What is taxation and why it matters: A simple guide for every Indian

Taxation is the process by which governments collect money from individuals and businesses within their jurisdiction to fund public expenditures and services.
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3 min
31-June-2025

Taxation is not just a deduction from your income—it's the backbone of national development. Every rupee you pay helps build schools, hospitals, roads, and a more equal society. But while taxes are mandatory, understanding them empowers you to make smarter money moves.

Just like taxes contribute to national growth, life insurance helps you secure your loved ones’ future while also offering potential tax savings under Sections 80C and 10(10D) of the Income Tax Act.

Let’s explore what taxation really is, its types, and how reforms like GST changed the landscape—along with how smart investments like life insurance policies and event Fixed Deposits (FDs) can play a key role in financial planning.

What is taxation?

Taxation is the process by which the government collects money from individuals and businesses to fund public services and infrastructure. It includes a variety of levies like income tax, GST, property tax, and more.

You pay tax every time you earn income, make a profit in your business, buy products, or even invest.

Certain investments—like life insurance savings plans—qualify for tax deductions, meaning you can protect your family and reduce taxable income at the same time.

Explore life insurance with savings plans that also provide tax benefits to you, helping your wealth grow. Choose a plan that suits your financial goals and get quote!

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Why do we need taxes?

Taxes do more than fund government expenses. They help in:

  • Funding public services – schools, hospitals, sanitation, and defence.
  • Reducing income inequality – progressive taxes ensure the rich pay more.
  • Controlling inflation – tax increases reduce excessive demand.
  • Encouraging social welfare – through subsidies and pension schemes.
  • Stabilising the economy – enabling the government to invest during downturns.

Want to grow your savings while staying tax-efficient? Explore life insurance plans that offer both protection and tax benefits—so your family’s financial future stays secure. Get quote now!

Types of taxes in India

Direct Taxes

These are charged directly on your income or wealth. You pay them personally, and the burden can’t be shifted.

  • Income Tax: Paid by individuals and HUFs on salaries, business income, or interest earned (including on FDs). Life insurance maturity proceeds (subject to certain conditions) can be tax exempted under Section 10(10D), reducing your overall tax burden.
  • Corporate Tax: Paid by businesses on their profits.
  • Capital Gains Tax: Applies when you sell property, stocks, or mutual funds for profit.

Indirect Taxes

These are taxes you indirectly pay while purchasing goods or services. They're included in the final price.

  • Goods and Services Tax (GST): Replaced multiple older taxes, simplifying the system.
  • Customs Duty: Charged on imports and exports.
  • Excise Duty: Earlier levied on manufacturing, now largely subsumed under GST.

The game-changer: GST in India

Introduced in July 2017, GST merged numerous state and central taxes into one. The benefits?

  • One tax across the country.
  • Simpler compliance for businesses.
  • Transparent pricing for consumers.

How taxes support national development

1. Revenue generation

Government uses your taxes to build infrastructure, provide public services, and support defence and law enforcement.

2. Wealth redistribution

Higher tax slabs for higher income help fund welfare schemes, pensions, and subsidies for the underprivileged.

3. Economic regulation

Tax incentives can encourage investments in specific industries. Sin taxes discourage harmful behaviour like smoking or pollution.

4. Market correction

Taxes can reduce overconsumption of harmful products and help offset public health expenses.

Understanding taxation in the context of FDs

Fixed Deposits are a preferred low-risk investment. However, you should be aware of how the returns are taxed:

  • Interest earned is taxable as “Income from Other Sources.”
  • TDS (Tax Deducted at Source) applies if interest exceeds Rs. 40,000 (Rs. 50,000 for senior citizens) in a financial year.
  • Form 15G/15H can be submitted to avoid TDS if your total income is below taxable limits.

Life insurance savings and investment plans, on the other hand, not only help your money grow but can also offer tax-free maturity benefits—making them a powerful addition to your portfolio alongside FDs.

Direct vs Indirect taxes: Key differences

Feature

Direct Taxes

Indirect Taxes

Collected from

Individual or entity

Consumer through seller

Examples

Income Tax, Capital Gains

GST, Customs Duty

Visibility

Clearly deducted

Hidden in product/service price

Redistribution focus

High

Low

 

Benefits of taxation in India

  • Controls inflation: Higher taxes reduce consumer spending.
  • Reduces inequality: Richer individuals contribute more.
  • Strengthens infrastructure: Roads, power, schools.
  • Promotes growth: Funds sectors like agriculture, startups.
  • Social upliftment: Supports schemes like PM Awas Yojana, Ujjwala, etc.

Tax benefits are not just about saving money today—they’re about securing tomorrow. A life insurance plan helps you achieve both. Compare plans now and get quote!

Countries with zero income tax

Nations like UAE, Qatar, and the Bahamas don’t charge personal income tax. They usually rely on oil exports or tourism, and often levy high sales or corporate taxes to fund public welfare.

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Which country has the highest income taxes?

Sr no

Country

Personal Income Tax Year 2023 (%)

Sales Tax 2023

Corporate Tax 2023

1

Finland

57.3%

24%

20%

2

Japan

55.95%

10%

30.62%

3

Denmark

55.9%

25%

22%

4

Austria

55%

20%

23%

5

Sweden

52.3%

25%

20.6%

6

Aruba

52%

4%

25%

7

Belgium

50%

21%

25%

8

Israel

50%

17%

23%

9

Slovenia

50%

22%

22%

10

Netherlands

49.5%

21%

25.8%


* This data is subject to change

Why taxation isn't just a deduction—it’s your contribution

They provide the government with the necessary funds to operate efficiently. This revenue is utilised for various public services such as building roads, providing education, healthcare, and defense.

Additionally, taxes help maintain law and order, support social welfare programs, and stimulate economic growth.

In essence, paying taxes is a civic responsibility that contributes to the overall development and well-being of a society.

Conclusion

Taxation may seem like a drain on your income, but it’s actually a powerful tool to build a stable future—for you and for the nation. Knowing the types of taxes, how GST works, and how your investments are taxed can help you take smarter financial decisions.

Whether you're an individual looking to save more or a business navigating compliance, remember—being tax-aware is being financially smart.

Income Tax Sections & Saving Tips

Section 80C of Income Tax Act

Section 80CCC of Income Tax Act

Taxation

Post office tax saving scheme

What is cess on income tax

Marginal rate of tax

Deferred tax liability

Exempt exempt exempt in income tax

Exemptions under new tax regime

How to save tax for salary above 10 lakh

How to save tax for salary above 20 lakh

How to save tax for salary above 30 lakh

How to save tax for salary above 50 lakh

How to save tax for salary above 9 lakh

How to avoid tax on savings account interest

Frequently asked questions

What do you mean by taxation?

Taxation refers to the process by which a government imposes financial charges on individuals and businesses. These charges, known as taxes, are mandatory and are used to fund public services and infrastructure.

What are the objectives of taxation?

The objectives of taxation include generating revenue for the government, redistributing wealth to reduce economic inequality, regulating economic activities, promoting social welfare, and stabilizing the economy through fiscal policies.

What is the role of taxation?

The role of taxation is to provide the government with the necessary funds to operate, including financing public services like education, healthcare, and defense. It also helps regulate the economy, redistribute wealth, and promote social equity.

What is the purpose of taxation in India?

In India, the purpose of taxation is to raise revenue for government expenditures, support economic development, reduce income inequalities, fund social welfare programs, and regulate economic activities to ensure sustainable growth and stability.

What is Indian taxation?

Indian taxation refers to the country's structured tax system, where authority is divided between the Central Government, State Governments, and local bodies. The Central Government imposes taxes like income tax (excluding agricultural income), customs duties, excise, and service tax, while states handle other forms of taxation.

What is the full form of tax?

The full form of "tax" is "Taxation." It involves the government's process of collecting mandatory contributions from individuals and businesses to fund public services and programmes. Taxes apply to various income and wealth sources, including salaries, investments, and property.

What is the other meaning of taxation?

Apart from being a financial obligation, taxation also refers to the process by which governments collect revenue to fund public services and development. It symbolises a civic duty and a tool for economic regulation, helping maintain infrastructure, ensure social welfare, and redistribute wealth for balanced economic growth.

What is the tax feature?

A key feature of tax is that it cannot be transferred—only the income earner is responsible for paying it. Tax systems often follow a progressive structure, where higher earners contribute a larger share. Tax rules, collection methods, and rates are set by laws such as the Income Tax Act, 1961, ensuring legal compliance and fairness.

What are the 7 principles of taxation?

The seven core principles of taxation include equity, certainty, convenience, economy, simplicity, flexibility, and diversity. These principles ensure that tax systems are fair, predictable, easy to comply with, cost-effective, and adaptable to economic changes.

Is taxation good or bad?

Taxation is essential for funding public services and infrastructure, making it beneficial when used efficiently. However, excessive or unfair taxation can discourage economic activity and burden citizens, so a balanced approach is necessary.

Which country has no tax?

Countries like the United Arab Emirates, Qatar, and the Bahamas are known for having no personal income tax. However, they may impose indirect taxes, such as VAT, or earn revenue from natural resources and tourism.

What are the benefits of tax?

Taxes fund essential public services such as infrastructure, healthcare, education, and national security. They also help reduce income inequality through social welfare schemes and enable governments to regulate economic activity. Overall, taxes are vital for the development, stability, and functioning of a nation's economy and governance.

Which type of tax is GST?

The Goods and Services Tax (GST) is an indirect tax that replaced several earlier taxes in India, such as VAT, Service Tax, Central Excise Duty, Entertainment Tax, and Octroi. It was implemented on 1 July 2017 to simplify the taxation system on the supply of goods and services.

Who introduced taxation?

In India, taxation was first introduced in 1860 by Sir James Wilson. The primary objective was to recover the financial losses incurred by the British Government due to the Military Mutiny of 1857, marking the beginning of formal income tax in the country.

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