Schemes: Taxes support various welfare programs aimed at social upliftment, including education initiatives, healthcare services, housing schemes, and food security programs.
National Defence and Security: A part of tax revenue is directed towards strengthening national defence, border security, and law enforcement agencies.
Salaries for Government Employees: Taxes fund the salaries of government employees, including those in public services, education, and healthcare sectors.
Scientific Research and Space Exploration: Government-funded scientific research and space exploration projects often rely on tax revenue.
Beyond funding public services, timely payment and filing of taxes can also offer benefits to individuals. These include providing documented proof of income, which can facilitate loan approvals and visa processing. Filing tax returns can also enable taxpayers to claim tax refunds if they have paid more tax than their actual liability.
The Indian tax system has seen recent reforms aimed at enhancing efficiency and transparency. A significant reform on the indirect tax side was the implementation of the Goods and Services Tax (GST) on July 1, 2017. GST replaced a number of central and state indirect taxes, creating a unified indirect tax regime. This change aimed to simplify compliance, reduce the cascading effect of taxes, and promote economic integration.
In direct taxation, the government has introduced measures such as the Faceless Assessment Scheme. This scheme, introduced on August 13, 2020, aims to reduce the physical interaction between taxpayers and tax officials, intending to increase transparency and efficiency in the assessment process. There have also been adjustments to corporate tax rates for certain domestic companies, offering concessional tax regimes under specific conditions.
Income tax is a direct tax imposed on the annual income of individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities in India. The Income Tax Act, 1961, governs the calculation, assessment, and collection of income tax. All taxpayers with income above a certain threshold are required to pay income tax and file an Income Tax Return (ITR) annually.
Key terms related to income tax include:
Assessee: An individual or entity liable to pay tax under the Income Tax Act.
Assessment Year (AY): The year immediately following the financial year, in which the income earned in the financial year is assessed. For example, for income earned in the financial year 2024-25, the assessment year is 2025-26.
Financial Year (FY): The period from April 1st of one year to March 31st of the subsequent year, during which income is earned.
Gross Total Income (GTI): The sum of income from all five heads of income: salaries, house property, profits and gains of business or profession, capital gains, and income from other sources, before claiming deductions.
Taxable Income: The income remaining after claiming all permissible deductions and exemptions from the gross total income. This is the amount on which tax is calculated.
Income Tax Slabs: Income tax rates are structured into different income brackets or "slabs." The tax rate increases as the income bracket increases.
Deductions: Specific expenses or investments that can be subtracted from the gross total income to reduce the taxable income. Examples include deductions under Section 80C (for investments in PPF, ELSS, etc.), Section 80D (for health insurance premiums), and Section 80G (for donations).
Exemptions: Certain types of income that are not included in the calculation of taxable income. Examples include agricultural income and specific allowances like House Rent Allowance (HRA) up to certain limits (under the old tax regime).
Rebate: A reduction in the tax payable. For example, under Section 87A, a tax rebate is available for individuals whose net taxable income does not exceed a specified limit.
Surcharge: An additional levy on income tax, applicable if the total income exceeds a certain threshold. The surcharge rate varies based on the income level.
Cess: A tax levied for a specific purpose, in addition to the regular tax. For example, Education Cess and Health and Education Cess are levied to fund education and healthcare initiatives.
Tax Deducted at Source (TDS): Tax that is deducted at the time of payment of certain incomes, such as salaries, interest, or rent, by the payer. The deducted amount is then remitted to the government.
Tax Collected at Source (TCS): Tax collected by sellers from buyers at the time of sale of certain goods or services.
Advance Tax: Tax paid in advance during the financial year, rather than at the end of the year. This is generally applicable to individuals and entities with a significant tax liability.
The tax system in India is a fundamental component of the country's financial structure. It comprises both direct and indirect taxes, each with its own mechanisms for collection and application. Direct taxes, such as income tax and corporate tax, are levied on income and wealth, with the taxpayer bearing the direct liability. Indirect taxes, exemplified by GST, are levied on goods and services, with the burden ultimately shifting to the consumer. Recent reforms, including GST and faceless assessments, have aimed to streamline the tax process and promote transparency. Understanding the types of taxes, their operational mechanisms, and the associated terminology can assist individuals and businesses in managing their tax obligations.
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Sections 80C, 80D, and HRA exemption are only a few of the deductions and exemptions that taxpayers can claim under the previous tax regime. This can reduce the taxable income. The new tax regime, introduced to simplify taxation, offers lower tax slab rates but allows for a limited number of deductions and exemptions. Taxpayers have the option to choose between the two regimes.
Failure to file an Income Tax Return (ITR) by the due date can result in a late filing fee under Section 234F of the Income Tax Act. Additionally, interest may be charged under Section 234A on any unpaid tax from the due date until the actual date of filing. In certain circumstances, if the tax liability is substantial, prosecution proceedings may also be initiated. Furthermore, a taxpayer may not be able to carry forward certain losses to offset against future income if the return is filed late.
The determination of which tax regime is more suitable depends on an individual's financial situation, particularly their investment patterns and eligible expenses. If an individual has made significant investments that qualify for deductions under the old regime (e.g., PPF, life insurance, health insurance premiums, home loan interest), the old regime might result in a lower tax liability. If an individual has limited investments or expenses that qualify for deductions, the new regime's lower tax rates might be more beneficial. Using a tax calculator can help compare the tax payable under both regimes based on specific income and deduction details.
Tax liability can be managed through various provisions in the Income Tax Act, primarily by utilizing available deductions and exemptions. Under the old tax regime, investing in instruments like Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), and certain life insurance policies can provide deductions under Section 80C. Health insurance premiums can be deducted under Section 80D. Additionally, specific allowances like House Rent Allowance (HRA) and Leave Travel Allowance (LTA) can be exempt from tax under certain conditions. For those opting for the new tax regime, opportunities for reduction are more limited due to fewer available deductions.
For individual taxpayers whose accounts are not subject to audit, the general due date for filing Income Tax Returns (ITR) for a financial year is July 31st of the subsequent assessment year. For example, for the financial year ending March 31, 2025, the ITR should generally be filed by July 31, 2025. Different due dates apply to businesses and other entities, especially those requiring an audit.
An Income Tax Return (ITR) is a form that individuals and entities submit to the Income Tax Department of India. This form provides a detailed account of their income earned from various sources during a financial year, the deductions and exemptions claimed, and the total tax payable or refundable. Filing an ITR is a mandatory annual compliance requirement for those whose income exceeds the basic exemption limit.
In India, an individual is generally required to file an Income Tax Return if their total income during a financial year exceeds the basic exemption limit. This limit varies based on the age of the taxpayer (e.g., for individuals below 60 years, it is currently INR 2.5 lakh under the old regime and INR 3 lakh under the new regime). Companies and firms are also required to file ITRs regardless of their income.
Several documents are typically required for filing taxes in India. These include:
PAN Card and Aadhaar Card: Essential for identification and linking with bank accounts.
Form 16: Employers issue it, and it gives information on salary income and TDS withheld.
Form 16A/16B/16C: TDS certificates for income other than salary, such as interest or rent.
Form 26AS: An annual consolidated statement showing tax deducted/collected at source and advance tax paid.
Bank Statements/Passbook: To verify interest income and other financial transactions.
Investment Proofs: Documents supporting claims for deductions under sections like 80C, 80D, etc.
Aadhaar Card: Linking PAN with Aadhaar is mandatory for filing ITR.
Salary slips: Detailed breakdown of salary components.
Home loan interest certificate: If claiming deduction for home loan interest.
Property details: If owning a house property.
Capital gains statements: For income from sale of assets.
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