Types of Taxes in India: Complete Guide to Tax Structure

2025-05-08

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Shape Taxes are the government's largest source of income. The money collected from taxes is used for various projects for the nation's development. The Indian tax system is well structured and has a three-tier federal structure.

The tax structure in India consists of the central government, state governments, and local municipal bodies.

When it comes to taxes, there are two types of taxes in India:

Direct tax
Indirect tax.

The direct tax includes income tax, gift tax, capital gain tax, etc., while indirect tax includes value-added tax, service tax, goods and services tax, customs duty, etc.

The Central Government of India imposes taxes such as customs duty, central excise duty, income tax, and service tax. The state governments impose income tax on agricultural income, state excise duty, professional tax, land revenue, and stamp duty. The local bodies can collect octroi, property tax, and other taxes on various services like water and drainage supply.

Key Takeaways

India’s tax system consists of direct taxes like income and corporate tax, and indirect taxes such as GST, customs duties, and excise duties.
Direct taxes, like income tax and corporate tax, directly affect individuals' and businesses’ disposable income and profits.
Indirect taxes, including GST and customs duty, are passed on to the end consumers, which can increase the cost of goods and services, affecting everyday spending.
India’s dual taxation system means both central and state governments levy taxes, ensuring balanced revenue generation.
Individuals face a slab-based income tax system with tax benefits under specific exemptions, while businesses must comply with corporate tax rules, considering turnover, exemptions, and compliance with GST.

Types of Taxes in India

Taxation in India is majorly divided into Central and State Govt taxes with two types of taxes:

Direct Taxes
Indirect Taxes

While direct taxes are levied on earnings in India, indirect taxes are levied on expenses. The responsibility to deposit the direct tax liability lies with the earning party, whether an individual, HUF, or company.

Indirect taxes are collected mainly by corporations and businesses that provide services and products. Thus, these entities are responsible for depositing indirect taxes.

What is Direct Tax?

Direct taxes are imposed on corporate entities and individuals. These taxes cannot be transferred to others. For individual taxpayers, the income tax is the most important type of Direct tax. This tax is levied during each assessment year (1st April to 31st March). As per the Income Tax Act, 1961, you must make income tax payments if your annual income exceeds the minimum exemption limit. You can get tax benefits under various sections of the Act.

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What are the Different Types of Direct Tax?

Direct taxes account for almost 50% of the government’s revenue in India. However, income tax is not the only direct tax. Here are the types of direct taxes applicable in India:

Income Tax
Capital Gains Tax
Corporate Tax

Income tax applies to any income of an Individual and HUF except capital gains and profits from business and profession. Income tax is calculated as per the applicable slab rates for the Assessment Year.

The central government announces the slab rates in the annual budget.

You also have the provision to reduce your taxable income using the tax-saving investments and expenses under section 80C.

What other Taxes come under Direct Tax?

Individuals in India earn income in a diverse range. Therefore, it is important to levy a tax on you based on your income, and if someone earns more, the tax percentage should be different. The Income Tax Act segregates the income range and charges different rates as per the segregation. The different groups are known as tax slabs. Your income tax slab can vary not only based on your income but also your age. During the Central Government’s Budget Session, amendments are made to the income-tax slabs daily.

1. Capital Gains Tax

Capital gains tax applies to the profits from the sale of a capital asset only. The tax rate on capital gains depends on the type of capital gain. Income Tax Act, 1961 divides the capital gains tax into the following two types:

Short-Term Capital Gains Tax
Long-Term Capital Gains Tax

Short-term capital gains are when the assets are sold within a specified period, for example:

Equity stocks sold within 12 months of purchase
Debt mutual fund units sold within 36 months of purchase
Real estate property or gold sold within 36 months of purchase

If the asset is sold after the specified period, the gains or losses will become long-term capital gains or losses.

Depending on the type of asset, your gain may receive indexation benefit on long-term capital gains. Indexation allows you to benefit from inflation in your capital gains, reducing your tax liability.

2. Corporate Tax

Corporate tax in India is levied on the taxable income of companies registered under the Companies Act, 1956. The tax rate structure has undergone significant changes in recent years, with the government aiming to simplify the system and incentivise domestic manufacturing. Tax Slabs for Domestic Company for AY 2024-25:

Condition	Income Tax Rate (excluding surcharge and cess)
Total Turnover or Gross Receipts during the previous year 2020-21 does not exceed ₹400 crores	25%
If opted for Section 115BA	25%
If opted for Section 115BAA	22%
If opted for Section 115BAB	15%
Any other Domestic Company	30%

7% - Taxable income above ₹ 1 crore– Up to ₹ 10 crore
12% - Taxable income above ₹ 10 crore
10% - If Company opting for taxability u/s 115BAA or Section 115BAB

Indirect Taxes in India: Key Types & Impact on Economy

Indirect taxes in India, including GST, customs duties, and excise, are applied to goods and services at various stages of production and consumption. These taxes are collected by businesses and passed on to consumers, making them a significant revenue stream for the government. They help simplify the tax system and encourage compliance, while also influencing market prices and demand.

Some other Popular Indirect Taxes in India include:

Service tax: This tax is levied by entities for rendering services like consulting, legal, and other such services. This tax is collected from the service recipients and paid to the Central Government.
Excise duty: This duty is applicable on all goods that are manufactured in India. This indirect tax is payable by the manufacturers and often passed on to the customers. This indirect tax in India is levied by the Central Government and works according to the provisions of the Central Excise Act, 1944.
VAT: Value Added Tax (VAT) is imposed on the sale of movable goods in the nation. VAT is levied at all stages of the production and distribution channel that include an instance of value addition. This tax is levied by the State Governments under Entry 54 of the State List.
Customs duty: It is one of those indirect taxes that are applicable for bringing imported goods into the country. In certain instance, this duty may also be levied on exported goods. The Customs Act, 1962 provides regulations on the levy and collection of this duty, import and export procedures, penalties, prohibitions, and offence.
Securities Transaction Tax (STT): This indirect tax is imposed when stocks are sold or purchased through any Indian stock exchange. STT was introduced in 2004 and is applicable to shares, mutual funds, and future and options transactions. STT was imposed to reduce the short-term capital gains tax and eliminate long-term capital gains tax.
Stamp duty: This is an indirect tax charged by state governments on the transfer of immovable property within their jurisdiction. In addition, stamp duty is mandatory on all types of legal documents. Its rates vary from one state to another.
Entertainment tax: The state governments charge such tax on every transaction related to entertainment. Some examples are movie tickets, video game arcades, stage shows, exhibitions, amusement parks, and sports-related activities.

Did You know?

According to Section 115BAB, new domestic manufacturing companies may choose to avail themselves of a concessional tax rate of 15% (resulting in an effective tax rate of 17.16%)

What are the Different Types of Indirect Taxes in India?

Indirect taxes in India have been the government's most consistent and largest revenue source. The Indian tax system has had multiple indirect taxes, some of which are still operational:

Service Tax
Indian Excise Duty
Value Added Tax (VAT)
Customs Duty
Securities Transaction Tax (STT)
Stamp Duty
Entertainment Tax

A few of the indirect taxes in India, like service tax, value-added tax, and excise duty have been removed for a large number of goods and services. These taxes have been replaced by a single Goods and Services Tax.

Customs duty tax applies to goods imported into India from other countries and, in a few cases, to goods exported from India.

Securities Transaction Tax or STT applies to the transactions involving an exchange of financial securities. For example, equity stocks, mutual fund units, and future and options contracts. This tax is necessarily applied to securities exchange transactions. However, you can also pay stamp duty and STT on securities changing hands outside the exchange or over the counter.

STT allows the buyers and sellers of securities to benefit from lower short and long-term capital gains taxes on the exchange.

Stamp duty is a State Government levy on the transfer of assets within their territory. It acts as legal proof of ownership of the asset or security.

Entertainment tax in India is also a state subject and applies to transactions involving the entertainment business in the country. Such businesses and activities include movie releases, sporting events, concerts, amusement parks, and theatres.

What is Goods and Services Tax?

The Goods and Services Tax (GST) has consolidated India's complex web of indirect taxes. The tax system in India can have three layers of levies: Centre, State, and Local Authority or Municipalities.

Before GST introduction in the Indian taxation system, the following indirect taxes could apply to the goods and services in India:

Excise Duty
Entertainment Tax
Value Added Tax (VAT, State)
Octroi
Service Tax
Central Sales Tax (collected by State)
Purchase Tax
Entry Tax (State)
Luxury Tax (State)

These interconnecting and often overlapping taxes posed many disadvantages and conflicts for suppliers, manufacturers, and government bodies.

Disadvantages of Indirect Taxes before GST

A complex web of multiple tax points and returns for suppliers:

Incidents of double taxation and cascading effect
Difficult web legal conditions for exporters
The difficulty of market entry due to varying rules and regulations
Very high after-tax prices for goods and services

The introduction of GST removed the complexity and hurdles for businesses to participate in nationwide markets. GST made goods and services cheaper for individuals and end consumers while making taxation transparent and easy for sellers.

The Present State of GST

GST has simplified the indirect taxation for goods and services in India. With GST, instead of five or six different taxes, you only need to consider the following three (out of which only two will apply):

Central Goods & Services Tax (CGST)
State Goods & Services Tax (SGST)
Integrated Goods & Services Tax (IGST)

CGST and SGST apply when the sale occurs within the state. IGST applies to goods sold between states.

The Rate of GST

Under the Central Board of Indirect Taxes and Customs (CBIC), the GST Council announces GST rates for different commodities and services. The average rate of GST in India is about 12%.

The rates are lower than those of the other countries and economies worldwide using GST.

Direct vs Indirect Taxes in India: Key Differences Explained

Direct and indirect taxes form the backbone of India’s tax system. Learn how they differ, who pays them, and their impact on your finances.

Feature	Direct Tax	Indirect Tax
Who Pays?	Individuals and businesses	Consumers
Collection Method	Paid directly to the government	Collected by intermediaries
Burden Transfer	Cannot be shifted	Shifted to end consumers
Examples	Income Tax, Corporate Tax	GST, Customs Duty

Impact on Individuals and Businesses

For Individuals

Direct taxes, like income tax, affect disposable income.
Indirect taxes like GST increase the cost of goods and services.
Tax deductions and exemptions help in reducing tax liability.

For Businesses

Corporate taxes affect profitability and financial planning.
GST compliance impacts pricing and operational costs.
Tax policies influence investment decisions and market competitiveness.

Taxation Policy in India (Central and State Tax Policies)

The Taxation Policy in India is based on a dual structure, where both the Central Government and State Governments have the authority to levy and collect taxes. This system is designed to distribute the tax burden and responsibilities between the two levels of government to ensure balanced revenue generation and fund public services across the country.

Together, the central and state taxes ensure a well-rounded approach to financing government activities. The introduction of the Goods and Services Tax (GST) has simplified indirect taxation by combining several state and central taxes into one, promoting uniformity across the country for goods and services while allowing both levels of government to share the tax revenue.

This dual system ensures that both central and state governments have a sustainable source of income for governance, with a clear distribution of tax authority to meet different needs at the national and local levels.

List of Taxes in India – Central and State Government Taxes

Central Taxes

Income Tax
Corporate Tax
Goods and Services Tax (GST)
Customs Duty
Excise Duty (on select products)

State Taxes

State GST (SGST)
Stamp Duty
Property Tax
Road Tax
Professional Tax

Tax Structure in India for Personal and Corporate Taxation

Personal Taxation

Slab-based Income Tax System: Individuals are taxed based on income slabs with progressive tax rates.
Exemptions & Deductions: Section 80C, 80D, HRA, and other benefits reduce taxable income.
New vs. Old Tax Regime: Taxpayers can choose between two structures based on their financial planning.

Corporate Taxation

Domestic Companies: Taxed at varying rates based on turnover and exemptions.
Foreign Companies: Subject to higher tax rates.
Minimum Alternate Tax (MAT): Ensures companies pay a minimum tax regardless of exemptions.
Dividend Distribution Tax (DDT) (now removed): Previously applied to dividends paid by companies.

Understanding India’s taxation system is vital for financial planning, compliance, and economic growth. With evolving tax policies, staying informed helps individuals and businesses make better financial decisions.

Exemptions on Tax Deduction

The tax deduction is a reduction of income that eventually lowers your tax liability. Deductions are expenses you incur during the year, which can be subtracted from your total income to calculate how much tax you need to pay. There are many deductions that you can use to reduce your total income.

Here are some of the most commonly used ways for the tax deduction:

House Rent Allowance: You can get the tax benefit under HRA if you have rented accommodation. The amount exempted can be totally or partially exempted from income tax.
Medical Insurance Deduction: If you have brought a medical policy, the premium you paid for the policy could save your tax as the amount is deducted from gross income (up to a limit).
Food Coupons: Some employers, such as Sodexo, may provide you with food coupons. Such meal coupons are tax-exempt up to a certain limit. The yearly exemption for food coupons is up to ₹26,400.
Section 80C, 80CC, and 80CCD(1): This is the most popular option, and you must already be using it to reduce your taxes. Under this, you can reduce your taxable income by investing your money in tax-saving investments.

Section 80C - Deductions on Investments	You can claim a deduction of ₹1.5 lakh from your total income under section 80C
Section 80CCC – Insurance Premium	Deduction for Premium Paid for Annuity Plan of LIC or Other Insurer
Section 80CCD – Pension Contribution	Deduction for Contribution to Pension Account
Section 80GG – House Rent Paid	Deduction for House Rent Paid Where HRA is not received
Section 80 TTA – Interest on Savings Account	Deduction from Gross Total Income for Interest on Savings Bank Account
Section 80E – Interest on Education Loan	Deduction for Interest on Education Loan for Higher Studies
Section 80EE – Interest on Home Loan	Deductions on Home Loan Interest for First-Time Home Owners
Section 80D – Medical Insurance	Deduction for the premium paid for Medical Insurance

What Happens if You Don’t Pay Taxes?

Paying taxes is a fundamental responsibility of every citizen. The tax structure in India consists of direct and indirect taxes, ensuring that the government has the necessary funds for infrastructure, public services, and welfare programmes. The consequences can range from financial penalties to legal action, depending on the severity of non-compliance.

Legal Penalties and Interest Charges: If you fail to pay your taxes on time, the Income Tax Department may impose penalties. Under Section 234A, interest is charged on unpaid taxes, and late filing can attract penalties of up to ₹5,000 under Section 234F. In extreme cases, prosecution may lead to imprisonment ranging from three months to seven years.
Increased Scrutiny from the Tax Authorities: The Income Tax Department closely monitors non-compliance. If you fail to pay taxes, your financial transactions may come under scrutiny, leading to tax notices, audits, and even legal proceedings. This can create unnecessary hassles and impact your financial credibility.
Loss of Financial Benefits: Not filing your tax returns on time may impact your ability to secure loans, credit cards, and even travel visas. Many banks require proof of tax payment for loan approvals, while foreign embassies often ask for ITR documents during visa processing.
Impact on Business Operations: For businesses, failing to pay taxes can lead to severe consequences, including penalties, frozen bank accounts, and cancellation of business registrations like GST. The types of taxes in India applicable to businesses include income tax, GST, corporate tax, and customs duty. Non-payment of these can disrupt business operations and result in legal action.
Missed Tax Refunds and Deductions: If you fail to file your returns, you may miss out on tax refunds for excess tax deducted at the source (TDS). Additionally, you won’t be able to claim deductions under sections like 80C (investments), 80D (health insurance), and 80E (education loans), resulting in higher tax liability.

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How to File Taxes in India?

Filing taxes in India is a crucial responsibility for individuals and businesses. Whether you are a salaried professional, a freelancer, or a business owner, understanding the tax filing process can help you stay compliant with the law while maximising benefits. The tax structure in India is divided into direct and indirect taxes, with income tax being one of the most commonly filed direct taxes.

Step 1: Determine Your Taxable Income

Your taxable income includes earnings from salary, business profits, house property, capital gains, and other sources. Deductions under sections like 80C, 80D, and 80E can help reduce your taxable income, ultimately lowering your tax liability.

Step 2: Choose the Right Tax Regime

The Indian tax system offers two regimes: the old tax regime, which provides multiple exemptions and deductions, and the new tax regime, which features lower tax rates but fewer deductions. Choosing the appropriate regime depends on your financial situation and available deductions.

Step 3: Gather Necessary Documents

Before filing your Income Tax Return (ITR), collect essential documents such as:

Form 16 (issued by your employer)
Form 26AS (for tax credit verification)
Bank Statements
Investment Proofs
Aadhaar and PAN Card

Step 4: Select the Appropriate ITR Form

The Income Tax Department provides different ITR forms based on the taxpayer's income source and category. For instance:

ITR-1 (Sahaj): Salaried individuals with income up to ₹50 lakh
ITR-3: For business owners and professionals
ITR-4 (Sugam): For individuals under the presumptive taxation scheme

Step 5: File Your ITR Online

The Indian government has streamlined tax filing through the Income Tax e-Filing portal. Here’s how you can file your return:

Log in to https://www.incometax.gov.in
Select “File Income Tax Return”
Choose the right assessment year and ITR form
Fill in your income, deductions, and tax paid details
Verify your details and submit the form

Step 6: Verify Your ITR

After submission, your return must be verified within 120 days. This can be done via:

Aadhaar OTP
Net banking
Sending a signed physical copy to the Centralised Processing Center (CPC), Bangalore

Step 7: Check for Refunds and Notices

Once your ITR is processed, you can track refunds on the e-filing portal. The Income Tax Department may also issue notices if discrepancies arise, requiring further clarification or document submission.

Summing Up

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Glossary

Tax Slab: A system where income is divided into ranges, each subject to a different tax rate, varying by income level and age.
Section 80C: A section of the Income Tax Act that allows deductions up to ₹1.5 lakh on certain investments and expenses, reducing taxable income.
Public Provident Fund (PPF): A long-term investment option under Section 80C, offering tax benefits and stable returns backed by the government.
Indexation: An adjustment to capital gains to account for inflation, reducing tax liability on long-term capital gains.
Octroi: A local tax collected on goods brought into a city for consumption, sale, or use, typically levied by municipal bodies.

FAQs on Tax Structure in India

India has a variety of taxes, with five key ones being income tax, Goods and Services Tax (GST), customs duty, excise duty, and corporate tax. Each tax serves distinct purposes, targeting income, consumption, and business profits.

For the financial year 2023-24, income up to ₹2.5 lakh per annum is tax-free for individuals under 60, while higher exemptions apply for senior and super senior citizens.

Sikkim offers significant tax exemptions for its residents, particularly on income from salaries and dividends, making it one of the most tax-friendly states in India.

Individuals with annual incomes below the minimum exemption limit, agricultural income, and those eligible for specific exemptions, like certain categories of senior citizens and residents of tax-free states, do not pay income tax.

You can save income tax by investing in tax-saving instruments like Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Savings Schemes (ELSS), and claiming deductions under Section 80C, 80D, and other relevant sections of the Income Tax Act.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.