Skip to main content

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 (


Popular posts from this blog

Why it’s important to save for retirement

While retirement may seem far off in the distance for some, financial experts say you’re never too young to begin saving.  In fact, the earlier you calculate your retirement needs and start building your nest egg, the easier it will be to create a viable plan for the future. Many experts advise you begin saving a percentage of your income for retirement as soon as possible, no matter how little the contribution may be, as it’s possible the Social Security benefits millions of people currently depend on may be in jeopardy.

Low interest credit cards - how to make them work for you

Credit cards are borrowing instruments, unlike debit cards where you already have the money. Banks are there to make money too. Just like high street stores, they hope to maximise their profits within the rules. So it’s important to understand the basics and find a credit card that’s right for you – you can compare low APR credit cards here . Now you know the rules, let’s find out how to play the game. The financial services industry charges interest on the money that it lends out. Let us assume you borrow £100 on your credit card and keep it for exactly one year before you pay it back. For the purposes of this article, we will assume your loan attracts 8% interest per year, which is the Annual Percentage Rate, or APR for that particular transaction. Practical example

Brief Overview of Credit Card Machines

The world has witnessed so much of modernization eliminating the cash transactions from businesses. These days we have all sorts of online transaction which is popularized by the help of credit card machines. This is a device that can do transactions with a debit card or a credit card. Credit card machines securely transmit funds from one account to another. It is a Point of Sale terminal that can do transaction with a credit / debit card. This machine allows a merchant to insert, swipe, or key in manually the required credit card information and transmit such data to the merchant service provider for consent and then later on the transfer the fund to the merchant. It is used by merchants to directly capture card information instead of manually entering it in card details. Credit card machines are efficient enough to provide the benefit of decreased transaction processing times.

Four Things to Know About the Housing Market in 2021

Due to the Covid-19 pandemic, the increase in the number of people working from home as well as the initial ban on property transactions in the first lockdown, the housing market in the UK was majorly affected. After the first lockdown, the housing market restarted in the UK and was allowed during the second and third lockdown. The government introduced the stamp duty holiday which definitely helped boost the housing market as well as the buyer's confidence, and due to its overwhelming success, this scheme has been extended till July 2021. Even though the demand for homes increased, the average price of property rose in certain areas and government schemes worked like a charm, the housing market was nowhere close to where it was before the pre-Covid era. While no experts can predict with any amount of certainty the future of the housing industry in the UK, here are the four things that you need to know about the housing market in the UK in 2021. Increase in demand for properties in

Peer-to-peer Lending Oprions for Students

Is peer-to-peer lending safe? Going to college is necessary in this day and age if you hope to get a good paying job. However, finding the money to do so isn’t always easy. One method of getting money for college is to take out a student loan from the government. Another is to go a private lending institution, such as a bank or credit union. A third method, and one that is becoming more and more popular, is to get a loan from a private individual. This type of loan is usually called peer-to-peer (P2P) lending. Following are a few options for students who are seeking a peer-to-peer loan. What Is Peer-to-Peer Lending? Peer-to-peer lending is essentially a financial agreement that takes place between individuals. One party, you, borrows money from someone else. It works the same way as a traditional loan because unlike a scholarship, grant, or gift, you will be expected to pay the money back, on time, and with interest tacked on. You and the lender agree on how much will be paid back wit

Responsibilities a Property Management Company Needs to Handle

When you are considering investing in a residential or commercial property, you need to plan a number of things. At such times, getting help from the right professionals may be of immense help. You may consider opting for property management companies for handling the responsibilities. Understanding the tasks, before and after the purchase, these companies handle is necessary before you employ them.

Why comparing ISA rates is a necessity?

Investment is not about the capital you put in an account, it is your ability to judge risk and return trade-off. Unless you weigh your decision carefully you may end up making no profit. Choosing the best ISA provider therefore could be a difficult task. If you are investing in cash ISAs you must have few hundreds of options to test the best. One should compare ISA rates for the bigger return. But who can help you on this? How do you know which Cash ISAs is giving better interest rate? What are the terms and conditions? Who are the account providers? Are these accounts easily accessible? What others are talking about those ISA accounts?  How advantageous cash ISAs could be in terms of risk coverage?