Tax rates in India

Taxation is an integral part of any country's financial system, and India is no exception. Understanding the tax rates applicable to different entities is crucial for individuals, domestic companies, and foreign companies operating in India.

Income tax rates applicable to foreign companies

Foreign companies operating in India are subject to income tax at 40 percent of the average taxable income.

Surcharge: Foreign companies are required to pay a surcharge on their income tax, which varies based on their income range. The surcharge rates are as follows:

• The rate of 2 percent is applicable to foreign companies having an income range between INR 10 million and INR 100 million.
• The rate of 5 percent is applicable to foreign companies having an income range exceeding INR 100 million.

Health and Education Cess: This cess is levied at a rate of 4 percent on the amount of income tax plus surcharge.

Income tax rates applicable to partnership firms and Limited Liability Partnerships (LLPs)

Partnership firms and LLPs are subject to income tax at a rate of 30 percent.

Surcharge: The amount of income tax shall be increased by a surcharge at the rate of 12 percent of such tax, where the total income exceeds INR 10 million.

Health and Education Cess: This cess is levied at a rate of 4 percent on the amount of income tax plus surcharge.

Tax rates applicable to domestic companies

Health and Education Cess: The amount of income tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of 4 percent of such income tax and surcharge.

Minimum alternative tax (MAT)

Minimum Alternative Tax (MAT) is a tax provision in India that ensures that companies pay a minimum amount of tax, even if they have reduced their tax liability through various deductions and exemptions. A domestic company that has opted for the special taxation regime under Sections 115BAA and 115BAB is exempt from the provision of MAT. If a domestic company has opted for the provisions of section 115BA, they are not exempt from MAT. In that case, the provisions of MAT apply, and tax payable cannot be less than 15 percent (+HEC) of the "book profit" computed as per Section 115JB.

However, MAT is levied at the rate of 9 percent (plus surcharge and cess as applicable) for such companies that are units of an International Financial Services Centre (IFSC) and derive their income solely on convertible foreign exchange.

Income tax rates for individuals

Income tax is levied on the income earned by individuals, Hindu Undivided Family (HUF), partnership firms, LLPs, and corporations as per the Income-tax Act, 1961 of India. The income tax rates for individuals are based on a slab system, where different tax rates are prescribed for different income ranges. In essence, as a taxpayer's income rises, the applicable tax rates progressively increase.

Starting April 1, 2023, major changes have been introduced in India's new income tax regime through the Finance Act, 2023. The new income tax regime, introduced in 2021, has now become the default mode of taxation. Although the old tax regime continues to be operational, taxpayers will have to especially opt for it. Importantly, no new changes have been introduced to the old income tax regime.

New income tax regime

The Indian income tax system has introduced a new income tax regime that taxes individuals based on their taxable income or profits earned. Taxpayers can opt for this new regime, which offers lower tax rates but requires forgoing exemptions and deductions. Initially, the new tax regime had seven distinct tax slabs. However, in efforts to boost consumer spending, the government has reduced both the number of tax slabs and tax rates under the new system in Financial Year (FY) 2024. The 2023 union budget extended the rebate for individuals subject to the new income tax regime for annual incomes up to INR 700,000. Previously, individuals with incomes up to INR 500,000 paid no income tax under either the old or new schemes.

The new income tax regime includes a standard deduction of INR 50,000. Salaried taxpayers can claim this upfront deduction of INR 50,000 from their total taxable income, which was previously only available under the old tax structure.

The government has rationalized the tax slabs under the new income tax system, reducing the total number of taxable brackets to five. Here is the updated income tax structure as per the Union Budget of 2024 for the new regime:

Old tax regime

Despite the availability of higher tax slabs, the old tax system has remained the preferred choice for taxpayers in the country. This is because it provides individuals with higher annual earnings and more investments with the opportunity to benefit from significant tax deductions.

Under the old taxation system, the taxpayer can utilize deductions, exemptions, and allowances to strategically manage their finances and reduce their overall tax liability.

Here are some of the deductibles under the previous tax system:

• Public Provident Fund (PPF)
• Equity-Linked Savings Schemes (ELSS)
• Employees' Provident Fund (EPF)
• Life insurance premiums
• Principal and interest payments on a mortgage
• Health insurance premiums
• Investments in National Pension System (NPS)
• Tuition fees for children
• Interest on savings accounts

Here are exemptions under the previous tax system:

• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Reimbursement for mobile and internet expenses
• Food coupons or vouchers
• Company-leased automobile benefits
• Standard deduction
• Uniform allowance
• Leave encashment

In the case of AOP, which consists of only companies as its members, the rate of surcharge should not exceed 15 percent. Health and Education cess is at four percent on the aggregate of base tax and surcharge.

Resident individuals with a total income not exceeding INR 500,000 can avail rebate of INR 12,500 or actual tax liability, whichever is lower.