Chapter - 1

Introduction to India's Tax System

AMALA.S MCOM , NET , KSET

ASSISTANT PROFESSOR
BENGALURU NORTH UNIVERSITY
Introduction to India's Tax System:-

India’s tax system is a well-structured and comprehensive framework designed to

generate revenue for the government to finance public services, infrastructure, and
welfare programs. It plays a crucial role in the country’s economic development and
social equity.
Definition of Taxes in India
Taxes are mandatory financial charges or levies imposed by the government on
individuals, businesses, and other entities. In India, taxes are collected by both the
Central Government and State Governments under the authority of the Constitution
of India.
A tax is a compulsory contribution to the government to fund public expenditure.
 Purpose of Taxes in India
Taxes serve multiple purposes beyond just raising
revenue:

Revenue Generation
Economic Development
Redistribution of Wealth
Regulation of Economy

Encouraging Social Welfare

Control Inflation and Deficits

Taxes in India are not just a financial obligation but a tool for sustainable economic
growth, social equity, and nation-building.
 Role of Taxes in Nation-Building and Public Welfare

Taxes are not just a source of revenue for the

government; they are a critical tool for shaping the
nation’s economy and society. In India, they play a
central role in promoting development, social equity,
and public welfare.

1. Nation-Building

2. Public Welfare
 1. Nation-Building

• Infrastructure Development
• Defence and Security
• Economic Stability
• Industrial & Technological Growth
 2. Public Welfare

• Healthcare & Education

• Social Security & Welfare
Programs
• Poverty Alleviation
• Environmental & Social
Initiatives
Types of Taxes:
Taxes in India are broadly classified into two main categories:
Direct Taxes
These are taxes levied directly on individuals and organizations based on their income or profits.
The most prominent example is the Income Tax, administered by the Central Board of Direct
Taxes (CBDT). Corporate tax, capital gains tax, and wealth tax (abolished in 2015) also fall under
this category.
 Income Tax:

1. Income Tax: Levied on the taxable income of individuals .The rates are progressive (higher
income generally means a higher tax rate) and are governed by the Income Tax Act, 1961.
Individuals can typically choose between an Old Tax Regime (with various exemptions and
deductions) and a New Tax Regime (with lower slab rates but fewer exemptions).
exemption's: on OLD Tax Regime

Standard Deduction
• Salaried individuals can claim a standard deduction of ₹50,000.
Deductions under Chapter VI-A
• Section 80C, 80CCC, and 80CCD (1): A combined maximum deduction of ₹1.5 lakh can
be claimed for various investments and expenses, such as:
o Public Provident Fund (PPF)
o Employee Provident Fund (EPF)
o Equity Linked Savings Scheme (ELSS)
o National Savings Certificate (NSC)
o Life insurance premiums
o Principal repayment on a home loan
o Tuition fees for up to two children
• Section 80CCD(1B): An additional deduction of up to ₹50,000 is available for
contributions to the National Pension Scheme (NPS), over and above the ₹1.5
lakh limit.
• Section 80D: Deductions can be claimed for medical insurance premiums paid
for self, family, and dependent parents.
• Section 80E: Deduction is available for the interest paid on an education loan.
• Section 80G: Taxpayers can claim deductions for donations made to certain
charitable institutions.
Exemptions on Allowances
• House Rent Allowance (HRA): Salaried individuals who live in rented accommodation
can claim a partial or full exemption on the HRA component of their salary under Section
10(13A).
• Leave Travel Allowance (LTA): Employees can claim a tax-free reimbursement for
travel expenses incurred during vacations within India. This can be claimed for two
journeys within a block of four calendar years.
A 4% Health and Education Cess is levied on the total tax amount calculated, and surcharges may
apply for high-income earners.

Old vs. new tax regime Deductions.

Feature Old Tax Regime New Tax Regime

Deductions & Exemptions Offers a wide range of deductions and Does not allow most deductions and
exemptions, such as those exemptions, including those
under Section 80C, 80D, HRA, under Section 80C, 80D, HRA,
and LTA. and LTA.

Tax Rates Higher tax rates. Lower tax rates.

Standard Deduction ₹50,000 for salaried individuals. ₹75,000 for salaried individuals (for FY
2024–25).

Documentation Requires documentation to support Requires less documentation due to

claimed deductions. limited deductions.
 Income tax for senior citizens

Income tax for senior citizens in India offers several benefits, including higher basic
exemption limits under the Old Tax Regime and specific deductions and relaxations aimed at
reducing their tax burden.

Eligibility Criteria

• Senior Citizen: Age 60 years or above but less than 80 years during
the financial year.
• Super Senior Citizen: Age 80 years or above during the financial
year.
Income Tax Slab Rates Senior Citizen (FY 2025-26 / AY 2026-27)
Income Slab (₹) Old Tax Regime Rate Old Tax Regime Rate New Tax Regime Rate
(Senior Citizen) (Super Senior Citizen) (All Citizens)

Up to ₹3,00,000 Nil Nil Nil (up to ₹4,00,000

effective with rebate)

₹3,00,001 - ₹5,00,000 5% Nil 5%

₹5,00,001 - ₹10,00,000 20% 20% 10% (for ₹8L-₹12L

slab)

Above ₹10,00,000 30% 30% 15% to 30%

(depending on specific
slab)

Note: The New Tax Regime for FY 2025-26 has an effective zero tax liability up to
₹12 lakh annual income due to an increased rebate under Section 87A and a
standard deduction for pensioners.
Key Exemptions and Benefits Senior Citizen

The Indian Income Tax Act offers several special benefits for resident senior citizens:

• Higher Basic Exemption Limit: (₹2.5 lakh limit) below 60 age. (₹3.0 lakh limit) for Senior
Citizen.
• Exemption from Advance Tax
• Higher Deduction on Interest Income (Section 80TTB): Senior citizens can claim a deduction
of up to ₹50,000 .The TDS threshold on this interest income has also been increased to
₹1,00,000.
• Deduction for Medical Expenses/Insurance (Section 80D): A higher deduction limit of up to
₹50,000.
• Exemption from ITR Filing (Section 194P)
• Paper Filing of ITR
• Form 15H
Corporate Tax in India

2. Corporate Tax in India: Corporate tax is a direct tax levied on the income or profits
of companies operating in India. It applies to both domestic companies and foreign
companies earning income in India. Corporate tax is a major source of government
revenue and plays a key role in economic development.

• Domestic Companies: Registered in India and taxed on global income.

• Foreign Companies: Not registered in India but earning income within the

country; taxed only on India-sourced income.

Corporate tax is levied on net profit, calculated as:
Net Profit = Total Income – Allowable Deductions – Exemptions
• Allowable deductions include business expenses, depreciation, and approved
investments.
• Administered by the Central Board of Direct Taxes (CBDT).
• Companies must file annual tax returns and pay taxes as per schedule.
• India enforces Transfer Pricing Rules to prevent profit shifting by multinational
corporations.
Purpose and Impact
• Provides revenue for government projects, public services, and infrastructure.
• Encourages investment through reduced rates for new businesses.
• Helps maintain economic stability and promote industrial growth.
A. Tax rates for domestic companies
Domestic Company means an Indian Company or any other Company which in respect of its income
liable to pay tax in India and has made the prescribed adjustments for the declaration and payment of
dividend within India.
The corporate tax rate for domestic companies are as below:

Total turnover or gross receipt

Income during the previous year 2022-23 Any other domestic company
does not exceed Rs. 400 crores

Total Income less than 1 Crore in

25% plus cess 4% 30% plus cess 4%
current year

Total income more than 1 Crore but 25% plus surcharge of 7% plus cess 30% plus surcharge of 7% plus cess
less than 10 Crore in current year 4% 4%

Total income more than 10 Crore in 25% plus surcharge of 12% plus cess 30% plus surcharge of 12% plus cess
current year 4% 4%
 Type of company Tax Rate

22 % plus surcharge of 10
All domestic companies’ u/s
Further domestic companies 115BAA without availing prescribed
% and cess of 4 %, thus
have following options for effective tax rate of 25.17
deduction/exemption (applicable
concessional tax rates subject to % irrespective of amount
from FY 2019-20)
satisfaction of prescribed of income
conditions:
Manufacturing companies 15 % plus surcharge of 10
incorporated on or after 1st % and cess of 4 %, thus
October 2019 u/s 115BAB (without effective tax rate of 17.16
availment of prescribed % irrespective of amount
deductions/exemption) of income
 B. Tax rates for foreign companies
As per income tax law, Foreign Company is a company which is not a domestic company as
defined i.e. The Company which is registered outside India. A foreign Company can become a
domestic company if it makes arrangement for declaration & payment of dividend in India.
Following are the applicable tax rates for foreign Companies.

Income upto Rs. 1 Income of more than Rs 1 Crore Income of more than Rs 10
Type of Income
Crore and upto Rs 10 crore Crore

Royalty received from Government or an

Indian concern or fees for rendering
technical services where such agreement 50% plus surcharge of 2% plus 50% plus surcharge of 5% plus
50% plus cess of 4%
has, in either case, been approved by the cess of 4% cess of 4%
Central Government after the date of
March 31, 1961 but before April1,1976.

35% plus surcharge of 2% plus 35% plus surcharge of 5% plus

Any other income 35% plus cess of 4%
cess of 4% cess of 4%
[Link] Gains Tax:

Capital Gains Tax is a direct tax levied on the profit earned from the sale of a capital
asset such as property, stocks, mutual funds, gold, or bonds. The gain arises when the selling
price of an asset exceeds its purchase price.
In simple terms:
Capital Gain = Selling Price – Purchase Price
the tax imposed on this gain is called Capital Gains Tax.
Types of Capital Gains
Short-Term Capital Gains (STCG):
o Applies when assets are sold within a short period from purchase.
o The holding period varies by asset type:
▪ Listed shares & equity mutual funds held for less than 12 months.

▪ Real estate or other assets held for less than 36 months.

o Tax Rate: Generally, 15% for equity-related gains; other assets taxed as
per individual’s income tax slab.
Long-Term Capital Gains (LTCG):
o Applies when assets are held for a longer duration before sale.
o Holding period:
▪ Listed shares & equity mutual funds: more than 12 months.

▪ Real estate or other assets: more than 36 months.

o Tax Rate:
▪ 10% (without indexation) for equity investments exceeding ₹1 lakh.

▪ 20% (with indexation) for property and other long-term assets.

Exemptions and Deductions
Certain sections of the Income Tax Act provide exemptions if the gains are reinvested,
such as:
• Section 54: Reinvestment of property gains in another residential property.
• Section 54EC: Investment in specified bonds.
• Section 54F: Investment of proceeds from other assets into residential property.

Purpose of Capital Gains Tax

• To ensure fair taxation on wealth generation through asset appreciation.
• To promote long-term investment and discourage speculative short-term trading.
• To generate revenue for public welfare and development projects.
 Securities Transaction Tax (STT):
4. Securities Transaction Tax (STT): The Securities Transaction Tax (STT) is a direct tax
levied on the purchase and sale of securities (such as shares, derivatives, equity mutual funds,
etc.) that are listed on recognized stock exchanges in India. It was introduced by the Government
of India in 2004 to simplify the taxation of securities trading and to ensure transparency in
capital market transactions.
Key Features of STT
Applicability : STT is levied on every buy or sell transaction involving:
o Equity shares of listed companies
o Equity-oriented mutual funds
o Derivatives (futures and options)
o Equity-based Exchange Traded Funds (ETFs)
Tax Rates:
o Delivery-based equity trading: 0.1% on both buy and sell sides.
o Intraday trading: 0.025% on the sell side only.
o Futures contracts: 0.01% on the sell side.
o Options contracts: 0.05% on the sell side (on premium).
(Rates are subject to change as per government updates.)

Purpose of Securities Transaction Tax

• Revenue Generation
• Curb Tax Evasion
• Simplify Taxation
• Encourage Transparency

Impact of STT
• Simplified tax compliance for investors and traders.
• Encouraged formal, transparent trading practices.
• However, slightly increases the cost of frequent trading for market participants.
Indirect Taxes
Indirect Taxes are imposed on goods and services rather than on income or profits.
These are collected by intermediaries (like sellers) from the end consumers.
1. GST (Goods and Services Tax) in India.
The Goods and Services Tax (GST) is a comprehensive, indirect tax levied on the manufacture,
sale, and consumption of goods and services in India. It was introduced on 1st July 2017,
replacing multiple indirect taxes like VAT, excise duty, and service tax. The GST is
administered by the Central Board of Indirect Taxes and Customs (CBIC).

Structure of GST:
GST in India is a dual system, shared between the Central Government and State
Governments:
• CGST (Central GST) – Collected by the Central Government.
• SGST (State GST) – Collected by the State Government (for intra-state sales).
• IGST (Integrated GST) – Collected by the Central Government (for inter-state sales).
Example:
If goods are sold within Karnataka, both CGST and SGST apply.
If goods are sold from Karnataka to Tamil Nadu, IGST applies.
GST (Goods and Services Tax) in India.

Key Features
• Unified Tax Structure:
• Dual GST Model:
o Central GST (CGST):
o State GST (SGST
o Integrated GST (IGST):
• Destination-based Tax:
• Input Tax Credit (ITC):
• Administration
GST Rates and Structure (as of September 22, 2025)

• 0%: Essential goods and services

• 5%: A merit rate for essential and commonly used
goods.
• 18%: The standard rate, which applies to most
goods and services.
• 40%: A higher rate for luxury and "sin" goods.
Special rates also exist for items like gold (3%) and
precious stones (0.25%).
2. Customs duty:

Tax levied on goods when they are transported across international borders. The Central Board of Indirect
Taxes and Customs (CBIC) administers customs duty in India to regulate the movement of goods,
generate revenue, and protect domestic industries from unfair competition.

Purpose of Customs Duty Calculation of Customs Duty

Cost, Insurance, and Freight (CIF) value.
• Revenue Generation
• Type of Goods
• Protection of Domestic Industries
• Country of Origin
• Regulation of Trade
• Value and Quantity
• Fair Trade Practices
Excise Duty:
Excise duty is an indirect tax levied on the manufacture or production of specific goods
within a country. In India, its application has changed significantly since the
implementation of the Goods and Services Tax (GST) in 2017.

Products still under excise duty:

• Petroleum Products:
• Alcoholic Beverages:
• Tobacco and Tobacco Products:

Excise duty before GST

• Prior to the rollout of GST, excise duty was a major
source of revenue for both the central and state
governments and was levied on a wide range of
domestically produced goods.
STAMP Duty:

Stamp duty is a state-level tax in India levied on legal documents, primarily for property transactions.
In Karnataka, stamp duty and property registration fees are mandatory charges paid by the buyer to
legally validate and record a property transfer.
Here are the key details for Karnataka, including recent changes introduced in late August 2025.

Stamp duty and registration charges in Karnataka:

Effective August 31, 2025, Karnataka doubled its registration fee from 1% to 2%. For properties
valued above ₹45 lakh, this brings the total transaction costs to approximately 7.6% (5% stamp
duty + 2% registration fee + 0.6% cess and other charges).
Stamp duty rates
• Property value below ₹20 lakh: 2%
• Property value between ₹21 lakh and ₹45 lakh: 3%
• Property value above ₹45 lakh: 5%
Registration charges
• All property values: 2% of the property's market value, regardless of gender.
• Additional charges
• Cess: 0.5% on the duty amount.
• Surcharge: 2% in urban areas and 3% in rural areas.

Factors affecting stamp duty calculation

• Market value vs. consideration value:

• Property type:
• Location:
• Owner's profile:
TOLL TAX:
In India, a toll tax is a fee charged for using specific highways, expressways, bridges, and tunnels. The
revenue collected is used to fund the construction and maintenance of these roads by the National Highway
Authority of India (NHAI). Since February 2021, all four-wheeled vehicles must use a FASTag for toll
payments.

ROAD TAX

Road tax is a mandatory levy imposed by state governments in India on motor vehicles registered
within their state. It is a one-time fee for private vehicles that is paid at the time of registration and is
used to fund the development and maintenance of road infrastructure. The amount of road tax varies
by state and is calculated based on several factors.
 Differences between toll tax and road tax:
Factor Toll Tax Road Tax

Purpose A user fee to fund the construction A one-time or recurring tax on all
and maintenance of specific registered vehicles to fund state-wide
highways and expressways. road infrastructure.

Collection Authority Primarily collected by the National Collected by the State Transport
Highways Authority of India Department.
(NHAI) or private concessionaires.

Payment Paid on a "pay-per-use" basis at Typically paid at the time of vehicle

designated toll plazas. registration.

Applicability Applies only to vehicles traveling Applies to all registered vehicles in a

on specific toll roads. state.
Environmental Cess:
An environmental cess is a tax levied by the government for environmental conservation and to
discourage activities that cause pollution. In India, there have been several forms of environmental cess,
including a tax on coal and specific charges on vehicles.

Water Cess
The Water (Prevention and Control of Pollution) Cess Act of 1977 provided for the collection of a cess
on water consumed by certain industries and local authorities. The funds were used to finance pollution
control boards. However, this cess was also subsumed under the GST regime.

Electricity Duty:
In India, electricity duty is a tax imposed by state governments on the consumption of electricity. It is a
component of the monthly electricity bill and is distinct from the energy charges paid to the power
utility.
 Overview of the Indian Tax Structure: -
Roles of the Central Government and its agencies
• Central Board of Direct Taxes (CBDT)
• Central Board of Indirect Taxes and Customs (CBIC)
• GST Council
Roles of the State Governments and their agencies
• Excise Duty on Alcoholic Liquor
• State Goods and Services Tax (SGST)
• Stamp Duty and Registration Fees • Entertainment Tax (Now Mostly
Subsumed Under GST)
• Motor Vehicle Tax / Road Tax
• Property Tax
• Professional Tax
• Land Revenue / Agricultural Tax
• Electricity Duty
 Fundamental Definitions: 'Assessee', 'Previous Year', 'Assessment Year', and 'Person'.

Brief explanation of the fundamental definitions under the Income Tax Act, 1961 — covering
‘Assessee’, ‘Previous Year’, ‘Assessment Year’, and ‘Person’

Assessee
An assessee is any "person" who is liable to pay
tax or any other sum under the Income Tax Act,
1961. This can include an individual, a
company, or a Hindu Undivided Family (HUF).
The "previous year" is the financial year in
which income is earned, while the "assessment
year" is the subsequent year when that income is
assessed and taxed.
Previous Year (PY)
• The earning period: This is the financial year in which a person earns their income.
• Exception: For a new business or a new source of income, the first previous year
starts from the date the business or income source was established and ends on March
31st of that financial year.

Assessment Year (AY)

• The assessment period: This is the year immediately following the previous year,
during which the income from the previous year is assessed and taxed.
• ITR filing: Taxpayers file their Income Tax Returns (ITR) for the previous year
during the relevant assessment year.
Person
• Under Section 2(31) of the Income Tax Act, 1961, the term "person" has a broad
definition and includes:
• Individuals: A natural human being.
• Hindu Undivided Families (HUFs): Families governed by Hindu law.
• Companies: Any corporation incorporated under the Companies Act.
• Firms: This includes partnership firms and Limited Liability Partnerships (LLPs).
• Association of Persons (AOP) and Body of Individuals (BOI):
• Local Authorities: Bodies like municipalities.
• Artificial Juridical Persons (AJPs):
Navigating Income Tax Portals:

You can access a comprehensive playlist of official tutorials on

the Income Tax e-Portal Tutorials YouTube channel. Specific
helpful videos and user manuals available from the department's
website include:

Navigating GST Portals:

•Overview of GST portal - part 1 and part 2: These videos

provide a general overview of the portal and specific processes
like Aadhaar authentication.