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Taxes are necessary for civilised societies as they allow governments to carry out various activities for the development of the country and the welfare of the people. There are different types of taxes levied by the government that can be broadly classified into direct and indirect taxes. Taxes are the primary source of revenue for the government. Of all the different types of taxes levied, Income tax* is the biggest contributor to government reserves. In this article, we will talk about Income Tax* and discuss if the income tax rate for India is higher compared to other countries.
Understanding Income Tax
As mentioned above, there are two types of taxes in India – direct and indirect. Direct taxes are paid by the taxpayer directly to the government. The liability and responsibility of paying these taxes lie with the taxpayer.
Some examples of direct tax are income tax, corporate tax etc. While indirect taxes are paid by consumers when they buy goods or avail services. These taxes are collected by businesses and transferred to the government. Hence, the liability of paying the tax lies with the consumer, but the responsibility of collecting -tax and paying the government lies with businesses.
Income Tax is a direct tax that the government levies on citizens. It declares the rate of tax at the beginning of the financial year based on the economic condition of the country. Every year, the government declares changes in income tax rates and regulations during the Union Budget presentation.
In India, products and services such as life insurance policies are taxable and these tax laws are subject to change from time to time. However, life insurance also offers some of the tax benefits as given below:
- the premiums paid on life insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act. The maximum tax deduction that can be claimed under this section is ₹1.5 Lakh.
- the death benefits proceeds received from a life insurance policy are tax*-free under Section 10(10D) of the Income Tax Act.
- the annual premiums paid on Unit-Linked Insurance Plans (ULIPs) are also eligible for tax deductions under Section 80C, similar to traditional life insurance policies.
- additionally, the returns earned from ULIPs can be tax-free under Section 10(10D) of the Income Tax Act, subject to certain terms and conditions.
What are Income Tax Rates in India?
In the latest Union Budget, the government announced the following income tax rates:
Normal tax regime
Income Range (₹) |
Income tax rate |
₹0 < Taxable income < ₹250,000 |
No tax |
₹2,50,001 < Taxable income < ₹5,00,000 |
5% |
₹5,00,001 < Taxable income < ₹10,00,000 |
20% |
Taxable income > ₹10,00,000 |
30% |
Alternate tax regime
Income Range (₹) |
Income tax rate |
0 < Taxable income < ₹250,000 |
– |
₹2,50,001 < Taxable income < ₹ 5,00,000 |
5% |
₹5,00,001 < Taxable income < ₹7,50,000 |
10% |
₹7,50,001 < Taxable income < ₹10,00,000 |
15% |
₹10,00,001 < Taxable income < ₹12,50,000 |
20% |
₹12,50,001 < Taxable income < ₹15,00,000 |
25% |
Taxable income > ₹15,00,000 |
30% |
There are different basic exemption limits for senior citizens, super senior citizens, and special rates of taxes for association of persons, body of individuals, artificial judicial person, domestic company, foreign company, and cooperative society.
What is the Highest Income Tax Rate in India?
The top marginal tax* rate of 42.744% is applicable when the taxable income exceeds INR 5 crores. While this might seem like a high rate and justify the perceived income tax* burden, you will be surprised to know that the highest tax rate in India is not the highest in the world.
Countries with higher income tax* rates compared to India:
- Canada - 54%
- China - 45%
- UK - 45%
- US – 50.3%
Apart from the countries listed above, the Netherlands, Spain, China, Germany, France, Greece, Italy, and over 25 countries have higher income tax* rates than India.
Effective Average Tax* Rates Across Major Economies
Apart from comparing the maximum tax rate in India with other countries, we can also compare average tax* rates for a better understanding of the income tax* burden on people in different countries:
- Canada has the highest effective tax rate. Individuals earning more than ₹6 crores have to pay tax* at 51.4%
- The effective tax* rate for individuals earning more than ₹6 crores are taxed at 41.97% in China
- The United Kingdom charges income tax at the rate of 42.1% for individuals earning more than ₹6 crores
- In the USA, the income tax* rate for people earning more than ₹6 crore is 44.7%
Hence, the highest tax in India is on par with that charged by most other leading economies.
Are You Paying a High-Income Tax?
The government offers various schemes to help people reduce their tax* liability. Section 80C is one of the most popular regulations for saving tax*. Under this section, you can avail up to ₹1.5 Lakh tax deductions every year by investing in one or more of the instruments listed in the section. These include:
- Public Provident Fund (PPF)
- National Pension Scheme (NPS)
- Unit Linked Insurance Policies (ULIP)
- Life insurance policies
- Tax*-saving fixed deposits, and many others.
Of all these tax-saving options, life insurance in India can help you prepare your family for financial exigencies when you are not around.
By having a life insurance policy in place, a policyholder can have peace of mind knowing that their family will be financially protected in the event of their death or disability, and also to provide for their long-term financial goals. In the event of the policyholder's death, the death benefit from the life insurance policy can be used by their family to cover expenses such as outstanding debts and daily expenses. It can also provide a source of income for the policyholder's dependents, replacing the loss of income and helping them maintain their standard of living.
Some life insurance plans also provide a maturity benefit, which can be used to meet one’s financial goals such as paying for a child's education or planning for retirement. A life insurance can also accumulate cash value over time. This cash value can be used as a savings or investment vehicle and also to meet any emergency financial needs.
In case one wants to plan their retirement or set up a future retirement fund for their spouse in the event of an unforeseen eventuality, a life insurance plan can easily help one achieve these objectives.
Riders are also an important part of life insurance in India which help enhance the policy coverage. Hence, life insurance can also help one deal with medical emergencies if they include health riders that cover a range of risks such as hospitalisation expenses, critical illnesses, and others, to their life insurance policy.
Lastly, one can also create a legacy for their beneficiaries or generate wealth through a suitable life insurance plan.
Conclusion
As responsible citizens, we must ensure that we pay income tax* on time and file returns too. While the common perception is that the income tax* rate in India is high, the fact is that the rates are on par with most countries. Running and managing a vast and diverse country like ours requires funds. With taxes being the main revenue source, by ensuring that we do not miss paying them, we contribute to the development of the nation.
L&C/Advt/2023/Feb/0323
