Paying tax

Taxes are compulsory payments to the government. They pay for schools, hospitals, transport, defence and other public services. There are two kinds:

• Direct taxes: paid directly on income or profit by the person who earns it, for example income tax.
• Indirect taxes: included in what we pay for goods and services, for example GST (Goods and Services Tax); the shop collects it, but the buyer pays it.

Personal income tax is charged on what a person earns during a financial year (1 April to 31 March). Everyone with income must pay, except people below a certain limit. It is progressive: the more you earn, the higher the rate on the higher part of your income, because people who can afford more contribute more. Paying taxes honestly and on time is a citizen's duty.

India uses tax slabs (Table 5.1, new tax regime for FY 2025-26). Each band of income is taxed at its own rate:

• up to Rs 4 lakh: nil;
• Rs 4-8 lakh: 5%;
• Rs 8-12 lakh: 10%;
• Rs 12-16 lakh: 15%;
• Rs 16-20 lakh: 20%;
• Rs 20-24 lakh: 25%;
• above Rs 24 lakh: 30%.

Each year the Ministry of Finance proposes the slabs in the Union Budget. The CBDT (Central Board of Direct Taxes) runs the direct-tax laws.

Worked example: Priya earns Rs 14 lakh a year.

• Step 1: taxable income. Salaried people may subtract a fixed standard deduction from their income before working out tax. It is not paid to anyone; it just lowers the income that is taxed. Rs 14,00,000 - Rs 75,000 = Rs 13,25,000.
• Step 2: apply the slabs. First Rs 4 lakh: nil. Next Rs 4 lakh at 5% = Rs 20,000. Next Rs 4 lakh at 10% = Rs 40,000. The remaining Rs 1,25,000 at 15% = Rs 18,750.
• Total tax = Rs 78,750.

Sai has a taxable income of Rs 3,80,000. That is below Rs 4 lakh, so his tax is nil.