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What Are The Types Of Taxes In India & How Can You Minimize Them?

What Are The Types Of Taxes In India & How Can You Minimize Them?

Taxes in India
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The Government of India collects several Crores in taxes every year. These collections are used to undertake development projects to help boost the country’s economy and improve the standards of living of the citizens. Payment of tax benefits the payers on multiple levels including improving of infrastructure, supporting the society, and promoting general welfare activities.

We tend to spend our income on various services and goods that enhance our quality of life but can also leave behind severe financial strain. To ease this financial burden, the government provides the option of income tax saving through waivers, refunds and rebates on taxes levied on our income and spends.

What are the types of taxes in India?

Taxes in India can be categorized into 2 types – Direct Taxes and Indirect Taxes, which are further sub-divided into other types. Within the Income Tax Act of 1961, there are different sections that govern these taxes. Let’s define each in brief –

1. Direct Taxes are paid by individuals and legal entities directly to the government. Direct taxes cannot be transferred by one individual or entity to another individual or entity. The Central Board of Direct Taxes (CBDT) overlooks direct taxes. Direct Taxes include the following taxes:

  • Income tax: As the name suggests, income tax is levied on the annual income/ profits of individuals or entities. Everyone who earns an income is liable to pay tax directly to the government.
  • Capital gains: A kind of tax levied on the money received through an investment or on sale of a property. It could be from either short-term or long-term capital gains from an investment.
  • Corporate tax: Corporate tax refers to the income tax paid by a company. It is based on the different revenue slabs.
  • Securities transaction Tax: STT is levied on the price of the share as well as securities traded on the Indian Stock Exchange (ISE).

2. Indirect taxes are levied on services/ products, collected by the seller of the service/ product. This tax is indirectly collected by the retailers from the buyers of these services/ products. There is only one indirect tax collected by the government, called the Goods and Services Tax or GST.

  • Goods and Services Tax: GST is a consumption tax levied on all goods and services in India. For sellers and service-providers, every step of the production process and any value-added services are subject to imposition of tax.
  • GST was introduced to eliminate several other kinds of taxes including Value Added Tax (VAT), customs duty, as well as customs and excise taxes.
  • The products/ services excluded under GST are electricity, petroleum products and alcoholic drinks as these are still taxed as per the previous tax regime of the respective state governments.

How can you save taxes?

Furnishing of inaccurate income details is called evasion, but to take benefit of exemptions, deductions and incentives provided under Income Tax Act, one must resort to tax minimization. Saving tax legally requires ‘tax planning’ for taking advantage of all exemptions, deductions, and benefits.

Some of the popular tax benefits include:

  • Standard deduction of up to Rs.40,000 can be claimed in an year by salaried persons and pensioners.
  • By compliance to conditions stated in Chapter VI A of the Income Tax Act, companies can get a number of tax benefits.
  • Selling a long term asset possession, can get you exemption from the Capital Gain Tax if the profit amount is re-invested in specified instruments.
  • Deduction of up to Rs1,50,000 can be availed for investments in tax saving insurance plans under Section 80C of the Income Tax Act.
  • A deduction of Rs50,000 can be claimed by persons of 60 years or more on from interest earned on FDs under section 80TTB.
  • Under Section 80E, you can forego any tax payment on the interest component of education loans.

There are number of other benefits provided under the Income Tax Act. All the above points can help one reduce their tax burden substantially for a stipulated financial year. Also, it is advised you read carefully about the various provisions offered by the government to help you save taxes, before making an investment or making a major purchase.

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