What is Tax: Understanding the Basics for Financial Literacy

Financial literacy includes several topics, and taxes are one of its most discussed ones. As a taxpayer, you must be filing it monthly or yearly, but did you know that you can also save on what you pay? Yes, you read it right. You can leverage certain deductions to save extra funds while filing your taxes. By understanding ‘what is tax’, its types, the eligibility criteria, and why it is important to file them, you will be able to manage it better. So, let’s get started with the tax basics.

What is Tax?

Tax is a mandatory financial charge imposed by the government. It is levied on individuals and entities to fund public expenditures. You can also consider it as a compulsory contribution from citizens towards the development and welfare of the country. Tax liability in India is subject to certain criteria. 

In addition to understanding ‘what is tax’, it is also important to know its classification. Broadly, taxes are categorised into direct and indirect taxes. Indirect taxes are levied on the purchase of goods and services. It includes GST (Goods and Services Tax), excise duty, and customs duty. On the other hand, direct taxes are levied directly on individuals or entities and include income tax, corporate tax, and property tax.

Different Types of Taxes

India has a varied structure for everyone when it comes to an understanding of ‘what is tax.’ Some common types of taxes include:

1. Income Tax: This tax is imposed on everyone who is earning within the tax slab, whether they are minors or above the age of 18. If you are an individual or business entity, you need to submit all information on your salary, business profits, capital gains, and other sources. In fact, it is one of the most important forms of taxes.
2. Goods and Services Tax (GST): It’s an indirect tax levied on the sale of goods and services. Levied in 2017, GST replaced multiple indirect taxes to create a unified tax structure across the country.
3. Corporate Tax: It is a charge imposed on a company’s profits earned during a financial year.
4. Property Tax: It is levied on the ownership of property, including land, buildings, and houses.
5. Customs Duty: Tax is imposed on goods imported into the country and sometimes on exported goods as well.

Why Filing Income Taxes is Important?

Besides knowing ‘what is tax,’ filing it is equally important. So, here are a few reasons that will bring clarity to why filing taxes is important:

• Filing your taxes in a timely and accurate manner ensures that you stay compliant with the country’s tax laws, avoiding legal complications.
• When you understand the importance of filing returns, you will know there are deductions and exemptions that you can claim. This, in turn, will help reduce your tax liability.
• Knowing the importance of ‘what is tax’ and filing it on a regular basis contributes positively to your financial history. It also increases your credibility for loans and other financial transactions.
• Taxes, when collected, contribute towards the nation’s development by funding infrastructure, healthcare, education, and other public services.

How to Calculate Income Tax?

Understanding ‘what is income tax’ helps in managing it better and ensures you file it correctly. Since it is one of the most important types of taxes, here is what you need to know on how to calculate it:

1. First, you should gather all the details of your income from all sources. This includes everything: salary, business, capital gains, etc.
2. You must keep all the deductions like investments, expenses, and exemptions in mind. Under various sections of the Income Tax Act, the taxable income is reduced.
3. India has progressive tax slabs with different rates for different income brackets. You will know what income tax amount you will be paying based on these slabs.
4. Several online tools help in computing tax liabilities accurately. You can also take advice from financial institutions for a comprehensive understanding.

Building Financial Security Via Tax Awareness

Grasping the fundamentals of financial literacy, like ‘what is tax’, is a significant step to becoming aware of our financial compliances. In fact, knowing them helps us understand our financial duties to the government, make smarter money choices, and manage taxes better. 

Canara HSBC Life Insurance proves to be trusted financial institutions when it comes to understanding taxes. Their ‘tax university’ section issued for informational purposes only, can help you know them better. Moreover, with their help, you can improve your personal budgeting and make smart investment decisions. 

While the journey starts with understanding ‘what is tax,’ you end up establishing a financially empowered future for yourself. Stay informed, file your taxes diligently, and contribute to the nation’s and your financial growth today!