All law-abiding citizens know that they have to pay their taxes year in and year out. Unfortunately, this is as far as their knowledge goes. When asked how their tax system works, most will simply say that they pay a certain amount every year as part of their contribution but will not be able to really explain the how. In this article we shall try to demystify the inner workings of the Indian tax system.

How Does an Income Tax System Work?

The income tax system of India is not actually different from those of other countries. They may have varying rates and income tax classification schemes but the principles are essentially the same. The reasoning behind taxation is that those who can should contribute. In simple words, those who are in the productive segment of society should help in the provision of goods and services so that even those who do not have the means will have the opportunity to avail of such goods and services.

For instance, everyone knows that health is a basic human right. While there are medical treatments and procedures that can only be obtained by paying for them, there are healthcare services that should be given free especially to the society’s needy and indigent populations. These can be in the form of basic medicines for cough and fever and basic immunization coverage for children and susceptible individuals. Unfortunately, the government doesn’t get these resources for free. They have to pay for them, too. They also need to have clinics and hospitals as well as the medical and nursing staff to man these facilities. Everything entails cost.

This is where income taxes help. Depending on how much you are earning every year, a certain portion of it will be deducted in the form of an income tax. When taken together with the income taxes of other taxpayers, a considerable amount can be produced to sustain such programs. As such, while everyone earning an income contributes, their level of contribution depends on their level of income. The more you have, the more you can give in return.

Who Should Be Taxed?

Anyone who has a stable source of income is levied an income tax whether the income is in the form of cash or any other remuneration of value. The income tax of business organizations is usually computed based on their gross profits. Government entities usually have income taxes that are deducted automatically from their monthly wages. There are also private entities that observe the same practice of automatically deducting the income tax from their employees’ monthly remuneration package.

What are Taxable Incomes?

In India, the following can be considered as sources of one’s income.

  • Salary – Examples of this are salaries, wages, and pensions that are received by an employed individual on a regular basis.
  • Capital gains – These are the result of the selling of capital assets such as real estate property, mutual funds, and shares.
  • Property or house – When a house or property is being leased or rented to another individual or entity, the rent or lease payments are considered as sources of income; hence, taxable.
  • Business or profession – The fees that are charged by professionals, self-employed individuals, contractors, agents, freelancers, and business owners are grouped under this classification of taxable incomes.
  • Others – These may include winnings from national games, accrued bank interests, and other potential sources of income that may be classified as such by the Income Tax Department.

What are Tax Slabs?

The income tax system of India is based primarily on the categorization of a taxpayer’s annual income. Depending on the tax slab corresponding tax rates can be levied as follows.

  • If earning less than Rs 2.5 Lakhs, there’s no tax
  • If earning more than Rs 2.5 Lakhs but less than Rs 5 Lakhs, the income tax is 5% of the taxable income
  • If earning more than Rs 5 Lakhs but less than Rs 10 Lakhs, the income tax is Rs 12,500/- plus 20% of the taxable income for any value above Rs 5 Lakhs
  • If earning more than Rs 10 Lakhs, the income tax is Rs 1,12,500/- plus 30% of the taxable income for any value above Rs 10 Lakhs

Why Your PAN Card Matters

All taxpayers, whether individuals or entities, are required to have their Permanent Account Number. This is important in keeping track of your contributions and to deter any unscrupulous activities aimed at undermining the Indian taxation system.

The income tax system of the Republic of India is no different from that of other countries. It helps ensure that all public utilities and services will be made available and accessible to everyone.