12

Basic Tax Structure

Learning Outcomes
Ater studying this chapter, yoU should be able to understand:
> Define tax structure of India,
Explain diferent types of tax prevailing in Inia,
> Explain tax authorities of ndia,
> Understand the income tax slabs rate,
>Compare the old and new tax regimne.

121 Introducion
the largest source of income for
ndia offers a well-structured tax system for its population. Taxes are
purposes and projects for the development of the
e government. This money is deployed for various
nation. for
general public in the form of taxes which it uses
Ihe government collects money from the The general public may comprise
aifferent developmental schemes and functioning of the economy.
Salaried people, business people, industrialists and many other service providers. All these people pay
efficiently. ln your lifetime, you definitely
laxes with the expectation that the government would function
things in the market, is inclusive of taxes that have
taxes. The prices that we pay when we buy
nave topay Wnen We earn money. Not manv
been charged on them. We bear taxes when we spend money and alsOhave often heard your eldere en
of uswillingly part with their hard earned money
for taxes. You must
the duty of every citizen but an
what do we get that we should pay taxes?" Payment of taxes 1s not only
prosperaus Secure, Stable and a just nation.etate
essential requirement for existence of our country as a
154 || Personal Financial Planning

You know that government spends money for providing many public services,
police, defence, etc., and basic facilities such as schools and hospitals to the poor and like, highwas,
underprivilegel
thus creating an egalitarian society. Itis also used for funding developmental programmes and serviore
Government gets money from taxes and therefore it is vital for all its citizens to pay taxes. However a
the same time it is important for us to learn to be wise and smart so that all taxes that we legally owe are
paid - and not a rupee more.

12.2 Tax Structure of India

India has a well-developed taxation structure. The tax system in India is mainly a
comprising the Central government, State Governments and the local government's three-tier system,
include panchayats and municipalities. The government cannot impose any tax organizations which
law. The entire system is clearly demarcated with specific roles for the unless it is passed as a
The Central Government of India levies taxes such as central and state government.
customs duty, income tax, service tax, and central
excise duty.
The taxation system in India empowers the state
income, professional tax, value added tax (VAT), stategovernments to levy income tax on agricultural
excise duty, land revenue and stamp duty. Ine
local bodies are allowed to collect octroi,
and water supply.
property tax, and other taxes on various services like
dranag

12.3 Types of Taxes

As said earlier we pay different types of
taxes to the
indirect. Direct taxes are those that are imposed andgovernment,
paid by
which can be classified as direct and
(1ike. taxes on income and wealth) Indirect taxes are the tax payer directly to the
those taxes that governmen
we pay indirectly tothe governmens
(1ike, taxes on commodities). An
payments that we have to make understanding these taxes is necessary for us to be aware of tue
of
Taxes are classified under two categories namely
direct and indirect taxes. The largest
between these taxes is their implementation. difference
() Direct Toxes
Direct taxes are paid by the assessee while indirect taxes are levied on
are levied on individuals and corporate entities and cannot be
goods and services. Direct
taxes
income tax, wealth tax, and gift tax. transferred others. These include
to

Income Tax
Atax levied against people or organisations (taxpayers) about their income or
Tax rates proits is known asused
an
income tax (commonly called taxable income). multiplied by taxable income are
typically
to calculate income taxes.
eof funding for the governmcnt. Taxation is the
Taxes are the primary source provessNoofmatter
Atax is a mandatory levy or chargesthe governmentimposes on people or businesses. levyingwhether
taxes.
 Basic Tax Structure || 155

receives asimilar return on the goods

unten thegovernment
pay
thetax. The income and wealth of individuals or
and services, the taxed parties are still required to
corporations may be subject to taxes, which may
rate.
also varyin
Salaried workers make up the majority of the nation's
taxpayers overall, and thus have a substantial impact on the
amount of taxes collected. The salaried class has access to
various tax-saving alternatives through income tax deductions.
One could significantly lower their tax obligation using these
deductions and exemptions. "There are 120 exemptions under
the Sprevious tax regime" Not all of themn provide benefits
miit iszAtpass.a
ions to taxpayers. Most of these make the direct tax system more INCOMETAX DEPARTMENT
e govemt complicated. The Ministry of Finance has eliminated over 70
ax, and cet exemptions after carefulconsideration. The new tax system does not permit maximum deductions.
) Indirect Taxes
n agriauta
hirect taxes are not directly paid by the assessee to the government authorities. These are levied on
likedring gods and services and collected by intermediaries (those who sell goods or offer services). Here are the
most common indirect taxes in India:
0 Value Added Tax (VAT): This is levied by the state government and was not imposed by all
states when frst implemented. Presently, all states levy such tax. It is imposed on goods sold in
the state and the rate is decided by the state governments.
sdireasal
gorernmt
) Customs Duty: Imported goods brought into the country are charged with customs duty which
is levied by the Central Government.
Orernnet
) Octroi: Goods that move from one state to another are liable to octroi duty. This tax is levied by
the respective state governments.
diferent
) Excise Duty: All goods produced domestically are charged with excise duty. Also known as
Central Value Added Tax (CENVAT), this is paid by the manufacturers.
) Service Tax: All services provided domestically are charged with service tax. The tax is paid by
allservice providers unless specifically exempted.
) Goods and Service Tax (GST): As a significant step towards the reform of indirect taxation
in India, the Central Government has introduced the Goods and Service Tax (GST), GST is
a comprehensive indirect tax on manufacture, sale and consumption of goods and services
throughout India and will subsume many indirect taxes levied by the Central and State
Governments, GST will be implemented through Central GST (CGST), Integrated GST (IGST)
and State GST (SGST), Four laws (IGST; CGST, OTGST &GST (Compensation to the States)
Act) have received President assent. All the States &UTexpected to pass State GST Act. by end
rused
OMay 2017. GST law is expected to take effect from July 1, 2017.
GST has three Cormponents:
(a) CGST:: Stands for Central Goods and Services Act. The central
ares

iether
an intrastate supply of goods or services.
government collects this taX on
156 || Personal Financial Planning

(b) SGST: Stands for State Goods and Services Tax. The state government collects this tax on an
intrastate supply of goods or services.
(c) IGST: Stands for Integrated Goods and Services Tax. The central government collects this tor
inter-state sale of goods or services.

Basic Tax System

In India

DieCtTax
Indirect Tax Tax on Tai

income lax GST

Surcharge ess

Agricuitural Tax

Fig-1: Tax Structure In India

12.4 Revenue Authorities

(BDT
The Central Board of Direct Taxes (CBDT) is a part ofthe Department of Revenue under the Ministryof
Finance. This body provides inputs for policy and planning of direct taxes in India and is also responsible
for administration of direct tax laws through the ncome Tax Department.
(BEC
alsoar
The Central Board of Excise and Customs (CBEC) is
the De
(evenue ul
Ministry of Finance. It is the nodal national agency respo Oms, centr
duty and service tax in India.
 from ml
income. This
will be so even if a person maintains always be typical for all the sources of
Thetotal income of a
diferent sources of income. records
or books of
accounts
person
takentogetherand considered in the previous year or from all thesources separately
of income
for
will be
the financial year immediately preceding
the assesSment year.
PERSON- These are seven categories of persons chargeable to tax
definition is inclusivee and not exhaustive. Therefore, any person, not
under the Act. The aforesaid
still fall within the four corners of falling in the above mentioned
seven categories, May the
term "person' and accordingly may
be liable to tax.

partdirectmenttaxesof inRevenue underthe ACSESSEE: "Assessee means a person by whom income tax or any other sum of money is
der the Act, and it includes: Every person in respect of whom any proceeding under payable
the Act
India andis also Miisn boc heen taken for the assessment of his income or loss or the amount of refund due to him. A

Department. a
respon morson who is assessable in respect of incomeor loss of another person or who is deemed tobe an
assessee or An Assessee in default under any provision of the Act.

25 Various Heads Under Income Tax

tof the Department of Revenue uale nderIncome Tax, 1961 the Tax is been Calculated into Five Categories under:
e for administering customs, cental aive Heads of Income Tax:
. Income from salary
158 || Personal Financial Planning

. Income from house property

Income from profts and gains from business or profession
Income from capital gains
. Income from other sources

Incorme
from
Salary
IncofMe Incomne
from from
Other House
Heads of Property
Inco ne
(Sec-l4]
Profits and
from Gains of
Capital Busincss
and
Gain Profession

Income from Salary

Any income that you receive in terms of the service you provide on a contract of employment is applical
for taxation under this head. This incudes salary, advance salary, perquisites, gratuity, commisia
annual bonus and pension.

TDS

salary
he
Thistax head also includes some exemptions:
Youcan
House Rent Allowance (HRA): As a salaried individual, if you live in a rented house,
claim House Rent Allowance for partial or complete tax
exemptions.
Conveyance Allowance: You can get a monthly tax exemption of up to actual expenditure. Car
 Basic Tax Structure || 159

Ihcomefrom HHouse Property

individual'sincome from his or her property or land is taxable under the head of income from house
An
property.To put it simply, this head includes the policy for calculating the tax on rental incomethat you
receive from your properties.

TAX

Ifyou own more than oneself-occupiedhouse, then only one house is considered to be occupied, and
the rest are considered to be rented out. The taxation occurs on income received from both commercial
and residential property.
Icome trom Profits and Gains from Business or Profession
Ihe profits that you earn from any kind of business or profession are taxable
nder this head. You can subtract your expenses from the total income to
-is applicah
Commisin determine the amount on which tax is chargeable. Here are the types of income
that are chargeable under this head:
" Profits generated from selling a certain license.
" Gains earned by an individual during an assessment year.
income.
" Theprofits that an organisation makes on its
Cash received on the export of a government scheme.
The benefits thata business receives.
" Gains, bonuses or salary that an individual receives
due to a partnership with a firm.

Income from Capital Gains

Aen you earn proits by transferring or selling an asset that was Capital Gain
is taxable under the head of
held as an investment, that income assets, like gold, bonds, mutual
Income from capital gains. Many under capital assets. Now, you can
stocks, etc., fall
Oucan

funds, real estate, short-term capital gains and long-term

subdivide capital gains into
Capital gains.
160 || Personal Financial Planning
period of 36 months or more,,they wil l
them for a
assetsafter holding Alternatively, if you sell your capital assets
When you sell your
capital
capital
gain and
under long-term months. the tax deduction will
within

date.
a period of36
rate

applicable if yousell
In the case of securities, this is
of

your
20%.
will have atax be under short-term capital gain from
holdings within 12 months
Lotery
at the rate of15r
the purchase

Income from Other Sources

Income from Other Sources races,

Biden

winnings from lotteries, horse

One-time incomes such as gambling or betting ofany
form
crossword puzzles, card games, Sources.
Income fromOther
are categorised under

12.6 Income Tax Slab partnershipfirms, LLPsand Corporates

HUE
on the income earnedbyallindividuals, tax is levied as per the slab system iftheir
Incometaxislevied India. In the case of
individuals,
the Income-tax Act of (known as the basic exemption limit).
as per minimum threshold limit
income is above the
means
Income Tax Slab?
a slab system. A slab system
1. What is taxpayers based on increasing with
Income-tax levies tax on individual ranges. It means the tax rates keep
Indian prescribed for different income
enables progressive and fair tax systems in
different tax rates are taxation
the taxpayer's income. This type of
change during every budget. These slab rates are
an increase in undergo a of individual
country. Such income tax slabs tend to Income tax has classified three categories
the categories of taxpayers.
different for diferent
"taxpayers such as:
years) including residents and non-residents
than 60
" Individuals (aged less years of age)
(60 to 80
. Resident Senior citizens
(aged more than 80 years)
Resident Super senior citizens
Rates for FY 2022-23 (AY 2023-24)
2. Income Tax Slab Why is it optional?. In t
for FY 2022-23 (AY 2023-24), New Tax regime (115BAC)
Income tax slab rate choose either:
an OPTION to certa
new regime, taxpayers has per New Tax regime on the condition that they forgo
lower rates as
" To pay income tax at deductions available under income tax, Or rebatesand
permissible exemptions and avail of
assessee can
continue to pay taxes under the existing tax rates. The
. To
tax at the existing higher rate.
paying optionto
exemptions by staying in the old regime and the
(2019-2020) and new tax slabs (2022-2023). The tax payerhas
There are old tax slabs
liability.
choose from any of thetax slabs according to tax
New Tax Slabs
Old Tax Slabs
Nil
Up to 2.5 lac Nil Up to 2.5 laklh
5%
2.5 lac more -5 lakh
72.5 lakh more- 5lakh 5%
 Basic Tax Structure || l61

Old Tax Slabs New Tax Slabs

75 lakh more -10 lakh 20% 75 lakh more -7.5 lakh 10%

T10lakh & above 30% 77.5 lakh more -F10 lakh 15%
710 lakh more -12.5 lakh 20%
712.5 lakh more -15 lakh 25%
T15 lakh & above 30%

?3,00,000 is tax exempted.

"la case of senior citizens, Income up to
for income between 73,00,000 -*5,00,000
*lh case of senior citizens, income slab applicable is

haome Tax Slabs for Individual Aged below 60 Years &HUF

Income Tax Slab Individuals below the age of 60 years- Income Tax Slabs
NIL
Upto 2.5 lakh
5%
2.5 lakh more - 75 lakh
75 lac more -10 lakh 20%
30%
10 lakh & above

Wote:
exemnption limit is up to T2,50,000 for Individuals, HUF below 60 years aged and
. Income tax
NRIS.
be applicable on the tax amountcalculated as
L. An additional 4% Health & education cess will
above.

rcharge Income above the specified limits, it is

arge is an additional charge levied for persons earning
arged on the amount of income tax calculated as per applicable rates
" 10% - Taxable Income above 750 lakh - up to ?1 crore
" 15%- Taxable Income above 1 crore - up to 2 crore
" 25% - Taxable Income above 22 crore - up to 75 crore
" 37% - Taxable Income above 75 crore
Maximun rate of Surcharge on Income by way of Dividend or Income under the provisions of
tions 111A. 112A and 115AD is 15%.
The tax calculated on the basis of such rates will be subject to health and education cess of 4Y0.
Any individual opting to be taxed under the new tax regime from Fy 2020-21 onwards will have to
*up certain exemptions and deductions
compared to new regime.
So we can compare whenever we decide about whether we have to choose between new
or the old regime. regitE
Q4. Mr. Sonu, a resident of India, was born on 7.11.1957. He submits the
the assessment year 2022-23. following information
His taxable income would be calculated as follows:

Components Amount ()
Basic Salary 16,000 PM.
D.A.
30% of Basic Salary
Income from other sources
1,50,000
He contributes 50,000 to public provident fund during the
liability under old tax regime and the New tax regime.
previous year. Calculate his total ta:
Components Old Tax Regime New Tax Regime
Income from salary
Basic salary (16,000*12) 1,92,000
 Basic Tax Struct. r2 167

omponents Old Tax Regime New Tx Pec

A. 57,600
ross salary income 2,49,600
es- Standard deduction 50,000 1,99,600 2,49,60C
come from other sources 1,50,000 150,000
ross total income 3,49.60o 3,99,600
es: Deductions u/s 80c 50,000
axable income 2,99,600 3,99,600
a on 2,99,600 (being senior citizen)/tax on Nil 7,480
99,600 whether senior or not
ASS: Rebate (u/s 87A)
7,480
Sdd: Surcharge
id:Health &
Education Cess (4%)
Rotal Tax Liability
5. Mr. (Payable) NII NII
rthe Sachin, resident of India, was born on
a
7.11.1987. He submits the following information
basisassessment
Salary:
year 2022-23
 14

Income Tax Allowances

and Deductions

larning Outcomes
Aier studying this chapter, you should be able to understand:
Meaning of allowances and deductions;
Diferentiate between exemption and deduction;
Deduction and exemption allowed tosalaried employees;
º Deductions with market linked instruments;
Taxable, non-taxable and partially taxable allowance;
Deduction, Exemption not available in new tax regime.

4] Introduction
contribution
Salaried employees form the major chunk of the overall taxpayers in the country and the
the tax collection is quite significant. Income tax deductions offer a gamut of opportunities
make to
could
Ving tax for the salaried class. With the help of these deductions and exemptions and, one beneit
tax substantially. In the 'old tax regime there are 120exemptions. Taxpayers do not
Teduceallof them.
his/her Most of them complicate the direct tax system. After thorough study, the Ministry
of Finance has removed around 70 exemptions. In the new tax regime maximum deductions are not
OWed. In this chapter, we try to list some of the major deductions and allowances, available to the
salaried
persons, using, which one can reduce their income tax liability.
178 | Personal Financial Planning
Deductions
14.2 Meaning of Allowances ond income is anywhereabove after
5 lakhs in a
all. Thevfinancial year, you
As per the current tax
your
regulations,if so bad allowyou
regulations are not to
plans their:taxes to lower
income tax everyone
would have to Paytaxes. However, because of these options that tax liability. Tax exemptions and Tar
make
options. It is in their
your tax liability by various availthe maximum reduction liability.
most ofit. Everyone wants to which allowlowering of yourtax and
such options they are not. Meaning usage are
deductions are two
these two terms
sound similar. But
To most of the people,
and vice-versa due to lack of technical
completely different. exemption for atax
deduction
Most of us substitute tax tax liability. So, why bother with the details?
getting a reduced two separateterms with separate
knowledge. They are, after all, Exemption and Tax Deduction are
that Tax
Let us nowunderstand their difference is necessary.
knowing
tax treatments. Thus,

14.3 Exemption reducing

investment on which no tax is levied and thus
expenditure, income or an to aspecific head of
income and ca
Tax exemption can be These incomes or
investments pertain
specific income head,
the overall taxable income. only. After deducting allowed exemptions from the
heads
be claimed from thoseincome gross income.
are totaled to arrive at the
the different heads of
are:
Some Example of tax exempt items
(HRA)
1. House Rent Allowance
(LTA)
2. Leave Travel Allowance assessment.
received in the year of
3. Any Gratuity/VRS/pension
4. Company accommodation.
5. Leave Encashment
taxable portion of Income from Salary would be obtainea.
availed, the
After these exemptions are employee
before thea
must be informed to his employer source(TDS)
claimed by an
Allexempt items of income computes tax on the balance income
and deducts tax at
filing season. The employer then employee.
based on the specific income slab of each under
3
capitalwithin
tax. In addition, long-term bonds
agriculture is exempted
For example, inconme from be reinvested in a real estate
property or specified (HRA)asa
arising from the sale of a property can Salaried individuals get house rent
allowance conditions.
period to get tax exemption. under certain
a certain time can be used to claim tax exemption Maturity/Death
component of their salary. This component of PPE,
interest income
Tax exemptions can also be termed
as tax free incomes. For eg, the first place.
from life insurance policies. In short, incomes which are not taxable in
benefit
from
14.3 Deductions amount

compute your gross total income, the Income Tax Act allows you to deduct some
Once you liability.
your income. So that your income reduces and thereby reduces your tax
 Income Tax Allowances and Deductions | 179

Thisamountis based on certain investments or expenses you make in a financial year as per Income
Actcalled Deductions. Allowed deductions can be found in Chapter VIA ofthe Income Tax Act.
80U
is chapter contains sections 80C to
Common examples incude lite insurance premiums, tuition fees, health insurance premiums, ELSS
ostm ents, PPF investment, Repayment of principal component of home loan etc.
Moreover, there are certain other deductions available from a particular head, like standard
onction from salary income, Interest paid on home loan from "Income from house property" which
elp in lowering tax outgo.
Tax deductions are deducted from thegross total income or individual head to help save taxes.
Kemption Vs Deduction
efollowing are the difference between the tax exemption and tax deduction.
Incidence
Tax exemption - The allowed exemptions are not included in your taxable income. They are
deducted first to arrive at your gross total income.
Tax deduction - Deductions remain clubbed with your income. Once the gross total income is
calculated, thedeductions are deducted toarrive at Net taxable income. Onthis income, tax slabs
are applied to calculate the tax amount.
Application
lax exemption - Exemnptions are applied at each head of income to get the taxable amount of that
particular head.
lax deduction - Deductions are applied to your gross total income.

Significance
ax exemption - It consistsof those items which are not taxable.
lax deduction- Deductions are those items which are taxable but because of the provisions of the
act, their taxability has been reduced.

ApplTaxicability
exemption-
employee
Itcapplies
a to alltaxpayers in the country. Forinstance, the amount paid to asalaried
as HRA is not taxable.
Tax deduction - It applies only to those who qualify for the specific criteria. For instance, Section
80D of the lncome Tax Act can be used to claim deductions on premiums paid for medical insurance
policies.
So, though exemptions and deductions have the same goal - reduction of your tax outgo, they are
Afferent. You should know the difference to file your taxes properly. Mistakes in tax fling can lead
penalties isand unnecessary hassles. Though they sound technical the concept of exemptions and
eductions
aXes, know not complicated. Just alittle understanding is all you need. So, the next time youfle your
which items are exemptions, which aredeductions and how they differ.
 The The
encashment
Leave Pension Gratuity
component
Income 14.6
balance
employer
Income
of
calculates
the
component Tax
resignation
retirement orretirement
Allowed timeof
pension
Commuted disablementAllowed
resignation
Criteria
Exemptions
the
tax
(non-exempt
at allowed on exemption
value retirement
for
the or
exemption
death
Claimed
time at of
the the
portion) on
of| or or the in
" "
Least
"
Least retirement
Exemption Specitic
is
al (i) Amount
completed
(i)service;
maximum of Average pension.
Salary normal
total Ifamendment);
of f
actually tperhe F20 of
received.
Gratuity
of
Last taxed
gratuity
not is the the of
Leave StateLeave
eased
retirement the lakhyearssalary the
nt
specified per
following:
salary
amount
employee
following: along and Cases
government
ashment 30 (which of allowed
encashment day* employment(basic resignation
oyees
of or days of with
drawn
ntresignation by total
received,receives has
unutilised
leave + the
the for beendearness
received
isemployee
received
normal basic
fully government per the benefits
gratuity hiked15/26;
ed. is year)leave last then salary
xempt. by fully pension. allowance)*
at 10 one-half
legal the by for
months; then
from mentioned
exempt; Central (considering
i.e. of
every 710 the
heirs time3,00,000 one-third
of lakh number emplovee
o> of or year the
as belour