The Government of every country requires funding to aid it in carrying out its necessary functions and duties. These include operating public institutions, developing the country’s infrastructure and financing public welfare initiatives and schemes. In exchange for providing these amenities, a government generates the revenue required for them by taxing its citizens.
To make this process efficient, every country has a proper taxation process laid out by its government. India, with its wide distribution of income earners and sources of revenue, is no different. It places value in the importance of taxes across the board and marks an important distinction between its major types of taxes.
Let us discuss the Indian tax system in more detail, the importance of taxes in the country, and how you can save income tax in India.
Key Takeaway
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India has a structured tax system, and the importance of taxes is defined by two attributes: progressive and proportional. It is progressive in that the tax is levied at increasing rates on increasing brackets of income and revenue. Meanwhile, it is proportional in that the rate of tax levied is in proportion to the amount of income or revenue it is being levied upon.
Any changes in tax rates, brackets and slabs are determined largely by the central and state governments and must be accompanied by a law passed by the Parliament or State Legislature.
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Starting FY 2025–26, India’s new tax regime under Section 115BAC is the default for individuals and HUFs, unless they pick the old one. This new system has simpler tax slabs and removes most exemptions and deductions. Plus, the rebate under Section 87A means no tax for people earning up to ₹12 lakh, making it great for those who don’t have many deductions. But if the old regime saves you more with exemptions like 80C, 80D, or HRA, you can still choose that instead.
From income tax to customs duty, there are a variety of taxes applicable to Indian citizens under the nation’s taxation system. However, almost all taxes under the Indian taxation system can be primarily distinguished under two categories: direct and indirect taxes.
Some of the most important direct taxes are the income tax, Corporate Tax, capital gains tax, property tax, entitlement tax and such.
One of the most important indirect taxes is the Goods and Services Tax (GST), which has subsumed a large number of indirect taxes that existed before 2017. Apart from GST, there is also Custom Duty, Securities Transaction Tax and such.
Now that we understand the types of taxes in the Indian tax structure, let us review the importance of taxes as understood by this distinction.
They also help broaden the country’s net of tax liabilities, gathering contributions from those sections of society that are otherwise exempted from direct tax.
In 1970-71, personal income tax had 11 slabs, with the highest rate at 85%. With a 15% surcharge, the marginal rate hit a whopping 97.75%.
Source: ET
The need and importance of income tax in India are evident. Taxes are the government's primary revenue source, enabling it to fund critical public services and drive the country's development. They enable the government to fulfil its responsibilities and drive the country's progress. By paying taxes promptly and honestly, citizens can contribute to the overall development of India and secure a better future for all.
Here are some key reasons why paying taxes is important in India:
Accessing Government Benefits: Timely tax payment is often a prerequisite for various government benefits, such as obtaining loans, securing government tenders, and obtaining tax clearance certificates for high-value transactions.
The government of India has a structured taxation system that also involves tax benefits and exemptions. It is only to motivate the citizens to include savings, investment, and long-term financial security in their future planning. They allow citizens to reduce their taxable income, which in turn helps them lower their tax burden. The following provisions are a part of the tax saving:
If you are investing a part of your income in Life Insurance Premiums, such as a term plan for Canara HSBC Life Insurance, Employees’ Provident Fund (EPF) & Public Provident Fund (PPF), and Equity Linked Savings Scheme (ELSS), Section 80C deductions are applicable for you. It allows exemptions of up to ₹1.5 lakh for these premiums in a financial year.
Having health insurance is a form of financial security when it comes to medical expenses and unexpected emergencies. Another good thing about having health insurance is the tax exemption under Section 80D of the Income Tax Act. All premiums you pay for an individual, spouse, children, or parents fall under this category. The exemption limit varies up to ₹25,000 for self and family and an additional ₹50,000 for senior citizen parents.
Salaried individuals living in a rented house can claim an HRA (house rent allowance) exemption while filing their tax return. Even home loan deductions are possible for those who pay interest for home loans of up to ₹2 lakh annually under Section 24(b). It encourages people to save up better while also having a roof over their heads. If, as a salaried employee, you get a Leave Travel Allowance (LTA) from the employer, then these expenses are also tax-exempt.
Reinvesting gains from property sales into new residential properties is considered an investment made under section 54. It helps taxpayers to reduce or even eliminate the Long-Term Capital Gains (LTCG) liabilities. These exemptions, if used in the right manner, can help you save big on your financial planning.
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There are always consequences for non-payment of taxes and penalties for late payments. Failure to comply with the tax obligations in the country can lead to fines, charges, and even legal complications. As per the Income Tax Act of 1961, all must abide by their tax commitments. Here are the outcomes of not doing so.
Underpayment or non-payment of taxes can lead to heavy penalties; check these out:
Section 234A states that if you file your income tax returns late, an interest of 1% is levied per month.
As per Section 234B of the Income Tax, 1% interest per month is applicable if you have not paid at least 90% of the total tax liability by the end of March.
Section 234C goes for an interest penalty for delay in the payment of advance tax.
Taxpayers who intentionally hide, underreport, or misreport their income fall under Section 270A, which states that you are liable to pay 50% to 200% of the total tax payable. It is imposed according to various factors.
Now, you should know that tax evasion not only has consequences but is considered a criminal offence. The outcomes can be as severe as imprisonment between 6 months and 7 years, with fines, if evasion of over ₹25 lakh is registered. Meanwhile, for lesser amounts, imprisonment may range from 3 months to 2 years.
If you pay the income tax return after the due date has passed, you are liable to pay the following late fees:
₹5,000 if the deadline is passed, but you pay it before 31st December.
₹10,000 if you file it after 31st December.
Here, a reduction of ₹1,000 is applicable for taxpayers with an income below ₹5 lakh.
In extreme cases of tax evasion, where the defaulters are accountable for large income concealment for a prolonged period, the income tax department has the authority to freeze their bank accounts. They may as well seize assets or initiate recovery proceedings.
Those who do not comply with the country's tax regulations often face adverse consequences due to the impact on their eligibility for various government schemes. You may not be eligible for participation in schemes, loans, and even financial services where tax clearance is necessary.
While the importance of taxes to the country’s government cannot be overstated, the central government also makes various provisions to help citizens save income taxes in India. One of the most effective means of saving income tax in India while safeguarding the financial future of your loved ones is to avail of a trusted term insurance plan.
To that end, consider availing the iSelect Smart360 Term Plan from Canara HSBC Life Insurance. This term insurance plan provides useful features such as extensive coverage options and add-on covers. Moreover, it also helps you save income tax in India by availing deductions of up to Rs. 1.5 lakh in a financial year under Section 80C.
The importance of taxation can be understood by its primary purpose of financing government spending. Throughout history, many arguments and explanations for taxes have been put forth. Early taxes were used to finance the construction of defences, armies, and governing classes. The government requires funding for a variety of public services, including social welfare schemes, healthcare, education, and infrastructure. Taxes gathered from both individuals and corporations account for the majority of this revenue.
The three most important taxes are:
GST: The Goods and Services Tax (GST) is an indirect tax that is applied to different types of goods and services. The removal of the tax-on-tax or cascading impact of the former tax regime is one of the main advantages of the GST.
Excise Duty: Excise duty is a levy levied on the manufacturing, licensing, and sale of specific domestically produced items.
Sales Tax: When a seller sells or trades a taxable good, they may charge the buyer sales tax, which is a form of indirect tax. On behalf of the buyer, the seller then reimburses the government for the tax.
Taxation can be used to direct or influence citizens' consumption habits. It also encourages or discourages investment in particular economic areas. The government can greatly decrease the quantity of "harmful," "antisocial," but lawful economic activity through this. In addition, it can be used to shield regional and small companies from larger, international competitors and to reposition them for success.
Section 234A of the Income Tax Act of 1961 states that you will be responsible for paying 1% interest on the unpaid tax balance each month if you fail to make your tax payments on time. The date on which you file your return for the applicable fiscal year and the deadline for payment determines how much interest you will pay.
The different types of taxpayers can be categorised as follows:
Individuals
Hindu Undivided Family (HUF)
Companies
Association of Persons(AOP) and Body of Individuals (BOI) Firms
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