Income Tax

Posted in Finance, Accounting and Economics Terms, Total Reads: 2331

Definition: Income Tax

Income tax is a tax levied by governments on individuals and entities falling under the purview of their jurisdiction. This tax is generally expressed as a percentage on the financial income of these entities including salaries, profits or gains from businesses, capital gains or income from any other source. If T be the tax rate then the net tax to be paid by an individual with an income I would be:

Tax paid= T x I

Based on the source of income on which the tax is levied, it is classified as personal, corporate, payroll, inheritance or capital gains tax. Income tax is the major source of funding for national governments to carry out their activities and the systems vary in different countries from progressive, proportional and regressive. However, most companies follow a progressive taxation system in which tax rate increases as income increases following the ideology that the rich should contribute more to the public expense. Tax is also sometimes used as a tool to promote investments and savings by means of tax benefits.

Example: India follows a progressive system of taxation with different tax slabs for different income levels as detailed below:

Net Income Range

Income Tax rate

Up to 200,000






Above 1,000,000


Hence, this concludes the definition of Income Tax along with its overview.

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