What is Tax? Meaning, Types, Benefits, and Advantages

Taxes! It is probably one of the most discussed topics in every country around the world. Every year, in India, people wait for the Union Minister of Finance to discuss taxation in India during the budget meeting. 
 

The Indian tax system, like all other countries, directly impacts the prices of daily essentials and, thereby, our lives. It determines how the average Indian life functions and that is why a responsible Indian citizen should read this blog to learn about taxation, different types of it, and how tax works.

What is Tax?

In the simplest definition, taxes are the government’s earnings. 
 

To run a country effectively and efficiently, a government must collect taxes from its citizens. All citizens of every country in the globe pay taxes in some form or the other, depending on their eligibility.

How Does Taxation in India Work?

Countries collect taxes in many forms. The concept of tax in India has a few primary components — direct, indirect, and other taxes (customs, excise, service, and sales tax).
 

Primarily, as an Indian citizen, you may pay taxes in these ways:
 

• Tax on the income from your salary, business, and other profession

• Tax on the income from house property

• Capital gains tax on the income from capital gains

• Tax on the income from other sources

• Indirect taxes through purchasing goods and services.

• Customs duties on imports and exports.

• Excise duties on purchases of certain products.

Taxes on income in India depend on that person's income in that financial year. There are different tax slabs for different levels of income. 
 

Once you have paid the taxes on your salary or earnings, you also have the option of claiming exemptions and tax deductions on your income. If you earn in certain tax slabs and pay for some essentials like school fees, tuition fees of your children, medical treatment for you or your family, and health insurance, or invest in particular fields, you can claim tax relief under several sections of the Income Tax Act. 
 

We will discuss some of the tax-saving equipment later in this article. So, keep reading.

Different Types of Taxes in India

Taxation in India can be divided into three categories: direct, indirect, and other taxes. 
 

Direct Tax 

This type of taxation requires direct transitions. An individual or an entity directly pays taxes to the government, and it is regulated by the Central Board of Direct Taxes (CBDT).
 

Here are some examples of direct taxes. 

• Income Tax: As we have briefly discussed, an individual or a legal entity is liable to pay income tax on the annual income in a fiscal year. An individual is liable to income tax as per his or her annual income.
   

  You are not liable for income tax payment if you are younger than 60 years and earn ₹2.5 lakh a year. For senior citizens, annual income up to ₹3 lakh is tax exempted. We hope it simplifies the income tax meaning to you.

• Capital Gain Tax: You will only need to pay capital gain tax if you have earned a profit by selling stocks (mutual funds) or a property. There are two types of capital gain taxes — Long-Term and Short Term Capital Gain Taxes. These taxes vary depending on the tenure of your investment. 

• Prerequisite Tax: Many employees receive perks from their company on top of their salary, like fuel reimbursement, food coupons, fuel reimbursement, etc. Payments under such components are taxed separately under Prerequisite Tax.

• Securities Transaction Tax: A security transaction tax is paid at the time of stock market trading. If you are buying or selling a stock or security in the Indian stock market, you need to pay STT or Security Transaction tax. 

• Corporate Tax: Companies pay this tax directly to the government as per the tax rate, depending on their annual revenue. 
   

Indirect Tax

Indirect taxes are different from direct taxes. Indirect taxes are consumption-based taxes and are not paid directly to the government. Every time you buy goods or services, their prices include a tax. The consumer pays the tax to the seller by paying the price that is inclusive of all taxes, and the government collects it from the seller of goods or services. 
 

The most important indirect tax in India is GST^@.
 

• Good and Service Tax (GST): GST is a consumption tax included in the final price of a service or product. Before the GST was introduced, there were multiple taxes, and often, business owners ended up paying taxes on taxes. It is known as the cascading effect of taxes. The implementation of GST abolished this cascading effect. 
   

Other Taxes

Apart from the direct and indirect taxes, there are several other taxes in India. These taxes are levied on services, goods, and assets. These taxes include entertainment, municipal, property, and professional taxes, etc.
 

• You have to pay a tax while registering a property or transferring its ownership. Both the centre and the state levy these taxes, and these are direct taxes. Example: Transfer Tax, Stamp Duty, and Registration Fees.

• The government also collects cess on under different heads and for different purposes. A cess is applied to your final tax liability.

There are also taxes, like road tax, tolls, municipal taxes, etc.

Tax Slabs and Relaxations

Among all types of taxes discussed in this article, only income tax has different slabs, which are based on an individual's income level. The higher your income, the higher the amount of tax you need to pay.
 

The concept of tax in India has been designed to be fair rather than uniform. 
 

If you are earning more than ₹2.5 lakhs per year, you are liable to file tax returns as per the applicable slab. But here, we should mention that tax slabs are different in different tax regimes. 
 

According to the New Tax Regime, the income tax slabs in India are: 
 

According to the Old Tax Regime, the income tax slabs in India are: 
 

• Tax Benefits

As we mentioned earlier, there are certain relaxations in taxes based on your investment and expenses on essentials. An individual, following the old tax regime, can claim a tax exemption of up to ₹1.5 lakhs per year under Section 80C for investing in ELSS, PPF, EPF, Mutual Funds, tax saver fixed deposits, and some other pension plans1. 
 

Also, if you are paying health insurance premiums for yourself, your family, and dependent senior citizen parents, you can claim tax relaxation up to ₹1 lakh per year under Section 80D of the Income Tax Act, 1961.

Recent Tax Reforms

In Budget 2023, significant changes to India's taxation system were proposed. 
 

1. The default income tax regime will now be the New Regime introduced in 2020, aiming to simplify compliance and reduce tax rates, though taxpayers can still choose the old regime.

2. The basic exemption under the new regime has increased to ₹3 Lakhs. The income tax rebate limit under section 87A may rise to ₹7 Lakhs, offering substantial benefits to middle-class taxpayers. The proposed income tax slabs for the new regime are as follows:
    

   • ₹0 - ₹3 Lakhs: Nil

   • ₹3 - ₹6 Lakhs: 5%

   • ₹6 - ₹9 Lakhs: 10%

   • ₹9 - ₹12 Lakhs: 15%

   • ₹12 - ₹15 Lakhs: 20%

   • Above ₹15 Lakhs: 30%

3. The highest surcharge rate is set to decrease from 37% to 25%, reducing the maximum tax rate to 39%.

4. Salaried taxpayers with incomes above ₹15.50 lakhs will receive a standard deduction of ₹52,500, potentially shifting them into a lower tax slab.

5. The limit for tax exemption on leave encashment for non-government employees may increase from ₹3 Lakhs to ₹25 Lakhs, aligning it with salary increases.
    

Other tax-related proposals include:

• Increased presumptive taxation limits for micro-enterprises and certain professionals.

• A lower tax rate of 15% for new co-operatives engaged in manufacturing.

• Raised TDS limit on cash withdrawals to ₹3 Crores for co-operative societies.

• Extended incorporation date for startups to avail income tax benefits.

• EEE status for Agniveer Corpus Fund.

• Extended relaxation period for startups to carry forward or set off losses to 10 years.

• Increased tax collection at source to 20% on foreign remittances for overseas tour programs (excluding medical treatment and education financing).

• Capped deduction from capital gains on residential house investment at ₹10 crore.

• Taxation of maturity proceeds of life insurance policies issued after 1st April 2023 with aggregate premiums above ₹5 lakh.

Why Should You Pay Taxes?

While defining tax, we mentioned that this is how the government earns. The government collects taxes and spends on the country’s development. Taxes help in building roads and infrastructure. Collecting taxes enables the government to spend on education, healthcare, science and development. 
 

• By paying taxes, you contribute to improving the standard of living.

• You contribute to the development of education, healthcare, and other sectors.

• If you pay taxes on time and have all the supporting documents, you can easily get loans and credit cards.

• Tax documents can also help you during your Visa process.

Tax Evasion Laws in India

There are different rules and regulations that every citizen of India must abide by. Failing to pay your taxes on time can draw several punitive actions against you. You may have to pay a penalty or be comprehended for major tax compliance issues. 
 

• Section 271 (C): If you, an assessee, try to conceal your actual earnings, the Income Tax department will impose a fine of 100% to 300% on the tax evaded amount. In simple terms, you may have to pay 3 times the money you tried to hide from the Income Tax department. 

• Section 142 (1) and 143 (2): If a taxpayer defaults to pay the taxes, the Income Tax department will send a tax notice. Failing to respond to the tax notice will draw punitive action from the Tax Officer, and it is subject to his or her judgement.

Conclusion 

Tax is a crucial element of every working economy. In India, there are different types of tax systems — direct, indirect, and other taxes. A taxpayer directly contributes to the nation’s overall economic development, and a responsible citizen should know his tax liabilities.
 

We hope this article helped you understand the intricacies of tax.