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As of the end of the financial year 2023-24, India’s tax revenues amounted to 19.58 crore rupees, a significant 17.7% increase from the previous year and far exceeding revised estimates.
When it comes to monetary obligation, what people owe to the government is known as tax liability. These obligatory payments are meant to fund facilities and infrastructure developments and promote social welfare. If you are employed in a formal sector, self-employed or operating a business, it is essential that you know your taxes.
This article will simplify everything about tax liability by looking at different types of taxes and providing knowledge that can assist you in making informed financial decisions.
What is tax liability?
Tax liability is the sum of money in the form of a tax debt that you have to repay your tax authorities. It’s the total amount of taxes you pay to the government.
Taxes apply to the income that you earn in any service or business, interest earned from different investment avenues, capital gains on shares and other securities sold by an individual, winnings from the lottery, horse races, house rent, and more.
The Indian Income Tax Act of 1961 has set laws regarding tax rates, exemption limits, etc. Tax liability is not only about the present year’s liabilities; it involves all the years and includes all types of taxes payable to revenue employees.
Types of tax liabilities in India
Income tax liability
The sum of money that individuals or businesses have to pay to the government according to their earnings is called income tax liability. The rates applied are based on the slabs of income, which keep changing every year in India, where Income tax is levied.
When calculating income tax, the formula for tax liability consists of adding up total incomes, removing deductions and exemptions and finally multiplying by rates that have been laid down by law.
Goods and services tax (GST) liability
Goods and services tax (GST) liability arises from supply. It is a comprehensive indirect destination-based multi-stage tax levied on every value addition.
Registration under GST law is mandatory for a person or business undertaking taxable supplies of goods or services in India. Calculation and filing of GST involves finding output tax, input tax credits and net tax payable.
You may also like: IGST explained: Simplifying inter-state taxation in India.
Corporate tax liability
Corporate tax liability represents taxes payable by both Indian and foreign companies operating in India. Corporate tax rates are different for domestic entities compared to foreign firms.
Calculation of corporate tax involves finding out net profits, applying the appropriate taxing rate, and allowing for permissible expenses or losses carried forward, if any, that are considered in the process.
Deferred tax liability
Deferred tax liability refers to any company’s future dues for taxation, which it does not have to pay immediately. It takes place when accounting income differs from taxable income.
Deferred tax asset and liability differ because the former represents future economic benefits while the latter represents future financial outflows. Examples include depreciation methods used for accounting versus taxation purposes, in addition to others.
Must read: Understanding deferred tax liability in a business context
How to calculate tax liability?
Tax liability formula
Simply put, the tax liability is determined by multiplying the taxable income with the tax rates.
If you are below 60 years of age, compute your tax liability as follows.
| Old tax regime | New tax regime u/s 115BAC | ||
| Income tax slab | Income tax rate | Income tax slab | Income tax rate |
| Up to ₹ 2,50,000 | Nil | Up to ₹ 3,00,000 | Nil |
| ₹ 2,50,001 – ₹ 5,00,000 | 5% above ₹ 2,50,000 | ₹ 3,00,001 – ₹ 6,00,000 | 5% above ₹ 3,00,000 |
| ₹ 5,00,001 – ₹ 10,00,000 | ₹ 12,500 + 20% above ₹ 5,00,000 | ₹ 6,00,001 – ₹ 9,00,000 | ₹ 15,000 + 10% above ₹ 6,00,000 |
| Above ₹ 10,00,000 | ₹ 1,12,500 + 30% above ₹ 10,00,000 | ₹ 9,00,001 – ₹ 12,00,000 | ₹ 45,000 + 15% above ₹ 9,00,000 |
| ₹ 12,00,001 – ₹ 15,00,000 | ₹ 90,000 + 20% above ₹ 12,00,000 | ||
| Above ₹ 15,00,000 | ₹ 1,50,000 + 30% above ₹ 15,00,000 | ||
Source: Income Tax Department
Tax liability example
Let’s assume that during a single fiscal year, an individual’s total gross income amounts to ₹12,50,000. This includes a salary of ₹10,00,000, rental earnings of ₹2,00,000, and interest from a fixed deposit account of ₹50,000. Additionally, the individual holds an active home loan.
The person is eligible for deductions under Section 80C (₹1.5 lakhs) and Section 24 (₹50,000 for home loan interest), resulting in a total deduction of ₹2 lakhs. After claims have been made, net taxable income comes down to ₹10,50,000. The tax calculation, as per the old regime, is as follows:
| Income | Tax rate | Tax amount |
| Up to ₹2,50,000 | 0% | ₹0 |
| ₹2,50,001 to ₹5,00,000 | 5% | ₹12,500 |
| ₹5,00,001 to ₹10,00,000 | 20% | ₹1,00,000 |
| Above ₹10,00,001 | 30% | ₹15,000 |
| Total tax | ₹1,27,500 |
This results in a total tax of ₹1,27,500. Further on this entire tax, there is also a 4% health and education cess, which amounts to ₹5,100. Therefore, the total income tax liability for this financial year equals to ₹1,32,600.
Further reading: Luxury tax – The hidden hands behind overpriced luxury goods and services
Bottomline
A conscious understanding of tax liabilities is paramount for both individuals and corporations in handling their financial obligations wisely. The determination of taxation involves considering relevant standards and rates alongside any deductions or exemptions.
These principles provide taxpayers with a clear understanding of how they can follow tax laws more effectively while reducing their taxes owed and supporting public infrastructure and welfare projects.
FAQs
Tax liability is the total of money that a person or institution must legally give to the government on account of their gains, wealth, or other taxable activities. However, tax payable refers to the precise sum of taxes not yet paid but still due. Tax liability stands for an overall tax demand over a period, whereas tax payable indicates current outstanding amounts that ought to be settled.
TDS’s abbreviation denotes “tax deducted at source.” It is a process of collecting Income Tax in India whereby specific percentages from payments like salaries, interests, commissions and rents, among others, are subtracted right from the source of payment. Thus, ensuring the advance collection of taxes and curbing avoidance risks are among the reasons why the deducted amount is paid by the remitter into the governmental treasury.
Input tax liability pertains to taxes paid on business purchases, which are reclaimable as input tax credit. Output tax liability, on the other hand, involves taxes collected from sales. The distinction lies in their roles: input tax liability eases purchase-related tax burden, while output tax liability reflects sales tax obligations.
Total TDS deposited means cumulative total tax deducted at source (TDS) from various payments made by an assessee to his payees, such as salary, interest on securities, dividend shares, rent, etc., over a specified period. After deducting this amount from his/her income, the payer remits it to the government. The payee’s total income includes any TDS received regarding this case and will reduce their overall tax bill when filing ITRs.
TFN stands for “tax file number.” It is an individual identification number given out by various revenue authorities. TFN helps streamline the taxation process and ensures secure communication with the taxation office. It becomes imperative for any form of taxation-related activity, such as filing tax returns or accessing social security benefits.