Your guide to taxation in India

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Taxation is the act of levying or imposing a financial obligation upon residents of a country by a taxing authority, most often the government of the country. 

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Understanding taxation

Taxation is legally distinct from extortion and protection rackets because the taxing authority is the government, not individual players. Tax systems have changed substantially between governments throughout history. In most contemporary tax systems, tangible assets such as property, and particular transactions such as sales transactions are taxed. 

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Types of taxes in India

There are two primary types of taxes, each of which can be broken into various subcategories.

Direct taxes

A direct tax is a tax that is owed by the person or legal organisation directly to the government. One cannot pass one person’s direct tax liability to another person or legal organisation.

Indirect taxes

Indirect tax refers to taxes placed on services and goods, collected by the service or product provider. Taxes are added to the cost of goods and services. At this time, the government only levies one kind of indirect tax on individuals and businesses – “GST” or the “Goods and Services Tax”.

Types of direct tax in India

In India, almost half of the revenue that the government receives comes from direct taxes. The following are the categories of direct taxes that are levied in India:

Income tax

Taxes are charged on the amount of money a person makes each year or the amount of money they make in profits. The tax-exemption limit for those under the age of 60 is Rs.2.5 lakh per year. The tax-exemption ceiling for those 60 to 80 years old is Rs.3 lakh.

Capital Gains Tax

The sale of an asset or the receipt of money as a result of an investment triggers capital gain. Gains in money from an investment might be short-term or long-term in nature. This takes into account all transactions conducted in kind and evaluates them according to their worth.

Corporate Tax 

The earnings of a firm are taxed through a corporate tax. Businesses must pay taxes on their taxable income, which comprises revenue less the cost of goods sold, general and administrative expenditures, sales and marketing, R & D, depreciation, and other operational costs. 

Securities Transaction Tax

Securities transaction taxes (STT) are charged on the stock market and the trading of securities. The price of the stock and the securities traded on the Indian Stock Exchange are subject to this tax. 

Prerequisite Tax

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These are the various levies that are placed on the advantages and privileges that are given to employees by their employers in the form of benefits and perks. The nature of the privileges and benefits, official or personal, have to be specified.

Types of indirect taxes in India

In India, indirect taxes have historically been the most reliable and significant contributor to the government’s overall income. 

GST 

The Goods and Services Tax (GST) is a comprehensive indirect tax imposed at the national level on the manufacturing, sale, and consumption of goods and services. It has taken the place of all indirect taxes that the Central and State Governments formerly imposed on goods and services.

The Goods and Services Tax (GST) system was put into effect on July 1, 2017. India has embraced the dual GST model, which mandates taxation by the central government and individual states. 

Other taxes 

Property tax

Property tax applies to residential and commercial property owners. It is used to maintain essential aspects of the civil service system. The municipal entities headquartered in each city are responsible for collecting property tax.

Professional tax

Those individuals who practise a profession or receive a salary, such as attorneys, chartered accountants, physicians, etc., are subject to this employment tax. The rate of this tax varies from one state to another. Certain states do not impose a tax on professionals. 

Entertainment tax

This is a tax that is charged on many forms of entertainment such as movies, television shows, and exhibits. The entertainment tax is sometimes known as the “amusement tax.”

Education cess 

This tax is imposed to fund the educational initiatives initiated and maintained by the Indian government.

Toll tax and road tax 

The maintenance of roadways and the infrastructure required to collect tolls are funded by this fee. 

Benefits of paying taxes

Filing income tax returns is required and advantageous for anybody who receives a taxable income. There are benefits to filing taxes even if your income is below the standard exemption amount. Here are some of the advantages of timely tax payment:

• Hassle-free loan approvals

When applying for a loan, particularly a home loan or car loan, banks will want a copy of your tax records. This may include ITR from the previous two to three years. Having an ITR can help you get a larger loan amount or have your loan application reassessed if it was first denied.

• Faster visa application approvals 

During the visa interview, many consulates demand you provide your tax returns from the preceding years. For some, the most recent tax return is adequate, while others want records over the last two to three years. This is required in the United Kingdom, United States, Europe, Canada and many other countries. The tax filings are evidence that you are not attempting to escape taxes by leaving the country. Even while going overseas, it is important to have your ITR receipts to seek consular assistance in case of an emergency.

• Retaining losses for future use

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Provided you submit your return before the original due date, you will be allowed to roll losses over to the following years, and those losses can be utilised as a credit against the income of subsequent years if you file your return on time. This indicates that you may deduct certain losses from the relevant income, which will assist you in reducing the amount of tax burden associated with the future income you will get. 

• Claiming tax refunds 

If income tax returns have been submitted, only then can the IT Department be able to provide any refunds that are owed to the taxpayer. Even if an individual’s income falls below the threshold for an applicable tax exemption bracket, there is still a possibility that tax refunds are available from various savings instruments that may be claimed if ITRs are submitted. One example of this is the taxation on fixed deposits deducted at the source at a rate of ten per cent. 

• Life insurance with a high level of coverage

Only by submitting income tax records, which allow for the verification of yearly income, is it possible to get life insurance or a term policy with an amount covered that runs from fifty thousand rupees to one million rupees. The only time such a large insurance cover is provided is when there is a significant income and there is a need for income tax return receipts.

• Compensation

Self-employed persons may be required to provide ITR receipts to make a claim for compensation if a motor vehicle accident results in a handicap or the untimely death of the individual. Before arriving at a suitable level of compensation, it is necessary to first determine the person’s level of income.

Not paying taxes results in penalties

The government has the power to impose fines of various severity on anybody who evades taxes, whether they are a person or a business. The amount of the penalty varies according to the kind of tax owed. This implies that in addition to the taxes that are due, the fine and interest on the fine must be paid as a penalty.

What are tax saving investments?

Tax-saving investments are investment options that lower your taxable income. Even the Indian government provides limited tax-saving tools, such as the Public Provident Fund (PPF) and the National Pension Scheme. Other popular tax-saving investments include Life/term insurance premiums, Equity-Linked Savings schemes (ELSS), Tax-saving Fixed Deposits, and Employee Provident Fund (EPF), etc.

How does tax saving investment work?

The main characteristic of tax-advantaged investments is a specified lock-in period. Let’s examine an example of Term Insurance. The insured is covered for a certain length of time under term insurance. If the policyholder dies within this time, the specified cover amount is paid to the nominee.

 In addition to providing your loved ones with financial protection, term insurance minimises your taxable income. When you get a term insurance policy from an insurer, you pay a modest annual premium. This is the amount that must be deducted from your total income to reduce your taxable income. You are eligible for tax advantages of up to Rs 1.5 lakh.

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