Types of Taxes in India & Smart Ways to Minimize Your Tax Burden

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. Tax payments benefit the payers on multiple levels-  from improving infrastructure to 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, and each of these spendings attracts taxes that add to our expenses. To ease the financial burden, the government provides the option of income tax savings through waivers, refunds, and rebates on taxes levied on our income and spending.

What are the Types of Taxes in India?

Taxes in India can be categorised into 2 types – Direct Taxes and Indirect Taxes, which are further subdivided into other types. Let’s define each type of tax 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) oversees 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 the 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 goods and services and collected by sellers or service providers on behalf of the Government. The most significant indirect tax today is the Goods and Services Tax (GST), which has replaced many earlier levies such as VAT, service tax, and excise duty. However, some items like petroleum products, electricity, and alcohol remain outside GST and continue to be taxed under their respective laws. Customs duties on imports and exports are also a form of indirect tax still in force.

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?

Hiding or giving false income details is called tax evasion. But using the exemptions, deductions, and incentives allowed under the Income Tax Act is a legal way to reduce your tax. This is called tax planning, and it helps you save by making full use of the benefits available.

Some of the popular tax benefits include:

• A salaried individual or pensioner can avail of a standard deduction of ₹50,000 under the old tax regime, while under the new tax regime, the deduction is enhanced to ₹75,000 

• By compliance with the 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 ₹1,50,000 can be availed for investments in tax-saving insurance plans under Section 80C of the Income Tax Act.

• A deduction of ₹50,000 can be claimed by persons of 60 years or more on interest earned on FDs under section 80TTB.

• Under Section 80E, an individual can claim a deduction on the entire interest paid on an education loan for up to 8 years, or until the interest is fully repaid, whichever is earlier

There are a 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 that 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.