Understanding Tax System in India

tax system india

There is nothing more baffling in civilized society than income taxes. Sure, everyone knows that they should file their income taxes on time. Unfortunately, not even the world’s 6th largest economy can boast of a population – some 1.2 billion and counting – that truly understands how their taxation system works and why everyone needs to play his or her part well. So how does the tax system in India really work?

An Overview of an Income Tax System

Every country around the world has its own set of rules and guidelines on how to collect the share of its people in keeping the government and public services running. This is the very fundamental principle of taxation. It is inherent in a democratic society that those who are productive will be able to share something for the whole society to benefit from, but mostly those who don’t have the means to fend for their needs.

For example, healthcare is a fundamental right of everyone. Unfortunately, there are those individuals who simply cannot afford the services of private medical practitioners. They have to rely on some form of subsidized health care that draws its funding from the taxes paid for by the productive members of society. If there are no taxes, the government will not be able to build free hospitals, supply these with free medications, and pay for the services of the healthcare professionals tending to the care of the needy.

As such the income tax system of India is pretty much like any other country. The taxes are levied on members of the population who are earning. The amount of taxes to be ‘shared’ with society is dependent on their income. In principle if you are earning less, then you should contribute less. If you’re earning more, then you should ‘share’ more.

Who are Taxed?

Individuals who derive a stable source of income whether it is in cash, kind, or any other form of remuneration are subject to an income tax. For businesses or companies, the income tax is computed against their gross profits. For government offices, agencies, or firms, their income taxes are automatically deducted from their monthly salaries. The deductions often include other charges as may be mandated by law. Some independent organizations also observe the practice of deducting income taxes from the salaries of their employees.

Taxable Incomes

The word ‘income’ can mean a lot of things. It generally describes the inward movement (in + come) of anything of monetary value. As such it is important to look at the potential sources of income as observed in the Indian taxation system.

  • Salaries – These include those received by employed individuals either in the form of salary or pension.
  • House or property – This typically includes income generated through the payment of lease or rent by other individuals.
  • Capital gains – When you sell a capital asset such as a property, shares, or even mutual funds, the proceeds of the sale will be considered as an income and, hence taxable.
  • Business and/or profession – Self-employed individuals, freelancers, contractors, business owners, agents, and professionals who typically charge a fee for their services will be classified under this category of taxable incomes.
  • Other sources – These typically include interests accrued from bank savings, fixed deposits, and even winning large sums of money in games such as KBC.

Tax Slabs

We mentioned above that the more ‘earnings’ you generate, the higher the rate of your income tax. The Indian tax system classifies income-earners into one of 4 different tax brackets or tax slabs. The tax rates are based on the cumulative income for the preceding fiscal year. So if you’re filing this 2018, your income taxes will be based on your income for the year 2017.

  • Rs 2.5 Lakhs or less per year – no tax
  • Rs 2.50001 Lakhs to Rs 5 Lakhs per year – 5 percent of your taxable income
  • Rs 5.00001 Lakhs to Rs 10 Lakhs per year – Rs 12,500 plus 20 percent of your taxable income in excess of Rs 5.0 Lakhs
  • Rs 10.00001 Lakhs or more per year – Rs 1,12,500 plus 30 percent of your taxable income in excess of Rs 10 Lakhs

The Importance of Your PAN Card

Your Permanent Account Number (PAN) Card is a vital piece of instrument since it helps validate your ‘contributions’ to Indian society. Whether or not you are receiving a large amount of money as income, you should still have your PAN since it tells the government that you are doing your part in improving the general society.

You can use the following links for a new PAN, a lost PAN and a replacement PAN or check status of PAN.

The taxation system in India is just like any other country in the world. It is based on the contributions of everyone in the productive sector to help finance public expenditures for all Indians to benefit from.