Everyone who works or earns a monthly income has to pay taxes. These taxes deducted by the government are used to provide the citizens with quality amenities and a high standard of living. There are two major types of taxes here in India; direct and indirect tax. The former goes straight to the government and is deducted from any income earned by an individual, while the latter as its name implies, is a tax paid to the government through a second party, it is usually charged from the sales of goods or payment for services rendered.
This article provides detailed information about the tax system here in India.
Tax eligibility
Individuals, Hindu undivided family (HUF), Association of Persons (AOP), Body of Individuals (BOI), Firms, and Companies. All of whom are subjected to different tax rates. While firms and Indian companies have a fixed rate of tax of 30% of profits, the individual, HUF, AOP, and BOI are taxed based on the income slab they fall under. The levy an individual is subjected to is dependent on where the taxpayer lives. Persons who reside within the territory have to pay tax on their global income that is, income earned here and overseas. While non-residents must pay taxes only on the income earned in India. The residential status of a taxpayer has to be clarified for every financial year for which income and taxes are estimated.
Types of Taxes
Direct Tax is of two types, namely, income and corporate tax. Forms of indirect taxes are; service tax on restaurant bills and movie tickets and VAT on products such as clothes and electronics. Goods and services tax is a combined tax to replace all forms of indirect taxes that business owners deal with every day.
Income Tax
An individual or any taxpayer is liable to pay a tax for every income earned. Specific rates apply to a range of incomes. For this type of tax, the government charges only income earned during a financial year by individuals and businesses. It is computed in accordance with the Income Tax Department’s tax brackets. Every taxpayer must acquire a permanent account number (PAN) and a tax deduction and collection account number (TAN). The TAN is used by auditors to deduct taxes from the individual’s PAN.
Income Range | Tax rate | Tax to be paid |
Up to Rs.2,50,000 | 0 | No tax |
Between Rs 2.5 lakhs and Rs 5 lakhs | 5% | 5% of your taxable income |
Between Rs 5 lakhs and Rs 10 lakhs | 20% | Rs 12,500 + 20% of income above Rs 5 lakhs |
Above 10 lakhs | 30% | Rs 12,500 + 30% of income above Rs 10 lakhs |
Corporate Tax
All companies in the country pay taxes on the profits made while doing business here. Usually, specific rates apply to corporates as prescribed by the income tax laws in the nation. The income of companies is generally subjected to a corporate income tax (CIT) at a flat rate of 10%. Companies within the country have to pay taxes provided they generate revenue from activities run. Foreign companies with branches in India can only be subjected to paying taxes if they operate and generate revenue at the branches.
Financial Year
This is a period, which usually lasts a year that the taxpayers use for bookkeeping and financial reportage purposes. It is the year an income is earned. As stated by the Income Tax Act, the phase begins from the 1st of April of the calendar year to the 31st of March, of the next calendar year. This is shortened as “FY”. The amount to be charged as tax is usually calculated for each month of the financial year.