Last updated on 7 de April de 2023
India will be the dominant economic superpower by the end of the 21st century. We analyze the most important taxes in India in an easy-to-understand manner.
Content
- Introduction
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
- Goods and Services Tax
- Stamp Duty
- Inheritance and Gift Taxes
- India Public Finances
- Conclusion
Introduction
With about 1.3 billion people and very impressive growth rates, all forecasts place India as the main economic power of the second half of the 21st century. With a lot of catching up to do, it presents plenty of investment opportunities.
As a result, it is an increasingly popular destination for expats. Big corporations from all over the world want to land and expand their presence in what will be largest economy in the world.
When it comes to the cost of living, and according to the comparison website WorldData.info, prices in India are only about a third of those in the United States. Therefore, it is a very affordable country for expats with Western salaries.
India uses its own currency, the Indian Rupee (INR). Throughout this analysis we will see the original tax amounts in rupees, as well as their equivalent in US Dollars. For this we will use an approximate exchange rate of $1 = 85 INR.
Taxes on Earned Income
Let us start our analysis of taxes in India by looking at how labor income is taxed.
Social Security
India has a social security system. Though not all workers in the country are part of it.
This is because India’s economy is informal in many sectors, as it has not had time to develop yet. Consequently, only employees of large and medium-sized enterprises, as well as public workers, contribute to the social security.
By the same logic, this also means that only a small portion of the population is covered by the benefits and coverage offered by the Indian social security system:
The most significant social security contributions are made to the pension system. These are managed by three types of existing funds: EPF, EPS and EDLI. In total, workers contribute between 10-12% of their gross salary to the pension system, employers the equivalent of 10.5-12.5% of their employees’ gross salary, and the government 1.16%.
Such contributions give individuals the right to receive to a public retirement pension, accidents insurance, and their families widowhood and orphan pensions.
When it comes to healthcare insurance, those workers with salaries of up to 21,000 INR per month ($247) are covered by the social security and must make contributions. In this case, the worker contributes 1.75% of their salary, while the employer the equivalent of 4.75% of the worker’s gross salary.
It should be noted that, depending on the type of company, its size and region, additional social security payments may have to be made.
As a result, for those workers who are part of the Indian social security, contributions are in the range of 11.75-13.75%, whereas their employers have to contribute a percentage between 15.25-17.25%.
Income Tax
Workers in India must also pay income taxes. The Indian income tax system is progressive and has 7 different brackets:
- From 0 to 250,000 INR ($0 to $2,941): 0%
- From 250,000 to 750,000 INR ($2,941 to $5,882): 5%
- From 500,000 to 750,000 INR ($5,882 to $8,824): 10%
- From 750,000 to 1,000,000 INR ($8,824 to $11,765): 15%
- From 1,000,000 to 1,250,000 ($11,765 to $14,706): 20%
- From 1,250,000 to 1,500,000 ($14,706 to $17,647): 25%
- More than 1,500,000 (More than $17,647): 30%
Thus, taxes are relatively low for most workers in the country, who tend to have low or very low incomes. Those with decent incomes must pay about one-third to the tax authorities.
Capital Income Taxes
Next we will analyze what taxes apply to income from savings and investments:
Interest Incomes
Interest from bank deposits or fixed income instruments is taxable, although there is an exempt amount. Thus, the first 50,000 INR ($588) in a tax year are not taxed in most cases.
Any interest income above that figure will have to pay tax. The rate will be between 10% and 20%, depending on the type of savings or investments product from which interest income has originated.
Dividends
Dividends received from stocks or direct business investments, regardless of whether they come from Indian or foreign corporations, are taxed at the progressive income tax rates that apply to earned income. As a result, they can be as high as 30% for those with higher incomes.
Rental Income
Income from real estate investments is also subject to taxation. However, the tax treatment it receives is quite favorable.
First, we need to calculate the taxable amount. From the gross income received we will subtract all expenses associated with the ownership of the property (municipal taxes, repairs, mortgage interest, etc.), as well as 30% of that gross income as a standard deduction.
On the taxable amount, taxes will be calculated using the progressive tax rates that apply to earned income, which range from 0% to 30%.
Realized Capital Gains
Regarding realized capital gains, taxes will depend on how they have been achieved.
Financial investments, for example, stocks and ETFs, are taxed at 10% if we have owned them for at least 3 years before selling them or if, due to the nature of the investment, as in the case short-term bonds, that has not been possible. Otherwise, the tax rate for realized capital gains increases to 15%
Capital gains from other types of investments, including real estate, precious metals or cryptocurrencies, will be taxed at 20%.
Corporate Tax
While income taxes in India are quite moderate, corporate taxes are quite onerous.
The applicable corporate tax rate for a company depends on whether it is domestic or foreign entity, the size of its profits, as well as its revenue growth over the previous year.
For smaller Indian companies, with profits of up to 10 million rupees ($117,647) the corporate tax rate is 26%. Profits of up to $100 million rupees ($1,176,470) are taxed at 27.82%. And profits above that at 29.12%.
If the company is Indian and has managed to increase its turnover considerably, the tax rates increase to 31.20, 33.98 and 34.94%, for profits of up to 10 million, 100 million and above 100 million, respectively. To be subject to these higher rates, a company’s revenue must have grown by at least 4,000 crore ($47 million) over the previous year. Therefore, it will be mostly large domestic corporations.
Finally, foreign companies operating in the country also have to pay corporate taxes. The applicable rates also depend on whether they are below 10 million rupees, between 10-100 million or above 100 million. The applicable corporate tax rates will be 41.60, 42.43 and 43.68%, respectively.
Goods and Services Tax
The consumption of goods and services in India is subject to the GST (Goods and Services Tax). It has 5 different rates:
The top GST rate in India is 28% and applicable to items such as cars, air conditioning devices and luxury hotels. In other words, non-essential purchases.
The second GST rate of 18% is used for televisions, financial services, cinemas and theaters, as well as restaurants with a license to sell alcoholic beverages.
The third rate, at 12%, applies to construction, mobile phones and some food products.
The fourth rate of 5% is used for private transport services, coffee, tea, sugar, and medical products and services.
Finally, most basic foods, books, newspapers and postal services are effectively exempt from GST.
Stamp Duty
The purchase of a property in India is subject to taxes in most cases. The Indian Stamp Duty is similar to the ones in UK and Australia.
Stamp Duty in India is determined by the region in which the property is located. The applicable rates range from 3% to 9.5% of the value of the transaction. Some regions offer lower rates if the buyer is a woman.
Registration fees have to be paid on top and, although they vary by region, they tend to be much more uniform, at around 1% of the transaction value.
Inheritance and Gift Taxes
Inheritance tax does not exist in India. This is regardless of the relationship between the deceased and the heir.
When it comes to gifts, taxes might apply. While gifts between family members are usually fully tax-exempt, gifts received from non-family members exceeding 50,000 INR ($588) could be subject to taxes.
However, if such gifts take place because of special occasions, such as for a wedding, they may also be exempt from taxes.
India Public Finances
Before concluding this analysis, we will look at the state of India’s public finances. This will help us determine if the current tax and spending policies are sustainable or may need to me amended in the near future.
The graph below shows the level of public debt in India since the late 1990s:
As we can see, India has a relatively high level of public debt. While it is true that most developed nations have even more public debt, emerging countries are usually more vulnerable as they cannot issue hard currency.
On the positive side, India’s population is young and growing. If we also consider the economic growth that is to come in the next few decades, India should be able to get into a much healthier financial position.
Conclusion
India is one of those extremely unique places. It will soon become the most populous country on the planet, with a much younger population than India. It also shares a lot of things with the Anglo-Saxon world.
Regarding its tax system, it is quite attractive for individuals, even if they enjoy high income levels, as most expats do.
Companies do bear a much heavier tax burden, as India has some of the highest corporate tax rates of any country in the world. Lowering them would allow India to attract a lot more foreign investment and develop its economy much faster.
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And if you want to read about taxes in another interesting Asian destination, check out this link:
Taxes in Hong Kong – A Complete Guide
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