Sep 26, 2012

Overview of the Indian Tax System

The Indian tax system can be very complex, but for a clearer understanding, we can break it down into simple elements that make up one’s personal income:

a) Salary from an Employer.

b) Rental (house property) income

c) Capital gains (gain or losses made by the buying and selling of Shares and other capital assets)

d) Business income – income earned as a professional or as a partner in a firm.

e) Other sources of income such as interest and dividends.

Put all these incomes together and you get your Gross Total Income. It is called “gross” total income because you can reduce this income by various schemes available. These are called Tax Deductions. You can reduce your tax liability by investing in either of the following tax deductions:

a)  Invest money into a Provident Fund account

b) Investing a term deposit (FD) for 5 years

c) Paying premium of life insurance policy for yourself, your spouse and your children.

d) Repaying the principal component of a home loan.
e) Paying the Tuition Fees for the education of your children.


The above tax deductions can help you reduce your taxable income by upto Rs 100000 under Section 80c of the Indian Income Tax Act.

There are other tax deductions which are applied when you pay premiums of a mediclaim policy or when you give donations to recognized charitable organizations or when you pay the interest of an education loan, amongst several others that help you further reduce your taxable income.

After the tax deductions have been applied we arrive at your Total Income. We can then calculate your tax liability as per the following tax slabs:

There are basic exemptions limits on which you pay no tax. Any income over these limits is then taxed at different rates listed below:

For the assessment year 2012-2013, the basic exemption limits are:
Rs. 180000 for men, Rs. 190000 for women and Rs. 250000 for senior citizens

All Income Over the basic exemption limit but below Rs. 500000 will be taxed at 10%.

Income over Rs. 500000 but below Rs. 800000 will be taxed at 20%.
and lastly,
Income over Rs. 800000 and above is charged at 30%.

Once your tax liability is determined, all your tax credits such as TDS, advance taxes and self assessment taxes are deducted from your liability to get to a final grand total of the possible taxes that you may pay or get refunded.

Working Example:

A Male, aged 45 with a Salary Income of Rs. 250000 and Interest Income of Rs. 50000, a Rs. 5000 Investment in Employee Provident Fund and a total TDS of Rs. 5000 in the assessment year 2012-2013 will be taxed as follows:

Gross Total Income: Rs. 250000 + Rs. 50000 = Rs. 300000
Tax Deduction: Rs. 5000 (Investment in EPF)
Total Income: Rs. 295000
Basic Tax Exemption: Rs. 180000
So you have to now pay Tax on Rs. 115000 @ 10% = Rs. 11500
But you have already paid TDS of Rs. 5000, which is deducted from Rs. 11500 to arrive at a final tax figure of Rs. 6500 + Surcharge + Education Cess which is payable as your final tax liability.

The above article has especially written for Finance Buzz on Tax system in India by Aashish Ramchand, a Chartered Accountant by profession and Co-Founder of Make My Returns (www.makemyreturns.com)

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