Taxes in India is categorized as direct and indirect taxes. Direct tax is a tax you pay on your income directly to the government.

Levy of income tax in India is dependent on the residential status of a taxpayer. Individuals who qualify as a resident in India must pay tax on their global income in India i.e. income earned in India and outside India. Whereas, those who qualify as Non-residents need to pay taxes only on their income earned in India. The residential status has to be determined separately for every financial year for which income and taxes are computed.

As per the slab system where different tax rates have been prescribed for different slabs and such tax rates keep increasing with an increase in the income slab.‘Taxation on income earned in a financial year a part of which is taxable as per rates prescribed for that year. With the financial year running from 1 April to 31 March of following year Direct Taxes are broadly classified as:

  • Income Tax– This is taxes on individual or a Hindu Undivided Family or any taxpayer other than companies, pay on the income received. The law Specifies the rate at which such income should be taxed
  • Corporate Tax– This is the tax that companies pay on the profits they earn from their businesses. Even in this case, a prescribed rate of tax for corporate has been fixed by the income tax laws of India

Income Tax Slabs and Taxpayers

Taxpayers in India, for the purpose of income tax includes:

  • Individuals, Hindu Undivided Family (HUF), Association of Persons(AOP) and Body of Individuals (BOI)
  • Firms
  • Companies

Each of these taxpayers is taxed differently under the Indian income tax laws. Whereas Indian companies and firms have a fixed rate, the individual,HUF, AOP and BOI taxpayers are taxed based on the income slab they fall under. People’s incomes are grouped into blocks called tax brackets or tax slabs and each tax slab has a different tax rate. In India, we have four tax brackets each with an increasing tax rate.

Income on which you pay Tax – On Behalf of salary income you receive, you may be earning an income from several other sources. Your Total Income is the sum total of all heads of income below.

Sources of Income

Income from Salary Salary, Allowances, Leave encashment basically all the money you receive while providing services towards your job as a result of your employment agreement
Income from House Property Income from house or building. This may be owned and self-occupied or may be rented.
Income from Capital Gain Gain or loss when you sell a capital asset
Income from Business or Profession Income/loss that arises as a result of carrying on a business or profession
Income from Other Sources This is the residual head – includes your income from savings bank accounts, fixed deposits, family pension or gifts received

Exemptions and Deductions

Income Tax Exemption can be provided on particular sources of income and not on the total income. It means that you do not have to pay any tax for income coming from that specified source. For example, income from agriculture is exempted under tax. In addition, long-term capital gains arising from the sale of a property can be reinvested in a real estate property or specified bonds within a certain time period to get exemption from tax. Salaried individuals get house rent allowance (HRA) as a component of their salary. This component can be used to claim tax exemption under certain conditions.

Income tax deductions can be claimed on the gross total income.Some specified investments and expenditure are considered to claim deductions. For example, investment in specified mutual funds, interest repayment of education loan, and premium payment for medical insurance can be considered for deductions.