What is Taxation and How the Government is Benefiting the People?
India is a large and massively populated country. So, to manage the livelihood of the large population, the Government came with a mandatory contribution- “Tax”.
The taxes help the Government to launch various projects. These projects grow the nation’s economy.
The tax payment provides multiple level benefits to the people. It includes:
- Development of Nation
- Improvement in Framework
- Development of society, and,
- Activities for the welfare of the Nation.
Now let’s read all about taxation and what are benefits provided by the Government.
What is Taxation?
Taxation is a procedure by which the Government of the country collects money from its people in a way to pay for its expenses. It is applied to all forms of compulsory Tax from earnings to capital taxes. The taxation is different from all other types of payment. It doesn’t require any permission and is not directly connected with any generated service.
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What are the diverse kinds of Taxes?
Broadly there are two types of Taxes. They are Direct Tax and Indirect tax. Further, these two types of Taxes are categorized into sub-categories. They are mentioned below:
1. DIRECT TAX
When a legal entity or a person directly pays the tax to the Government, it is called Direct Tax. These taxes cannot be shared between persons or legal entities. Other than this, the Central Board of Direct Taxes overlooks the direct tax. Below are the following sub-categories of the Direct Tax:
- Income Tax: Income Tax is a type of direct tax which is imposed on the individual income. This tax is paid directly by the person to the Government. Any person who earns an income of any kind is liable to pay Income Tax. But to pay this tax, there are different slabs of tax. It is for the different amounts of income.
Other than people, the taxes are also paid by the legal entities. These taxes include all the persons in Artificial Judicial, Body of Individual(BOI), Hindu undivided family. It includes local firms and authorities, companies and the Association of Persons (AOP).
- Capital Gains: The Government impose the Capital Gains Tax on the property sale. It is also imposed on the earnings through investment. However, the investment could be for long-term or short-term capital gains. The investment includes all kinds of exchanges made in the comparison opposite to its cost.
- Securities Transaction Tax: The Tax on Securities Transaction is levied on :
- Securities trading and stock marketing, and
- Securities traded on the Indian Stock Exchange.
- It is also charged on the price of the share.
- Prerequisite Tax: The prerequisite Tax is the tax that is applied to the employee’s perks and benefits given by the company. The purpose of the allowance and benefits is to be defined by the company.
- Corporate tax: Corporate Tax is defined as an Income Tax paid by the company. It depends on the different tax slabs that fall under the revenue of the company. The following are the sub-categories of the corporate tax:
A) Dividend Distribution Tax: The DDT is imposed on the dividends paid to the investors by the company. It is applied to the gross or net income through an investment received by an investor.
B) Fringe Benefit Tax: The FBT is levied on the employee who receives fringe benefits from the company. This includes home expenses, transit expenses, travel allowance, etc.
- Minimum Alternative Tax: The MAT is managed by the IT Act section 115JA. As per the criteria of the act, the IT department gets payment from the company.
2. INDIRECT TAX
When the person pays taxes on the products and services, it is called an Indirect Tax. These taxes are added to products & services. Presently, the Government collect indirect tax through GST (Goods and Service Tax).If you need any service related to Goods and Service Tax, then you can hire GST Suvidha Kendra.
What are the benefits of Taxes?
When an individual pay tax it benefits both- the Taxpayer as well as the Government. For the taxpayer, the Tax benefits in ways such as:
a) Easy approval of Visa application
b) Easy apply for credit cards and loan
c) Attainment of compensation in accident cases, and more.
However, the Tax of the payee can only be reduced if you satisfy certain requirements of eligibility.
On the other side, for the Government, the Tax benefits in several ways which include:
a) Development of facilities such as perk, Government schools, etc,
b) Addition in the economy
c) Development of people’s standard of living, and more.
The Government use the tax for various purposes, these are:
- Welfare and Development Projects
- Expenditure on Defense
- Scientific Research
- Insurance for public
- Schemes on Pensions
- Government operation
- Public Health
- Public utilities, etc.
- The taxes imposed on a wide range of stemming of income from salary, wealth, property, service, property rental, etc.
What are the advantages offered by the Government on Tax?
1. Employee Provident Fund (EPF) & Voluntary Provident Fund (VPF)
The Employee provident fund is a fund invested for an employee. It was bought with an aim to give employees financial security and stability. Meanwhile, towards EPF the employer and the employee each bestow 12% of the employees’ dearness allowance and basic salary. The deductions are made from the employee’s earnings on a monthly basis. Therefore, it helps in saving a massive amount of money in the long run.
On the other side, the Voluntary Provident Fund is available to the employee who can contribute voluntarily to the PF account. There is no fixed percentage on the employee’s salary contribution.
2. Public Provident Fund (PPF)
The Public Provident Fund is a continuing contribution option scheme. It offers an attractive return on the amount invested and on the rate of interest. The earn of interest and the returns are untaxable under Income Tax.
On the edge of VPF or PF, the employees who are making additions for 15 years are eligible for the Tax. It will be under section 80 C of the saving Tax.
3. Equity Linked Savings Scheme (ELSS)
The Equity Linked Savings Scheme provides a minimum of 3 years lock-in period. When a person invests in the ELSS funds, it gives double benefits of wealth accumulation and tax deduction over time.
Other than this, the employees who make an investment in equity mutual funds are also liable for saving Tax.
In a year you can save up to RS. 46,800 in the tax payment with the investment in ELSS mutual funds. You can also claim a tax refund of up to RS. 1,50,000 a year.
4. Life Insurance Premium
When you pay an amount of money in the deal for life coverage to the Life Insurance Company is called Life Insurance Premium. In the LIP, you (employee) can pay any payment for life policies, and get liable for tax savings. It can be either for themselves or for spouse/ children under section 80C. The premiums for countless schemes can be paid on the basis of the month, quarter or year.
If you have numerous policies, then you can claim a collective sum by adding all the premiums together. But many people think that the premiums of LIC policies are liable for a Tax deduction. Well, it is not like that!!
Let’s assume that you are paying LIC policies premiums to the private firms. On that condition, you are fit for the benefits of Tax. It will be under section 80C of tax savings.
5. Home Loan Principal Repayment
If a home loan is taken by you from the bank, then you will refund it in two parts. Firstly you will pay the interest part on the amount of the loan. Secondly, you will pay the amount of the loan itself, which is called the Principal amount. While repaying the principal amount you get tax relief under section 80C.
6. Infrastructure Bond
Recently, the Government has come up with a new clause especially for deducting tax for investment. It is in the form of Tax-Free Infrastructure Bonds. For instance, if you invested 1 lakh, in this situation, you will get a deduction of Rs. 20,000.
7. National Savings Certificate(NSC)
As a fact, you have bought the NSC for 6 years long term to save tax. In that case, you can claim the amount for tax deduction under section 80C of tax savings.
8. Pension fund below the section 80CCC
There is a Special Sub-Section under Section 80C. It is called Section 80CCC and is particularly for pension funds investment. You can claim the perks of a tax on the investment. It can be in any Government or private financial companies pension fund.
9. Tax Saving Bank Fixed Deposit
You get another option to save tax in the name of a Special Fixed Deposit. It will be issued by the bank. The tax-saving fixed Deposit will be for a minimum of 5 years long term.
10. Senior Citizen Saving Scheme-2004
The Senior Citizen Saving Scheme is presented for the senior citizen only. They can get good compensation for the contributed amount. Further, the investment in this scheme is liable for the deduction of tax.
11. Post Office Time Deposit (POTD)scheme
The Post Office Time Deposit scheme provides various options for investments. But, there is only one scheme under it which is currently offering a 7.5% iterate rate. This rate is eligible for benefits of Tax. While there is no other scheme under the POTD scheme that is fitted for a Tax deduction.
12. United Linked Insurance Plan( ULIP) investments
Basically, an investment in ULIP is a mixture of investment and insurance. It gives you a deduction of tax covered by Section 80C. However, the individual must be known with heavy charges and periods in the long locks. These vary from one ULIP scheme to another ULIP scheme.
13. Registration Charges and Stamp duty for a home loan
Let’s assume that you have bought the home through a home loan or on your own. In that circumstance, you can claim benefits on tax. These benefits are for the payment of registration charges and stamp duty applied on purchasing a home. Regardless, the benefits are under Section 80C of Tax saving.
14. xpense on Children Education
You are liable to claim tax benefits on the tuition fee given to your child’s educational institution or school. In spite of that, under section 80C, you are required to keep receipts for claiming tax benefits.
Why is it important to pay taxes?
Many people assume that paying taxes is a burden, but it is not like that. Rather, it is an important contribution made by the legal entity or the person. The tax helps in many ways:
- Nation Building
- Launching of various Government schemes for the general public
- Improved Education and healthcare system, & more.
In the end, as responsible citizens, we must pay tax on time for our country’s equitable and sustainable growth.