Tax laws cover direct taxes which you pay directly on your income or profits and indirect taxes which are added to the price of goods and services you buy. The system can seem complex but it is designed to ensure fairness, with higher earners typically paying more. Paying taxes is a legal obligation and understanding tax laws in India helps you avoid penalties, claim deductions and plan your finances better. For businesses, compliance with these laws is important for smooth operations and avoiding legal issues. Recent changes like the introduction of GST have made the system more streamlined but staying updated is key.
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What are theTax Laws in India?
Tax laws in India are rooted in the Constitution, which divides taxing powers between the Central Government and State Governments. The Central Government levies taxes like income tax, corporate tax and customs duty, while State Governments impose taxes such as value-added tax (VAT), stamp duty and land revenue. A key principle, outlined in Article 265 of the Constitution is that no tax can be levied without legal authority, ensuring all taxes are backed by specific laws passed by Parliament or State Legislatures.
The tax system is broadly divided into:
Direct Taxes: Levied on income or profits, such as income tax for individuals and corporate tax for companies.
Indirect Taxes: Applied to goods and services, such as GST and customs duty, which are included in the price paid by consumers.
In 2017, the introduction of the Goods and Services Tax (GST) marked a significant reform, unifying multiple indirect taxes into a single system to simplify compliance and reduce tax cascading.
Which Law Governs Income Tax in India?
Income tax is a direct tax levied on the income of individuals, Hindu Undivided Families (HUFs), firms, companies and other entities. It is governed by the Income Tax Act, 1961, administered by the Income Tax Department under the Central Board of Direct Taxes (CBDT). Following are the key features of the Act:
Taxpayer Categories
Income tax applies to individuals, HUFs, firms, companies, associations of persons (AOPs), bodies of individuals (BOIs), local authorities and artificial juridical persons.
Residential Status: Determines the scope of taxable income:
Resident and Ordinarily Resident (ROR): Taxed on worldwide income.
Resident but Not Ordinarily Resident (RNOR): Taxed on income earned in India or from a business controlled in India.
Non-Resident (NR): Taxed only on income earned or received in India.
Heads of Income
Heads of Income means the sources of income which are considered by the Law are taxable under Income Tax Act, 1961. Income is classified under five categories:
Salary: Earnings from employment or pensions.
House Property: Income from renting out property.
Business or Profession: Profits from self-employment or professional services.
Capital Gains: Profits from selling assets like property or shares.
Other Sources: Income from savings interest, dividends, or lotteries.
Tax Regimes
A tax regime is a system or framework of rules and regulations that governs how taxes are imposed, collected and managed, such as the old or new tax regime under the Income Tax Act, 1961, which offer different tax rates and exemptions. Taxpayers can choose between:
Old Regime: Offers deductions (e.g., under Section 80C for investments) but has higher tax rates.
New Regime: Introduced in 2020, it has lower tax rates but fewer deductions.
Tax Slabs (Old Regime, Individuals <60 years, AY 2025-26)
The Tax Slabs (Old Regime, Individuals <60 years, AY 2025-26) refer to the income tax rates and brackets applied to individuals under 60 years old for the Assessment Year 2025-26 (for income earned in Financial Year 2024-25) under the old tax regime in India. The table below is the rate of such tax
Income Range | Tax Rate |
Up to ₹2.5 lakh | 0% (No tax) |
₹2.5 lakh - ₹5 lakh | 5% |
₹5 lakh - ₹10 lakh | 20% |
Above ₹10 lakh | 30% |
Deductions and Exemptions
Deductions in Income Tax Act, 1961 is mainly given under Section 80C, Section 80D and Section 24. These deductions are as follows:
Section 80C: Up to ₹1.5 lakh for investments like PPF, ELSS, or life insurance.
Section 80D: Up to ₹1 lakh for health insurance premiums.
Section 24: Up to ₹2 lakh for home loan interest (self-occupied property).
Filing Income Tax Returns (ITR)
Filing Income Tax Returns (ITR) is mandatory for those with taxable income above the exemption limit. The due date for AY 2025-26 is September 15, 2025 which was extended from July 31, 2025. Late filing incurs penalties up to ₹5,000 and interest under Section 234A.
Recent Updates
The new tax regime has been made more attractive with a higher rebate limit (up to ₹7 lakh tax-free income) and revised slabs for AY 2025-26. Digital tools, like the e-filing portal simplify ITR submission.
Read Section 147 of Income Tax Act, 1961.
Goods and Services Tax (GST)
GST, introduced on July 1, 2017, under the Central Goods and Services Tax Act, 2017, is a landmark reform in tax laws in India. It replaced multiple indirect taxes like excise duty, service tax and VAT, creating a unified tax system. Key features include:
Types of GST
The Goods and Services Tax (GST) in India has four main types: CGST (Central GST), SGST (State), IGST (Integrated GST) and UTGST (Union Territory GST). Each type applies to specific transactions to streamline indirect taxation:
Central GST (CGST): Levied by the Central Government on intra-state supplies.
State GST (SGST): Levied by State Governments on intra-state supplies.
Integrated GST (IGST): Levied by the Central Government on inter-state supplies and imports.
Union Territory GST (UTGST): Levied in Union Territories without legislatures.
Tax Rates: GST rates are structured in slabs
GST rates in India are structured in slabs of 0%, 5%, 12%, 18% and 28%, applied based on the type of goods or services. Essential items have lower or no tax, while luxury goods and services attract higher rates.
GST Rate | Examples of Goods/Services |
0% | Food grains, milk, jaggery |
5% | Sugar, edible oil, apparel below ₹1,000 |
12% | Processed foods, mobile phones |
18% | Most goods and services (e.g., electronics) |
28% | Luxury goods (e.g., high-end cars, tobacco) |
Exemptions: Goods like alcohol for human consumption, petroleum products and electricity are not under GST but are taxed by states.
Registration and Compliance: Businesses with an annual turnover above ₹40 lakh (₹20 lakh for special category states) must register on the GST portal (https://www.gst.gov.in). They must file regular returns and use e-way bills for goods transport.
GST Council: A constitutional body, chaired by the Union Finance Minister, decides GST rates and policies.
Benefits
GST has unified India’s market, making tax laws in India more business-friendly
No Cascading Effect: Input tax credits prevent double taxation.
Simplified Compliance: A single tax system reduces paperwork.
Transparency: Digital tools like e-invoicing and e-way bills curb tax evasion.
Learn about the Principles of Corporate Governance.
What are Corporate Tax
Corporate tax is a direct tax on the net profits of companies, governed by the Income Tax Act, 1961. It applies to both domestic and foreign companies, with rates varying based on residency and turnover. Key features include:
Tax Rates
Domestic Companies: 22% under the new regime (introduced in 2019), with a 10% surcharge and 4% health and education cess. Companies with turnover above ₹400 crore may face higher rates (up to 30%).
Foreign Companies: 40% on income earned in India, with surcharges (2-5%) and cess.
Minimum Alternative Tax (MAT)
This part describes MAT, which ensures companies pay a minimum tax of 15% on book profits (or 9% for IFSC units) if their regular tax liability is lower. It applies to companies under the old regime but not those opting for the new regime. MAT credit can be carried forward for 15 years to offset future taxes.
Residency-Based Taxation
Residency-based taxation clarifies how taxation depends on a company’s residency. Domestic companies are taxed on their global income, while foreign companies are taxed only on income sourced in India, such as business profits, royalties, or capital gains from Indian assets.
Deductions
Deductions available under the old regime, includes depreciation (Section 32), donations (Section 80G) and capital gains exemptions (e.g., Sections 54EC, 54F). It also notes that business expenses like rent and salaries are deductible, but companies under the new regime forgo most deductions for a lower tax rate.
Recent Changes
In 2019, the government reduced corporate tax rates to 22% for existing domestic companies and 15% for new manufacturing companies to attract investment The effective tax rate, including surcharges and cess, can reach 25.17% for domestic companies and 43.68% for foreign companies. Corporate tax reforms have made India a more competitive destination for businesses.
Also, Get to Know About Kotak Mahindra Bank's Acquisition of Sonata Finance Case Study
Other Important Taxes
Beyond income tax, GST and corporate tax, other taxes form part of tax laws in India. These taxes address specific economic activities and they contribute to government revenue:
Securities Transaction Tax (STT): Levied on stock market transactions.
Capital Gains Tax: Applied to profits from selling assets like property or shares. Long-term capital gains (held over 24 months) are taxed at 20%, while short-term gains follow income tax slabs.
Agricultural Income: Exempt from income tax under Section 10(1) but may be taxed by states.
Wealth Tax: Abolished in 2016, replaced by a surcharge on high-income earners.
Recent Changes and Updates
Tax laws in India are dynamic with regular updates to reflect economic needs. These changes aim to simplify tax laws in India and encourage compliance:
New Tax Regime: Offers lower rates but fewer deductions, with a tax-free limit of ₹7 lakh for individuals (AY 2025-26).
GST Reforms: The GST Council regularly reviews rates to balance consumer and industry needs.
Digitalization: E-filing, e-way bills and e-invoicing have streamlined compliance, reducing paperwork and enhancing transparency.
Summary
Tax laws in India are essential for funding national development while ensuring fairness in revenue collection. From income tax for individuals to GST for goods and services and corporate tax for businesses, these laws impact everyone. Recent reforms like GST and corporate tax cuts have made the system more efficient but its complexity can still be daunting. Staying informed and seeking professional advice when needed can help individuals and businesses navigate tax laws in India effectively.
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Tax Laws in India: FAQs
Q1. How many tax laws are there in India?
There are over 20 major tax laws in India, including the Income Tax Act, 1961, GST Act, 2017 and various state-level tax laws.
Q2. What are the tax rules in India?
Tax rules in India include direct taxes (e.g., income tax, corporate tax) under the Income Tax Act and indirect taxes (e.g., GST, customs) governed by laws like the CGST Act, with rates and exemptions varying by income, goods, or services.
Q3. Is 7 lakh income tax free?
Yes, under the new tax regime for AY 2025-26, individuals with income up to ₹7 lakh pay no tax due to a ₹50,000 standard deduction and a ₹25,000 rebate under Section 87A.
Q4. What are the 7 principles of taxation in India?
The seven principles include equity, certainty, convenience, economy, simplicity, productivity and elasticity, ensuring taxes are fair, predictable, easy to pay, cost-effective, simple, revenue-generating and adaptable.
