Taxation in India
India’s taxation framework is a complex system that is fundamental to the country’s economic strategy, striking a balance between generating revenue and providing incentives for growth and investment. This framework includes various taxes, each regulated by intricate rules and rates. It is crucial for businesses, investors, and individuals to have a thorough understanding of this landscape for effective financial management and adherence to regulations.
Taxation system
India’s taxation system is structured to correspond with domestic fiscal policies and international commitments, providing a systematic yet flexible approach to taxation. It likely includes a mix of flat rates, progressive scales, and specific exemptions, mirroring the nation’s economic goals and social aims. Grasping the complexities of these tax mechanisms is essential for maximizing financial results, maintaining compliance, and making the most of opportunities within the legal framework.
Capital gains tax
In India, capital gains are divided into short-term and long-term categories, each with distinct tax rates. Short-term capital gains (STCG) for assets held for under 36 months (12 months for listed securities) are taxed at a flat rate of 15% when sold on the stock exchange and at the relevant slab rate for other assets. Long-term capital gains (LTCG) on assets held for over 36 months (12 months for listed securities) are taxed at 10% on gains that exceed INR 1 lakh (approximately €1,200) without the benefit of indexation.
Corporate taxation
In India, corporate tax is levied on the earnings of both domestic and foreign corporations. The tax rate differs depending on the company’s type, its turnover, and the applicability of any special provisions. Domestic companies that choose Section 115BAB face a tax rate of 15%, whereas others can be taxed at rates reaching up to 30%. Foreign firms are subject to a standard tax rate of 35%, along with additional charges for surcharge and health & education cess. The tax system also includes a Minimum Alternate Tax (MAT) of 15% for those companies with a standard tax liability that falls below 15% of their book profits.
Personal income taxation
In India, personal income tax is levied on individuals according to their income levels. There are two systems of taxation: the old system, which includes deductions and exemptions, and the new system, which has fewer deductions but features lower tax rates. Both systems implement progressive tax rates that vary from 5% to 30% based on income brackets. The new system simplifies the taxation process but restricts certain common exemptions, including those for housing loan interest. Conversely, the old system permits various deductions, including those available under Section 80C for investments and insurance premiums, and Section 80D for health insurance, among others.
Dividend taxation
In India, dividend tax is levied on the income that shareholders earn from dividends given out by companies. The tax rate is based on the individual’s income tax bracket. Following the elimination of the Dividend Distribution Tax (DDT) in 2020, dividends are now taxed directly to shareholders according to their applicable slab rates. For non-residents, there is a flat 20% tax on dividends, which can be influenced by benefits from Double Taxation Avoidance Agreements (DTAAs). Tax Deducted at Source (TDS) applies to dividend income that exceeds ₹5,000, and the interest deductions are capped at 20% of the dividend income.
Property tax
In India, property tax is a local tax imposed by municipal authorities on real estate, encompassing both land and buildings. The tax is determined by either the annual rental value or an area-based assessment, which is influenced by the property’s location. Rates can differ considerably among various states and cities. This tax is generally allocated for local infrastructure and services, such as water supply, sanitation, and road upkeep. The assessment takes into account various factors including the property’s location, its use (whether residential or commercial), and its size.
Inheritance taxation
India does not impose any inheritance tax at present. Assets that are inherited, whether they are movable or immovable, do not face taxation when they are received. However, if the heir chooses to sell the inherited property, they will be required to pay capital gains tax. The capital gains tax rate varies depending on the holding period and the asset type (such as long-term or short-term). According to the Income Tax Act of 1961, inherited property is not included in the gift tax, and taxes come into effect only when inherited assets are sold.
International taxation
In India, international tax regulations affect non-residents concerning income generated in India, which encompasses royalties, technical fees, and capital gains. Non-residents face a standard tax rate on specific income types, like 40% on business earnings, though they may qualify for reduced rates through Double Taxation Avoidance Agreements (DTAAs). India has a wide-ranging system of DTAAs with various countries that can lessen or remove taxes on particular types of income. Compliance with international tax regulations involves withholding taxes on payments made to non-residents and following transfer pricing rules.
Cryptocurrency taxation
In India, cryptocurrency transactions are subject to a uniform tax rate of 30% on profits, irrespective of how long the assets are held or the type of income they generate, whether from investment or business activities. This tax is levied on profits from selling, exchanging, or using crypto assets. Furthermore, a 1% Tax Deducted at Source (TDS) is imposed on transactions that surpass certain limits, such as ₹50,000 for individuals. Only the acquisition cost can be deducted, while losses incurred from crypto transactions cannot be offset against other income or carried over to succeeding years. All profits need to be declared under the appropriate income tax category.
GST system
The Goods and Services Tax (GST) in India is an indirect tax imposed on the supply of goods and services. This tax is comprehensive, multi-stage, and based on the destination, being applicable at each phase of the production and distribution process. GST rates are divided into five categories: 0%, 5%, 12%, 18%, and 28%. Basic necessities are typically taxed at 0% or 5%, whereas luxury and harmful goods face a tax rate of 28%. For sales within a state, GST is split into Central GST (CGST) and State GST (SGST), and for sales between states, it is referred to as Integrated GST (IGST).
Our taxation solutions
In a tax landscape that is always changing, having expert advice is crucial. Our firm provides a range of specialized tax solutions that cater to the varied requirements of individuals, corporations, and investors in India. Our offerings aim to help clients understand the intricacies of the tax code, reduce liabilities, and maintain complete regulatory compliance.
- Personal tax advisory: Tailored advice to minimize tax exposure while ensuring legal compliance.
- Corporate tax strategy: Comprehensive planning to maximize tax efficiency and leverage incentives.
- Capital gains optimization: Expert guidance to manage and reduce taxes on capital gains.
- International tax planning: Advanced strategies for optimizing cross-border tax outcomes.
- Cryptocurrency advisory: Compliant tax strategies for both individual and corporate crypto activities.
- Inheritance and estate planning: Strategic planning for efficient wealth transfer and reduced inheritance taxes.
- GST compliance: Full-service support for GST registration, reporting, and optimization.
Book a consultation
Navigating the intricate field of taxation can greatly benefit from expert guidance. Get in touch with us today to arrange a consultation with our tax specialists. We will collaborate with you to create a customized tax strategy that meets your goals and guarantees adherence to the regulatory framework in India.
Disclaimer
Tax laws and regulations are continually evolving and can differ depending on personal circumstances. The information shared here is intended for general guidance and may not represent the latest updates. It is strongly advised to seek the assistance of a qualified tax professional for personalized and current advice tailored to your situation.