Types of taxes in India
Tax is a legal obligation enforced by the state and the central government of India, and it is eventually one of the country's biggest sources of income. The taxation system in India involves two types of taxes: direct and indirect. 1
Indirect taxes
Indirect taxes are paid to intermediaries like sellers, service providers, and businesses by the consumer. Finally, these intermediaries pay the tax to the government of India. Indirect taxes include GST (Goods and Services Tax), retail taxes, etc. Here, the tax can be shifted from one tax-paying individual to another. For instance, the wholesaler passes the tax burden to retailers, who then pass it to consumers. Central Board of Indirect Taxes and Customs (CBIC) governs and manages indirect tax. 1
Direct taxes
Direct taxes refer to the tax that the government levies on the income and profit of individuals. People pay direct taxes straight to the government. CBDT (Central Board of Direct Taxes) is the governing authority for direct taxes. Direct taxes have to be paid by the taxpayer, and unlike indirect taxes, the burden cannot be passed on to someone else. 1
There are majorly four types of direct taxes:
Income tax
Income tax is levied on the income and profit of an individual that is earned around the year. The central government levies this tax, and people pay income tax based on their tax slab.1
Wealth tax
Wealth tax was abolished in 2016. It was levied on the net wealth of HUFs (Hindu Undivided Families) and individuals.1
Capital gain tax
Profit from capital assets is taxed under the capital gain tax. It includes jewellery, land, houses, vehicles, patents, etc. There are two types of capital gain tax: STCG (Short-Term Capital Gain) and LTCG (Long-Term Capital Gain) tax3
Corporate tax
Corporate companies are liable to pay corporate tax in India. For Indian companies, tax is levied on universal income, while foreign companies are only taxed for their income in India4
Securities Transaction
Securities Transaction Tax (STT) is somewhat like TCS (Tax Collected at Source). It is levied on transactions of securities that are listed on the recognized stock exchanges in India and is governed by the STT Act5
Gift Tax
If individuals receive gifts of over ₹50,000 in a year, it is taxed as income from other sources, and one has to pay tax on it as per their tax slab6
Tips to smart tax payment planning:
A lack of smart planning can lead you to pay more taxes than others on your income tax slab. You can avoid such a situation by following a few simple tips. Here are some smart tax payment planning tips while obeying legal mandates:
Choose the right tax regime
Ever since the new tax regime was introduced, taxpayers have had the option to pay taxes under either the old or new tax regime. There are certain differences in the amount of deductions and exemptions available. So, it is essential to analyses your tax burden and choose the regime smartly carefully.
You may be eligible for various deductions and tax exemptions under the old tax regime.7 So, make sure to understand these and raise claims to benefit from them carefully.
Pick some tax-saving instruments
One basic way of reducing tax burden is investing and saving in tax-saving schemes and policies. The best way is to start planning at the start of the financial year to maximize tax efficiency.
Old tax regime
You can claim deductions of over 70 exemptions under the old regime.7
- Section 80D deductions for premiums paid for health insurance plans.8
- Purchasing life insurance, investing in ELSS (Equity-Linked Savings Schemes), contributing to PPF (Public Provident Fund), Senior Citizens Savings Scheme (SCSS), or purchasing NSC (National Savings Certificate) can let you save up to ₹1.5 lakhs tax under Section 80C (in case of old tax regime) of the Income Tax Act of 19619.
New tax regime
The Budget 2020 introduced a new tax regime with revised slabs and lower tax rates. However, taxpayers choosing this regime forgo multiple exemptions and deductions, including HRA, LTA, Section 80C, Section 80D, and others. However, the New Tax Regime has streamlined tax rates7. To stimulate household spending and overall demand, it was announced in the Union Budget 2025* that incomes up to ₹12 lakhs will be tax-free. With the ₹75,000 standard deduction under the New Tax Regime, the effective tax-free income now extends to ₹12.75 lakh10.
Guidance from professionals
Taxation systems can be complex at times. So, instead of taking a confused step, you may also contact a professional who can help you out. You may consult a chartered accountant or a fund manager who can guide you through more efficient financial planning for the year.
File ITR on time
Make sure to file Income Tax Returns within the deadline to avoid any penalty and to make the most of your tax benefits.
Conclusion
The tax system in India is the major income source for both state and central governments. The country's welfare and development heavily depend on tax collection. So, it is crucial that every taxpayer pays their part of the tax while ensuring legal boundaries. However, it is always a good idea to reach the nooks and corners of your tax obligations in order to save as much as you can.
Luckily, the Indian taxation system lets you save and plan finances smartly to avoid paying excess tax. The recent Union Budget 2025 has further brought some income tax rebates and relief to the people. So, next time when you start your financial year and tax payment, make sure to be aware of the basics discussed and the simple tips!
FAQs
What are direct taxes?
1Direct taxes are the ones that are levied on the income and profit of an individual. Taxpayers directly pay their taxes to the collecting authority. Examples are income tax, capital gain tax, etc.
How much tax can I save?
Total tax deductions and exemptions depend on the income tax slab and individual investments/savings. Different sections of the Income Tax Act offer different benefits and exemptions.
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