Understanding the Tax System in India in 2024

Understanding Taxes in India in 2024 : Taxes, Types of Taxes in India

India’s taxation system serves as a foundation for the nation’s fiscal health and supports the funding of essential public services and infrastructure. As the Indian economy grows, the tax structure adapts, focusing on streamlining compliance and incorporating technology to make tax filing easier for citizens and businesses alike. With the emergence of new reforms and digital tools, the tax system in 2024 is designed to support sustainable growth.

This blog will delve into both direct and indirect taxes in India and explain how the tax system has evolved to meet modern-day requirements.

1. Direct Taxes in India: A Detailed Breakdown

Direct taxes are charged on the income or wealth of individuals and organizations. They are considered progressive, as they are based on the ability to pay—meaning, the higher the income or profit, the higher the tax. Here are the essential types of direct taxes in India in 2024:

1.1 Income Tax: The Most Common Direct Tax

Income tax is one of the most significant types of taxes in India, affecting salaried individuals, professionals, freelancers, and businesses.

Slabs and Regimes: For 2024, individuals can choose between the Old Tax Regime and the New Tax Regime:
- The Old Regime allows individuals to claim deductions under Sections like 80C, 80D, and 80G, which offer tax-saving investments in insurance, housing loans, health premiums, and donations.
- The New Regime simplifies tax calculations with lower rates but eliminates most deductions, making it easier for taxpayers without complicated financial setups.
Current Tax Rates (2024):
- Individuals with income up to ₹2.5 lakhs are exempt from income tax.
- Incomes between ₹2.5 lakhs and ₹15 lakhs are taxed at progressive rates.
- The highest tax rate of 30% applies to income exceeding ₹15 lakhs.

Key Updates: In 2024, the government has introduced AI-based tax assessments and a faceless evaluation system to reduce human intervention, promoting transparency in taxation.

1.2 Corporate Tax: A Driver of Economic Growth

Corporate tax is charged on the profits of both domestic and foreign companies operating in India. The corporate tax rate was slashed in recent years to foster business growth and attract foreign investments.

Domestic Companies: Currently, domestic companies are taxed at 25% if their annual turnover is below a specific threshold.
Foreign Companies: The taxation of foreign companies involves additional factors like the Double Taxation Avoidance Agreement (DTAA), which prevents companies from paying taxes in both India and their home country.

By lowering corporate taxes, India hopes to improve its rank in the Ease of Doing Business index and attract more multinational corporations to set up their businesses in India.

1.3 Capital Gains Tax: A Tax on Asset Transactions

Capital gains tax applies when profits are realized from the sale of capital assets like real estate, equities, mutual funds, and bonds. There are two types:

Short-Term Capital Gains (STCG): This is levied at 15% when assets are sold within a short holding period (less than 36 months for real estate and 12 months for stocks).
Long-Term Capital Gains (LTCG): A rate of 10% applies to profits over ₹1 lakh on assets held longer than 36 months. However, LTCG tax does not apply to assets like agriculture land, which are exempt from capital gains tax.

Understanding capital gains tax is essential for individuals and companies looking to manage their investments effectively, especially in the stock market and real estate sectors.

1.4 Wealth Tax: Gone, But Not Forgotten

Although the Wealth Tax was abolished in 2015, wealth regulation continues in other forms, such as capital gains tax and inheritance tax. The elimination of wealth tax aimed to encourage investment without penalizing wealth accumulation.

In 2024, other countries are exploring wealth taxes to mitigate inequality, but India continues to rely on income, capital gains, and property taxes to balance wealth distribution.

1.5 Gift Tax: Taxation of High-Value Gifts

The Gift Tax Act applies to gifts received by individuals, except for those received from close relatives or on special occasions like weddings. If the value of gifts exceeds ₹50,000 in a year, the recipient is required to pay tax on it as part of their total income.

By regulating high-value gifts, the government ensures transparency in financial transactions, especially in scenarios where individuals might attempt to transfer wealth without incurring taxes.

2. Indirect Taxes in India: Simplifying Consumer Taxes

Indirect taxes are imposed on the consumption of goods and services rather than on income or wealth. These taxes are typically passed on to the consumer by the seller. Here are the major types of indirect taxes in India:

2.1 Goods and Services Tax (GST): A Revolutionary Tax Reform

GST has fundamentally reshaped the taxation landscape by merging numerous state and central taxes like VAT, service tax, and excise duty into a single system. GST is levied at multiple stages, from manufacturing to final consumption, but consumers only bear the final tax.

GST Slabs in 2024:
- 0% for essential goods like food grains.
- 5%, 12%, 18%, and 28% for other products, based on the category.
GST Types:
- CGST (Central Goods and Services Tax) is levied by the central government on intra-state transactions.
- SGST (State Goods and Services Tax) is imposed by the state government.
- IGST (Integrated Goods and Services Tax) applies to inter-state transactions.

India’s GST system has simplified tax compliance, making it easier for businesses to file returns, and has reduced cascading taxes, where consumers paid taxes on already taxed items.

2.2 Customs Duty: Controlling International Trade

Customs duty is imposed on goods imported into or exported from India. It is a critical part of the government’s strategy to regulate trade, protect domestic industries, and generate revenue.

Basic Customs Duty (BCD) is the primary tax levied on imported goods.
Countervailing Duty (CVD) is imposed to neutralize subsidies given to exporters in their home countries, ensuring a level playing field.
Anti-Dumping Duty prevents foreign products from being sold below market value to harm Indian businesses.

2.3 Excise Duty: A Legacy Tax

Although excise duty has mostly been subsumed under GST, it still applies to specific sectors like alcohol, tobacco, and petroleum. These “sin goods” remain under the excise duty regime due to their impact on public health and the environment.

3. State-Specific Taxes in India: Empowering Local Governments

While the central government regulates many of the types of taxes in India, state governments have the authority to levy certain taxes to fund local infrastructure and services. Here are key state-level taxes:

3.1 Professional Tax: State-Level Income Tax

Professional tax is a nominal tax imposed by state governments on individuals earning a salary or practicing a profession. The tax rate varies by state, but it cannot exceed ₹2,500 annually.

3.2 Stamp Duty: Tax on Legal Transactions

Stamp duty is levied on the legal recognition of documents, especially during property transactions. The rate varies across states and depends on the value and location of the property.

3.3 Property Tax: A Municipal-Level Tax

Property tax is collected by municipal corporations and local bodies. It is based on the size, location, and usage of the property (residential or commercial) and funds local amenities like roads, parks, and schools.

3.4 Road Tax: Supporting Transport Infrastructure

Road tax is imposed by states on vehicle purchases. The amount varies depending on the type of vehicle, engine capacity, and fuel type. It supports road maintenance and infrastructure development.

4. Specific and Industry-Focused Taxes in India

These are specialized taxes targeting specific sectors or activities:

4.1 Securities Transaction Tax (STT): A Tax on Financial Markets

STT applies to transactions made on stock exchanges, ensuring transparency in financial markets. It is levied on the buying and selling of securities like stocks, derivatives, and mutual funds.

4.2 Entertainment Tax: Post-GST Entertainment Charges

Entertainment tax was mostly subsumed under GST, but some state governments still impose it on local events and entertainment activities. This tax applies to movie tickets, stage performances, and exhibitions.

4.3 Luxury Tax: Taxing Premium Services

Luxury tax applies to high-end goods and services, such as premium hotel stays, resorts, and designer products. Although it has been merged into GST, some luxury goods still attract additional taxes.

5. Changes and Updates in 2024: A Forward-Looking Tax System

2024 has brought several tax reforms focused on easing compliance, improving transparency, and promoting sustainable practices.

5.1 Faceless Assessments: Reducing Corruption

The faceless assessment scheme in 2024 aims to minimize human interaction in tax assessments, ensuring that tax audits are conducted fairly and transparently using AI-based tools.

5.2 GST Amendments for SMEs: Simplifying Compliance

Recent changes in the GST framework have simplified compliance requirements for small and medium enterprises (SMEs), making it easier for them to file taxes, especially with mandatory e-invoicing.

How to save Taxes in India in 2024

1. Maximize Deductions under Section 80C

Limit: ₹1.5 lakh annually.
You can invest in instruments like Public Provident Fund (PPF), Employees’ Provident Fund (EPF), National Savings Certificates (NSC), Equity-Linked Savings Schemes (ELSS), Life Insurance Premiums, 5-Year Fixed Deposits, and Home Loan Principal Repayments to claim deductions under this section.

2. Use Section 80D for Health Insurance Premiums

Limit: Up to ₹25,000 for individuals below 60 and ₹50,000 for senior citizens.
This section allows for deductions on premiums paid for health insurance for yourself, your spouse, children, and dependent parents.

3. Interest on Home Loan – Section 24(b)

If you own a house and are paying off a home loan, you can claim a deduction of up to ₹2 lakh on the interest component of the loan under Section 24(b) for self-occupied property. For properties rented out, there is no upper limit on the interest deduction.

4. Section 80E – Education Loan Interest

Interest paid on education loans qualifies for a deduction under Section 80E. There is no limit on the amount you can claim, but the deduction is only available for 8 years from the year you start repaying the loan.

5. National Pension Scheme (NPS) – Section 80CCD

Contributions to NPS provide an additional deduction of ₹50,000 under Section 80CCD(1B). This is over and above the ₹1.5 lakh limit of Section 80C.

6. Donations – Section 80G

Contributions to certain charitable institutions and relief funds allow deductions under Section 80G. Some donations qualify for 100% deduction, while others qualify for 50%.

7. House Rent Allowance (HRA)

Salaried individuals living in rented accommodation can claim deductions on House Rent Allowance (HRA). This can reduce the taxable income if the rent paid is greater than 10% of the salary, provided the person doesn’t own a home in the same city.

8. Invest in Tax-Saving Fixed Deposits

A 5-year tax-saving fixed deposit (FD) with a bank allows for a deduction under Section 80C, up to ₹1.5 lakh. However, the interest earned is taxable.

9. Invest in Sukanya Samriddhi Yojana (SSY)

For those with a girl child, investments made in Sukanya Samriddhi Yojana qualify for deductions under Section 80C. The interest earned is tax-free, making this an attractive long-term savings option.

10. Tax-Free Interest Income for Senior Citizens – Section 80TTB

Senior citizens can claim a deduction of up to ₹50,000 on interest earned from savings accounts, fixed deposits, and recurring deposits under Section 80TTB.

11. Leave Travel Allowance (LTA)

You can claim a deduction on travel expenses for domestic trips taken with family members under LTA. This can be claimed twice in a block of four years, and covers only travel costs, not accommodation or food.

12. Standard Deduction for Salaried Employees

A standard deduction of ₹75,000 is available for salaried employees, helping them reduce their taxable income directly without the need to submit bills or proof.

13. Tax Savings with Equity-Linked Savings Scheme (ELSS)

ELSS funds are mutual funds that qualify for tax deductions under Section 80C. They offer the dual benefit of wealth creation and tax savings, although they come with a lock-in period of 3 years.

14. Interest on Savings Account – Section 80TTA

For individuals below 60 years, interest earned on a savings account is eligible for a deduction of up to ₹10,000 under Section 80TTA.

15. Claim Deductions on Preventive Health Checkups

Under Section 80D, individuals can claim deductions for preventive health checkups for themselves, spouse, children, and parents, up to ₹5,000 annually. This is part of the total limit of ₹25,000 or ₹50,000 under Section 80D.

Recent Updates in Taxes

In 2024, several updates and changes were made to India’s tax laws, especially impacting income tax and corporate taxation. Here are the major updates:

1. Income Tax Changes

The Union Budget 2024 brought significant changes to the income tax regime to simplify the system and reduce the tax burden for middle-income taxpayers.

Revised Tax Slabs in New Regime: The new tax regime has been modified with more favorable rates for certain income brackets. Notably:
- Income between ₹3 lakh to ₹7 lakh is now taxed at 5% (previously it was 10% for ₹6-7 lakh).
- Income between ₹7 lakh to ₹10 lakh is taxed at 10%, down from 15%.
- Income above ₹15 lakh remains taxed at 30%.
These changes are expected to save taxpayers around ₹17,500 annually under the new regime.
Increased Standard Deduction: The standard deduction for salaried employees has been increased from ₹50,000 to ₹75,000, providing additional relief to salaried individuals.
Pension-Related Deductions: Deductions for family pensions have been increased from ₹15,000 to ₹25,000, further easing the tax burden on retirees.

2. Corporate Tax Adjustments

India’s corporate tax regime remains stable, with a tax rate of 25% for domestic companies and 30% for foreign entities. However, initiatives continue to streamline compliance through the faceless assessment scheme and encourage digital filings. There is also a focus on providing sector-specific incentives, especially in sustainable and green businesses.

3. GST Updates

The Goods and Services Tax (GST) system has seen some adjustments in 2024 to ease compliance, particularly for small and medium-sized enterprises (SMEs). The threshold for e-invoicing has been lowered, and businesses with an annual turnover exceeding ₹5 crore are now required to adopt electronic invoicing, simplifying tax submissions and audits.

4. Green Tax Incentives

India is increasingly moving towards environmentally-friendly taxation policies. In 2024, tax incentives for purchasing electric vehicles (EVs) and installing solar energy systems are gaining traction, promoting sustainable practices across the nation.

Conclusion: Navigating the Complex Tax System in 2024

Understanding the various types of taxes in India is crucial for individuals and businesses alike. With reforms focused on transparency, simplification, and sustainability, the Indian tax system is becoming more accessible. Whether dealing with direct taxes like income tax and corporate tax or indirect taxes such as GST and customs duty, staying informed ensures compliance and financial efficiency in 2024.