Study Notes on Tax in India for beginners || Commerce

By BYJU'S Exam Prep

Updated on: September 13th, 2023

Tax in India for beginners


  • Everyone who earns or gets income in India (Be it a resident or non – resident of India) is subjected to income tax.
  • Every commodity we purchase, every service we avail, we pay certain tax amount on it in the form of indirect tax.

Taxes in India – Taxes in India are classified into two categories they are: (i) Direct tax and (ii) Indirect tax

  • Direct tax – is a tax you pay on your income directly to the Government.
  • Indirect tax – is a tax that somebody else collects on tour behalf and pay to the Government. For example, Restaurants, Theatres, E-commerce websites recover taxes from you on goods you purchase.

1. Direct taxes in India can be classified as (i) Income tax and (ii) Corporate tax

  • Income tax – This is a tax where an individual or a Hindu undivided family, any taxpayers other than companies, pay on the income received. The law (Finance acts of the respected years) decides the rate at which the income to tax.
  • Corporate tax – This is the tax that companies pay on the profits they earned from the business. Here again, a specific rate of tax for corporates has been prescribed by the income tax laws in India.

2. Indirect taxes can be in many forms such as Service tax on restaurant bills as well as movie tickets, Value-added tax or VAT on goods such as clothes and electronics.

Key Dates:

  • 31 March – Deadline to make investments under section 80C
  • 31 July – Lat day to file your tax return
  • Oct – Nov – Time to verify your tax return.

Income Tax department classified income into five heads:

  • Income from salary – Income from the salary of a job person is covered here.
  • Income from other sources – Income from saving bank account interest, fixed deposits, winning KBC (Kaun Banega Crorepati, have to pay tax on their prize money).
  • Income from house property – Rental income of a person by tenets, etc.
  • Income from Capital gains – Income from the sale of capital assets such as mutual funds, shares, other capital assets.
  • Income from business and profession – This is when you are self-employed, or you run a business. Life insurance agents, Chartered Accountants, doctors and lawyers who have their own practice, tuition teachers have income in this head.

Income tax slabs and Taxpayers:

  • Taxpayers in India include (i) Individuals; (ii) Hindu Undivided Family; (iii) Companies; (iv) Firms; (v) LLP; (vi) Association of Persons (AOP); (vii) Body of Individuals (BOI); (viii) Local Authority and; (ix) Any other Artificial Juridical Person.
  • Each type of taxpayer is taxed differently as per income tax laws. While firms and companies have a fixed rate of tax of 30% of profits, others are taxed based on the income slab rates.

Income tax slab rates for FY 2019-20 (The assessment year 2020-21)

Study Notes on Tax in India for beginners || Commerce

Important Point: Everyone must be aware of that not all income can be taxed on a slab basis. Capital gains income is an exception to this rule. Capital gains are taxed depending on the asset you own and how long you have had it. The holding period determines whether it is a long term or short-term asset.

Study Notes on Tax in India for beginners || Commerce

Study Notes on Tax in India for beginners || Commerce

In order to compute tax liability off of a person in India, the following steps are followed:

  1. Determination of residential status, Which and what income is taxable in whose hands as per origin of income, decisions related to ROR/NOR/NR.
  2. Classification of income under different heads, 5 heads having a different scope of income classifications.
  3. Computation of income under each head, Exempted incomes, and head wise provisions.
  4. Clubbing of income of spouse and minor child, Avoid diversion of tax to immediate relatives.
  5. Set-off or carry forward and set off losses, setting off losses within heads like within the business head.
  6. Computation of Gross Total Income, Summation of final figures of each head.
  7. Deduction from GTI, Under section 80C to 80U.
  8. Computation of Total Income, Income after Deductions.
  9. Computation of tax liability, As per slab rates and cess.

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