There are two forms of taxation in India: direct and indirect taxes. All individuals are affected in some way by both. The following article explains the rationale behind taxation in India, who pays taxes and tips on tax planning.
1. Types of Taxes in India
The tax system in India is broadly segregated into two factions:
Direct Taxes:
These include taxes such as income tax, levied on individual income.
Indirect Taxes:
Other taxes not included under direct taxes that people pay while purchasing items include Goods and Services Tax (GST) and excise duties.
2. Who Pays Income Tax?
In India, residents earning an income or salary, regardless of if it is in India or abroad, are required to pay income tax. Here’s who is required to pay:
Resident of India (ROI):
A person is termed as a resident of India if he has lived in India more than 182 days in a year irrespective of their nationality. If they are a citizen of India, they have to pay tax on their total income, global earnings included.
Resident, but Not Ordinarily Resident (RNOR):
Someone who stays in India for 182 days or less in a given year and has an Indian source of income will be taxed on an income earned in India only.
The Government of India has evolved over the years to introduce income tax slabs where each individual has to pay tax according to their income level.
3. Tax Overview for an Individual
Every individual resident aged eighteen years and older is if the individual is eligible for taxable income has a Permanent Account Number (PAN) for tax purposes. It is also linked with the bank accounts of the individual. This measure ensures the government monitors your earnings to manage and collect taxes effectively.
4. How Does the Government Collect Taxes
The tax collection process of the Government can be summarized in key points:
Tax Deducted at Source (TDS):
This is an arrangement under which income tax is deducted at the source of income. TDS is applicable to wages and certain other payments.
Self-Assessment Tax:
In case of failure of TDS deductions, where your income continues to exceed the tax-exempt to assess your tax liabilities and make payments accordingly.
5. Tax-Related Forms
Filing taxes is easier when one understands different forms:
Form 16:
This form is meant for working individuals at a company, detailing the tax deducted from salary through the year.
Form 26AS:
The form serves the purpose of checking the amount of tax available for the individual account from the various income sources and TDS.
Income Tax Returns (ITR)
Forms are meant for specific kinds of earning, and there are several of them:
- ITR 1: Employed individuals who get other income
- ITR 2: Individuals who has capital gains
- ITR 4: Self-employed persons and traders
- ITR 6: For corporates
Form 15G & Form 15H:
If a person has income from Fixed Deposits (FD) and if the total income is less than the taxable range, these forms can be helpful. By filling in these forms, one can escape the hassle of tax being deducted at source on the interest earned from FD.
6. Tax Planning for Individuals
Smart tax planning can save a lot of money and can make tax payments easy. Here are some important ones:
Section 80C:
A maximum of Rs. 1.50 lakh can be claimed as a deduction and the eligible investments under this section are as follows:
- Life Insurance
- Term Insurance
- Tuition
- Public Provident Fund (PPF)
- Equity Linked Savings Scheme (ELSS)
- Tax Saver Fixed Deposits (FDs)
Health Insurance:
Expenses for medical insurance policy premiums is deductible up to Rs. 25000.
Donations:
Contributions to registered trusts or charities are also deductible.
Tax planning is a crucial process to understand in order to reduce your tax legally. A financial consultant is the best person to know in your case as they will advise you on which instruments and tactics will save the most tax for you.
Conclusion
It is vitally important for anyone looking to live and work in India to comprehend the tax structure that exists in the country. Everyone, regardless of their income level has some form of tax liability, either direct or indirect. Knowing which tax forms to use, which tax slabs to fall under, and regimenting one’s finances, can greatly reduce the tax burden. Also, it is wise to use a financial consultant to help deal with the intricacies of tax planning.
