Taxes in India: A Complete Guide

Taxes are an integral part of a country’s economy. They are the foundation of a country’s growth and development. Taxes help in funding public infrastructure, health care, education, and welfare schemes. With one of the largest populations in the world, India relies heavily on taxes to fund its welfare schemes and ambitious projects. Taxes link to individuals’ income, spending habits, and investments. Taxes link to profit, operations, and transactions for Businesses.

Understanding taxes is not only important for legal compliance but also for financial planning. This blog explores the types of taxes in India, their importance, and the current framework you should know about.

What are taxes?

A tax is a compulsory charge imposed by the government on businesses, individuals, and organizations. The government uses them for the proper functioning of the state and country.

Types of Taxes in India

India divides taxes into broader categories:

• Direct Tax: The government imposes these taxes directly on individuals and organizations based on their income and profits. Examples include: income tax, securities transaction tax (STT),
• Indirect Tax: The government levies these taxes on goods and services. Customers pay them. Examples include: customs duty, goods and services tax (GST).

Income Tax

It is a direct tax levied by the government on the income earned by individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities. You need to pay this tax if your total income exceeds the basic exemption limit in the current financial year. Income Tax classifies income into five categories, which are:

• Income from salary
• Earnings from house property
• Earnings from business/profession
• Income from capital gains, like selling property, stocks, gold, etc. This includes STCG – Short Term Capital Gain and LTCG – Long Term Capital Gain.
• Income from other sources, like lottery winnings, savings interest, gifts, dividends, etc.

In India, taxpayers get two income tax regimes to choose from: the New Tax Regime and the Old Tax Regime. The income slabs for both regimes are as below:

Income Slab: New Tax Regime

Income Range	Tax Rate
Up to ₹3,00,000	Nil
₹3,00,001 – ₹6,00,000	5%
₹6,00,001 – ₹9,00,000	10%
₹9,00,001 – ₹12,00,000	15%
₹12,00,001 – ₹15,00,000	20%
Above ₹15,00,000	30%

Income Slab: Old Tax Regime

Income Range (Individuals <60 yrs)	Tax Rate
Up to ₹2,50,000	Nil
₹2,50,001 – ₹5,00,000	5%
₹5,00,001 – ₹10,00,000	20%
Above ₹10,00,000	30%

Key differences between the two regimes

Feature	Old Regime	New Regime (Default)
Slab Rates	Higher	Lower
Deductions/Exemptions	Allowed (80C, 80D, HRA, Home Loan, etc.)	Mostly not allowed
Standard Deduction	Yes (₹50,000 for salaried)	Yes (₹50,000 for salaried)
Rebate u/s 87A	Up to ₹5 lakh income → Nil tax	Up to ₹7 lakh income → Nil tax
Best For	Taxpayers with many investments/loans	Taxpayers without many deductions

Few additional charges increase your tax liability in India. These are:

Health and Education Cess (Mandatory)

The government levies a 4% tax on the total income tax payable.

Surcharge (For high-income individuals and companies)

A surcharge is an extra charge on the income tax for people earning above a certain level.

For Individuals (FY 2025-26, New Regime):

• 10% of income tax if income > ₹50 lakh and ≤ ₹1 crore.
• 15% of income tax if income > ₹1 crore and ≤ ₹2 crore.
• 25% of income tax if income > ₹2 crore and ≤ ₹5 crore.
• 37% of income tax if income > ₹5 crore.

Under the new tax regime, the government caps the maximum surcharge at 25%.

For Companies:

• 7% surcharge if taxable income > ₹1 crore.
• 12% surcharge if taxable income > ₹10 crore.

Interest & Penalties (If You Delay or Default)

• Interest u/s 234A – for late filing of return.
• Interest u/s 234B – for not paying advance tax.
• Fee u/s 234F – for filing ITR after due date (₹5,000 to ₹10,000).
• Interest u/s 234C – for deferment of advance tax.

Capital Gains Tax

Whenever you sell a property, gold, or shares, the profit you earn on it is called capital gain. It is taxable under the Income Tax Act, 1961. Capital gains tax is a tax levied on the profit from the sale of a capital asset. Capital Assets include:

• Real estate (land, building, house property)
• Stocks, bonds, debentures, mutual funds.
• Gold, jewellery, or any other valuable items.

If you receive assets as a gift, inheritance, or will, there is no tax at the time of transfer. The government levies tax only when you sell them.

Types of Capital Gains

The holding period of the asset determines the categorization of capital gains.

Short Term Capital Gain (STCG)

• Sold within a short period of holding.
• Holding period criteria:
  • Listed shares/equity mutual funds: ≤ 12 months
  • Real estate (land/building): ≤ 24 months
  • Gold, debt funds, bonds, others: ≤ 36 months
• Tax rate:
  • Listed shares & equity MFs → 15% (u/s 111A)
  • Other assets → Taxed at normal income tax slab rate

Long Term Capital Gain (LTCG)

• Sold after a longer holding period.
• Holding period criteria:
  • Listed shares/equity mutual funds: > 12 months
  • Real estate (land/building): > 24 months
  • Gold, debt funds, bonds, others: > 36 months
• Tax rate:
  • Listed shares/equity MFs → 10% (above ₹1 lakh, without indexation)
  • Other assets (property, gold, debt funds) → 20% with indexation

Asset Type	Short-Term Holding Period	STCG Tax Rate	Long-Term Holding Period	LTCG Tax Rate	Old vs New Regime Difference
Listed Equity Shares & Equity Mutual Funds	≤ 12 months	15% flat (u/s 111A)	> 12 months	10% (on gains above ₹1 lakh, no indexation)	Same in both regimes
Unlisted Shares	≤ 24 months	Normal slab rate (5%, 20%, 30%)	> 24 months	20% with indexation	Same in both regimes
Real Estate (Land/Building)	≤ 24 months	Normal slab rate	> 24 months	20% with indexation	Same in both regimes
Gold, Debt Mutual Funds, Bonds, Jewellery	≤ 36 months	Normal slab rate	> 36 months	20% with indexation	Same in both regimes
Business/Other Assets	Varies	Normal slab rate	Varies	Normal slab rate / 20% (depending on classification)	Same in both regimes

Securities Transaction Tax (STT)

They levy it on the purchase and sale of securities listed on the stock exchange. The Government of India introduced it in 2004. It is a direct tax charged at the time of buying or selling securities through recognized exchanges. The stock exchange collects the tax and pays it to the government.

The system instantly deducts STT on each eligible transaction.

STT applies to the following securities traded on recognized stock exchanges in India:

• Equity shares (delivery-based and intraday)
• Equity derivatives (futures & options)
• Equity-oriented mutual funds (purchase/sale on exchange)
• Exchange-traded funds (ETFs)
• Units of business trusts

It does not apply to commodities, currency trading, bonds, or debentures.

Type of Transaction	STT Rate	Levied On	Who Pays
Delivery-based Equity (Purchase)	0.1%	Value of purchase	Buyer
Delivery-based Equity (Sale)	0.1%	Value of sale	Seller
Intraday Equity (Sale only)	0.025%	Value of sale	Seller
Equity Futures (Sale only)	0.0125%	Value of sale	Seller
Equity Options (Sale of Option)	0.0625% on Premium	Premium amount	Seller
Equity Options (Exercise of Option)	0.125%	Settlement price	Buyer
Sale of units of Equity-oriented MF/ETF (through exchange)	0.001%	Value of sale	Seller
Sale of units of Business Trust (REITs/InvITs) through exchange	0.001%	Value of sale	Seller

Securities Transaction Tax (STT) may seem small per trade, but it can significantly add up for frequent traders. While it ensures compliance and enables concessional capital gains tax treatment, investors should always factor in STT when calculating net profitability.

For long-term investors, STT is a minimal cost for transparent investing. But for day traders and derivatives traders, it can be a crucial factor affecting overall returns.

Professional tax

Professional Tax is a state-level tax, not a central one. That means its rules, rates, and applicability differ from state to state. It is a direct tax levied by some state governments in India. It applies to salaried employees, professionals (doctors, lawyers, and chartered accountants), freelancers, self-employed individuals, traders, and business owners.
The State Government collects it through the Commercial Tax Department. States like Maharashtra, Karnataka, West Bengal, Gujarat, Andhra Pradesh, Telangana, Tamil Nadu, Madhya Pradesh, Odisha, etc., apply this tax, while Delhi, Haryana, Rajasthan, Uttar Pradesh do not levy Professional Tax. Not all states apply this tax.

Professionals like doctors, lawyers, freelancers, and traders must register with the State’s Professional Tax Department. They need to pay PT directly, usually quarterly or annually.

Road Tax

Road Tax is a state-level tax levied by the State Government under the Motor Vehicles Act, 1988. The government charges it on motor vehicles for using public roads. The amount depends on vehicle type, engine capacity, fuel type, age of the vehicle, purpose (commercial/personal), and vehicle cost. Road tax rates differ across states.

When is the road tax paid?

• Onetime: Paid at the time of vehicle registration, usually valid for 10–15 years.
• Annually/quarterly: Some states allow or require periodic payments, especially for commercial vehicles.
• Transfer of vehicles between states: If you move your vehicle permanently to another state, you must pay road tax again in the new state (after getting NOC from the previous RTO).

For two-wheelers, the tax is between 4%-10%. The tax for private four-wheelers is 8%-15% of the cost. Commercial vehicles are taxed based on seating capacity, weight, and usage. Many states offer full exemptions or reduced taxes to promote the adoption of electric vehicles.

Road tax in some of the major states in India:

State	Two-Wheeler Road Tax	Four-Wheeler Road Tax	Notes
Karnataka	4% – 10% of cost	13% – 18% of cost	Among the highest in India
Maharashtra	11%–13% of the cost	13% – 18% of the cost	Higher for expensive cars
Delhi	4% – 8%	4% – 15%	EVs exempted
Tamil Nadu	8% – 10%	10% – 15%	Based on price brackets
Telangana	9% – 12%	12% – 14%	Lifetime tax applicable
West Bengal	6% – 10%	10% – 12%	Varies by engine capacity
Uttar Pradesh	6% – 8%	8% – 9%	Comparatively lower
Kerala	6% – 10%	10% – 15%	10% of the cost

Municipal Tax

If you own a house, shop, or any other property in India, you’re probably familiar with the term Municipal Tax. This is a local tax levied by the municipal corporation or local urban body of your area. It’s one of the key sources of revenue for local authorities, helping them provide civic amenities such as water, sewage, street lighting, garbage disposal, and road maintenance. This tax is mandatory for all property owners and is usually collected annually or half-yearly.

Municipal Tax (also called Property Tax) is a direct tax imposed by the local civic body on real estate (land and buildings). It is based on the property’s value and is payable by the owner, not the tenant. Collected revenue is used to maintain and improve local infrastructure.

The value of municipal tax is decided based on:

• Location of property.
• Type of property.
• Size of property.
• Usage.
• Age of property.
• Building material (kutcha/pucca).

Municipal tax in some of the major states in India:

City / State	Method Used	Key Factors Considered	Example Tax Rate / Structure
Delhi (NDMC, MCD, DCB)	Unit Area Value (UAV)	Location category (A to H), property type, usage, age, occupancy	Residential: ₹0.8–₹1.5 per sq. m × unit area × multiplier. Commercial: Higher multiplier (up to 3×).
Mumbai (MCGM/BMC)	Capital Value System (CVS)	Market value of property, carpet area, property type, age	Residential tax: 0.316% of market value; Commercial: 1.44%. Minimum charges apply.
Bengaluru (BBMP)	Unit Area Value (UAV)	Location (zones A–F), built-up area, usage, age, occupancy	Formula: Built-up area × Unit area rate × 10 months × Depreciation factor.
Hyderabad (GHMC)	Annual Rental Value (ARV)	Expected rental value of the property, usage type, and location	Residential: 17–30% of ARV. Commercial: 19–33% of ARV.
Chennai (Greater Chennai Corporation)	Half-Yearly Assessment	Built-up area, usage, basic rate (per sq. ft.), location	Residential: Around 0.6–1% of annual value; payable half-yearly.
Kolkata (KMC)	Unit Area Assessment	Location-based value (per sq. ft.), property type, usage	Market value of property, carpet area, property type, and age
Pune (PMC)	Capital Value Method	Market value, location, property type, usage	Residential rate: ~6–20% of annual value; Commercial rate is higher.

It is generally a bundle of charges like property tax, water tax, sewerage or drainage tax, lightning tax, and in some cases, education or health cess.

Stamp Duty

When you buy a property, whether it is land, a house, or a flat, the transaction is legally valid only if you pay stamp duty. It is a state government tax collected on property transactions, and the stamped document serves as legal proof of ownership. Stamp duty is one of the biggest costs (apart from the property price itself) in real estate transactions, and rates differ across states. It is charged on the transaction value or circle rate (government-fixed minimum value) – whichever is higher. Stamp duty is collected under the Indian Stamp Act, 1899. But each state notifies its own rate. The proof of payment is affixed on the property documents as a stamp.

Why is stamp duty important?

• A property without stamp duty is not admissible in the court.
• It ensures that the buyer’s name is legally registered.
• It is a major source of income for state governments.

Stamp duty is an unavoidable cost that adds 5-8% to the total property value, making it a key factor in budgeting for real estate investments.

BOCW Cess

Building and Other Construction Workers Welfare Cess

The construction sector in India employs millions of workers, many of whom work under harsh and unsafe conditions. To safeguard their rights and welfare, the Government of India enacted the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996, commonly known as the BOCW Act. Along with it, the Building and Other Construction Workers’ Welfare Cess Act, 1996, was introduced to create welfare funds through a cess on construction projects.

BOCW ACT

• It regulates employment, working conditions, safety, health, and welfare of construction workers.
• It applies to all establishments employing 10 or more workers in building/construction work.
• The Act covers workers engaged in constructing houses, buildings, dams, highways, bridges, dams, canals, irrigation projects, power plants, railways, etc.

The BOCW Welfare Cess Act of 1996 introduced BOW Cess. It is a tax/cess collected on the cost of construction of a project. It rates at 1% of the construction cost. It is payable by the employer/contractor/owner of the project.

Utilization of BOCW Funds

• Medical aid and health schemes.
• Accident coverage and compensation.
• Pension benefits.
• Education support for workers’ children.
• Housing loans or subsidies.
• Skill development and training.
• Maternity benefits for women workers.

This cess also exempts residential housing costing up to 10 lakh. This tax also exempts projects that comply with the factories and mines laws.

VAT and Excise Duty

Before the implementation of GST (Goods and Services Tax) in July 2017, the taxation on goods was governed by Value Added Tax (VAT) and Excise duty. While GST has subsumed most of these taxes, VAT and Excise Duty are still relevant in certain cases today.

Value Added Tax (VAT)

Value Added Tax (VAT) is a state-level indirect tax imposed on the sale of goods within a state. The government charges VAT at each stage of the value chain, meaning it levies VAT whenever someone adds value to a product. Key features of VAT :

• State governments levy it.
• It applies to the sale of goods and not services.
• The tax rate varies across states and product categories.

After GST, VAT was subsumed into it, but it is still applicable on certain products like Petrol, Aviation Fuel, and Diesel.

Excise Duty

Excise Duty is a central government tax imposed on the manufacture or production of goods in India. Unlike VAT (levied on sale), Excise Duty was charged at the manufacturing stage. Key features include:

• Central Government levies it.
• It applies to the production or manufacture of goods.
• There are three types: basic, additional, and special.

GST replaced excise duty, but it is still applicable on petrol, diesel, tobacco, and tobacco products.

Goods and Services Tax (GST)

The Goods and Services Tax (GST) is one of the biggest tax reforms in India. Introduced on 1st July 2017, GST replaced multiple indirect taxes like VAT, Excise Duty, and Service Tax with a single unified tax system. It follows the principle of “One Nation, One Tax”, making taxation simpler, more transparent, and uniform across the country.

• GST is a comprehensive indirect tax levied on the supply of goods and services.
• It is a destination-based tax – collected at the point of consumption, not origin.
• It subsumes central taxes (Excise Duty, Service Tax) and state taxes (VAT, Entry Tax, Luxury Tax).

Types of GST

Depending on the type of transaction, GST is divided into:

• CGST (Central GST): Collected by the Central Government on intra-state sales.
• SGST (State GST): Collected by the State Government on intra-state sales.
• IGST (Integrated GST): Collected by the Central Government on inter-state sales (between two states).
• UTGST (Union Territory GST): Collected on transactions in Union Territories.

Example: If you buy goods worth ₹1,000 in Delhi, GST = CGST + SGST. If goods move from Delhi to Maharashtra, GST = IGST.

GST Registration

• GST Registration is mandatory for business owners having a turnover greater than 40 lakh.
• For small business owners, the registration is not mandatory.
• After registration, the taxpayer gets a GSTIN – Goods and Services Tax Identification Number.

Benefits of GST

• It replaces multiple indirect taxes.
• It is transparent since it is single across multiple states.
• Businesses can claim credit for tax paid on inputs – Input Credit Tax (ITC).
• Reduce cascading effect – no tax on tax.
• Digitally compliant since the entire process is online.

Challenges of GST

• Frequent changes in rules and rates.
• Frequent issues with the technical portal.
• There is a high compliance burden.
• There is an additional burden on small businesses as they need to incur the additional cost of tax consultants and software.

GST vs the Previous Tax System

Feature	Pre-GST Era	GST Era
Taxes	VAT, Excise Duty, Service Tax, Octroi, Entry Tax	Single tax (GST)
Authority	Central + State separate taxes	Unified system (CGST, SGST, IGST)
Cascading Effect	Tax on tax existed	Eliminated with ITC
Transparency	Complicated, state-specific rules	Uniform and transparent
Compliance	Offline + multiple filings	Online, streamlined filing

GST Slabs

GST Rate	Covered Items (Examples)
0% (Exempt)	Essential stationery (notebooks, pencils, maps), life & health insurance premiums, select daily staples like UHT milk and paneer, and life-saving drugs.
5%	Packaged foods, toiletries (soap, shampoo), butter, ghee, cheese, utensils, small household items, agricultural tools, medicines, and feeding diapers.
18%	All standard goods and services—e.g., restaurants, telecom, financial services, electronics like TVs, ACs, motorcycles (≤ 350cc), small cars (< 1200cc), and auto parts.
40% (Demerit / Luxury)	Luxury items and sin goods—cigarettes, pan masala, aerated/sugary drinks, motorbikes > 350cc, yachts, private aircraft, betting & casinos.

Customs Duty

It is a type of indirect tax levied on goods imported into or exported from India. Its primary purpose is:

• To regulate international trade.
• To protect domestic industries from foreign competition.
• To generate revenue for the government.

The Customs Act of 1962 governs customs duty, and the Central Board of Indirect Taxes and Customs (CBIC) administers it.

Types of Customs Duty

Type	Description
Basic Customs Duty (BCD)	The Customs Tariff Act of 1975 prescribes rates for levying it on imported goods.
Countervailing Duty (CVD)	It is imposed on imports to counterbalance the excise duty charged on similar domestic goods.
Anti-Dumping Duty	It is levied when goods are imported at prices below their normal value (dumping).
Safeguard Duty	A temporary duty is imposed when a sudden surge in imports that threatens the domestic industry.
Protective Duty	It is imposed to protect certain domestic industries (rates decided by the Tariff Commission).
IGST on Imports	Imported goods are also subject to Integrated GST (IGST) at applicable rates. This ensures parity with GST levied on goods manufactured in India.
Social Welfare Surcharge (SWS)	It is an additional surcharge (currently 10% of BCD) levied to fund social welfare schemes.

The total customs duty payable =
Assessable Value (CIF: Cost + Insurance + Freight) + Basic Customs Duty + Cess + IGST + Other Surcharges

Exemptions

• Certain goods like life-saving drugs, defense imports, and charitable items are exempt.
• Export-oriented units (EOUs), SEZs, and government projects often get duty concessions.
• Free Trade Agreements (FTAs) allow reduced or zero customs duty on imports from partner countries.

Importance

• Revenue Generation – a significant source of government income.
• Trade Regulation – controls the flow of goods across borders.
• Industry Protection – shields domestic industries from foreign competition.
• Consumer Safety – ensures banned/harmful goods don’t enter the country.

Toll Tax

It is a fee collected from vehicles using certain roads, highways, expressways, tunnels, or bridges. The money collected is used for:

• Building, maintaining, and repairing roads.
• Recovering construction costs of national highways and expressways.
• Providing better infrastructure and safety facilities for commuters.

In India, the National Highways Authority of India (NHAI manages toll collection) under the National Highways Act, 1956. It is collected either in cash, via FASTag (mandatory for all vehicles since 2021), or through prepaid digital wallets. The charges depend on the type of vehicle, distance covered, and road project cost. The toll tax is determined by:

• Length of the road/highway.
• Construction & maintenance costs.
• Type of vehicle (car, bus, truck, multi-axle).
• Lane category (single-lane, double-lane, expressway).

FASTag

It is an electronic toll collection system based on RFID technology. A sticker affixed to the vehicle windshield. The system automatically deducts toll charges from the linked wallet/bank account. This reduces waiting time, there are no cash payments, and it provides transparency in toll collection.

Exemptions

• Vehicles of the President, Vice President, Prime Minister, Chief Justice of India, judges, MPs, MLAs (on duty).
• Ambulances, fire trucks, and defense vehicles.
• Vehicles of the Ministry of Defence & armed forces.
• Vehicles carrying funeral processions.

Taxes are the backbone of India’s economic framework, ensuring the government has the resources to build infrastructure, provide public services, and drive national development. From direct taxes like income tax and capital gains tax to indirect taxes such as GST, customs duty, tolls, and municipal levies, each type of tax plays a unique role in nation-building.

While taxation may feel like a burden at times, it is also a civic duty that contributes to the country’s growth and welfare. Understanding different taxes not only helps individuals and businesses stay compliant but also allows them to plan finances wisely, take advantage of exemptions, and avoid penalties. In short, paying taxes isn’t just about fulfilling a legal obligation—it’s about contributing to the nation’s progress.