Budget and Taxation
The Union Budget and India’s taxation system are fundamental to understanding how the government raises revenue and allocates spending to drive economic growth, social welfare, and financial inclusion. For IBPS Clerk candidates, questions on the budget, taxation (both direct and indirect), and specific tax provisions appear regularly in the General Awareness section. Moreover, bank clerks frequently handle queries related to tax deduction at source (TDS), tax-saving investments, PAN cards, and GST — all of which require a basic understanding of India’s tax system. This chapter covers the essentials of India’s budget process, taxation structure, and key tax provisions relevant to the IBPS Clerk examination.
The Union Budget: Overview
The Union Budget is the annual financial statement of the Government of India, presenting the government’s estimates of receipts and expenditures for the fiscal year (April 1 to March 31). The budget is presented by the Finance Minister in Parliament, typically on February 1 each year (so that the budget can be passed before the start of the new fiscal year on April 1).
Key budget documents:
- The Finance Bill: Contains the taxation proposals; becomes the Finance Act after passage by Parliament
- Economic Survey: Presented a day before the budget; reviews the economic performance of the past year and provides economic outlook; prepared by the Department of Economic Affairs
- Annual Financial Statement (AFS): The main budget document showing receipts and expenditures
Budget Preparation Process
The budget preparation process begins months in advance:
- Budget Circular: Issued by the Ministry of Finance to all ministries/departments in September/October
- Internal meetings: Ministries submit their demands for funds
- Meeting with Finance Minister: Ministries defend their proposals
- Finalization: Finance Ministry finalizes the budget in consultation with the Prime Minister
- Printing: Budget documents are printed under tight security at the Ministry of Finance Press
- Presentation: Finance Minister presents the budget in Parliament on February 1
Budget Terms
Revenue Receipts: Receipts that do not create a liability or consume assets (tax revenue + non-tax revenue). Capital Receipts: Receipts that create liabilities or reduce assets (borrowings, disinvestment, recovery of loans).
Revenue Expenditure: Expenditure that does not result in creation of assets (salaries, subsidies, interest payments, pensions, grants to states). Capital Expenditure: Expenditure that results in creation of assets or reduces liabilities (construction of highways, ports, schools, hospitals, military equipment).
Fiscal Deficit: Total expenditure minus revenue receipts and capital receipts (excluding borrowings). It represents the total borrowing requirement of the government. Formula: Fiscal Deficit = (Total Expenditure − Revenue Receipts − Non-debt Capital Receipts)
Primary Deficit: Fiscal Deficit minus interest payments. It represents the borrowing requirement net of interest obligations.
Effective Revenue Deficit (ERD): Revenue deficit minus grants for creation of capital assets. A better measure of the government’s true deficit.
Key Budget Components (Recent Trends)
Major expenditure heads:
- Interest payments: Largest single item (~20% of total expenditure) — payment of interest on past government borrowings
- Subsidies: Food subsidies (under NFSA), fertilizer subsidies, oil subsidies (Ujjwala connections, LPG subsidy)
- Defence: Typically 13–15% of budget
- Health and Education: Combined ~10-12% of budget
- Capital expenditure (infrastructure): Roads, railways, ports, airports
Major revenue sources:
- Direct taxes: Income tax, corporate tax (~5.5% of GDP combined)
- Indirect taxes: GST, customs duty, excise duty (~6-7% of GDP)
- Non-tax revenue: Dividends from PSUs, spectrum auctions, licensing fees
Direct Taxation
Direct taxes are taxes paid directly by the taxpayer on their income or wealth (the burden cannot be shifted to another person).
1. Income Tax
The Income Tax Act, 1961 governs income tax in India. It applies to individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities.
Heads of Income:
- Salaries: Income from employment
- House Property: Rental income from property
- Profits and Gains of Business or Profession: Income from self-employment, business, or profession
- Capital Gains: Profits from sale of capital assets (land, buildings, shares, gold)
- Other Sources: Interest, dividends, lottery winnings, gambling
Income Tax Slabs for Individuals (FY 2024-25, New Regime — default):
| Income Range | Tax Rate |
|---|---|
| Up to ₹3 lakh | Nil |
| ₹3 lakh – ₹7 lakh | 5% |
| ₹7 lakh – ₹10 lakh | 10% |
| ₹10 lakh – ₹12 lakh | 15% |
| ₹12 lakh – ₹15 lakh | 20% |
| Above ₹15 lakh | 30% |
Rebate under Section 87A: Tax rebate up to ₹25,000 for individuals with income up to ₹7 lakh (under new regime).
Surcharge: Additional tax on high incomes (10% for income ₹50 lakh–1 crore; 15% for ₹1 crore–2 crore; 25% for ₹2 crore–5 crore; 37% for above ₹5 crore).
4% Health and Education Cess is added to the total tax liability.
Standard Deduction: ₹75,000 (for pensioners: ₹1,05,000).
Tax-Saving Deductions under Section 80C
Individuals and HUFs can claim deductions up to ₹1.5 lakh per year under Section 80C (from gross total income):
- Life insurance premium
- Public Provident Fund (PPF)
- Employees’ Provident Fund (EPF)
- Equity Linked Savings Scheme (ELSS)
- National Savings Certificate (NSC)
- Tax-saving fixed deposits (5-year bank FDs)
- Principal repayment of home loan
- Children’s tuition fees
- Sukanya Samriddhi Yojana contributions
- ULIP premiums
Other deductions:
- Section 80CCD(1B): Additional deduction of ₹50,000 for NPS (National Pension System) contributions
- Section 80D: Health insurance premium (₹25,000 for self/spouse; ₹50,000 for senior citizens; additional ₹25,000 for parents)
- Section 80E: Interest on education loan (no upper limit)
- Section 80G: Donations to specified charitable institutions (50% or 100% deduction depending on institution)
- Section 80TTA: Interest income from savings bank accounts (up to ₹10,000)
- Section 24(b): Interest on home loan (up to ₹2 lakh for self-occupied property)
Corporate Tax
Domestic companies: 25% (for companies with turnover up to ₹400 crore in FY22) or 30% (for larger companies), plus surcharge and cess. Foreign companies: 40% plus surcharge and cess. Companies opting for the new regime may pay at 22% with no exemptions/deductions.
Indirect Taxation: GST
Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based indirect tax that replaced multiple indirect taxes (central excise duty, service tax, VAT, entry tax, octroi, etc.) on July 1, 2017.
GST is levied on:
- Supply of goods and services across India
- It is a destination-based tax — collected by the state where goods/services are consumed, not where they are produced
GST Structure:
- CGST: Central GST — collected by the central government
- SGST: State GST — collected by the state government
- UTGST: Union Territory GST — for Union Territories without a legislature
- IGST: Integrated GST — for inter-state transactions and imports
GST Rate Slabs:
- Exempt: Fresh fruits, vegetables, milk, bread, education, healthcare
- 5%: Sugar, tea, edible oil, economy rail travel, small restaurants
- 12%: Computers, processed food, business air travel, medicines
- 18%: Most items — soaps, toothpaste, capital goods, financial services, telecom
- 28%: Luxury items — AC restaurants (5-star), cars, pan masala, aerated beverages, luxury watches
- Nil: Unprocessed agricultural goods, education, healthcare
GST Compensation Cess: Additional cess on sin goods (tobacco, pan masala, luxury cars, aerated beverages) to compensate states for revenue loss during the transition period (2017–2022).
GST Council: A constitutional body chaired by the Union Finance Minister, with representatives from all states, that recommends GST rates and policies. All decisions require a two-thirds majority (75% of weighted votes of states present).
TDS (Tax Deducted at Source)
TDS is a means of collecting income tax at the source of income. The person making the payment deducts a percentage and remits it to the government. The recipient claims credit for the TDS deducted when filing their income tax return.
Common TDS rates:
- Salary (Section 192): As per income tax slabs
- Interest on securities (Section 193): 10%
- Dividends (Section 194): 10%
- Interest on deposits (Section 194A): 10% (if interest exceeds ₹40,000 per year; for senior citizens: ₹50,000)
- Professional fees/contractor (Section 194C/194J): 10%/20%
- Rent (Section 194I): 10%
Form 16: Issued by employers to employees showing salary, TDS deducted, and tax computation.
Form 26AS: Tax credit statement showing all taxes deducted, advance tax paid, and self-assessment tax paid by an individual.
PAN Card and Its Importance
PAN (Permanent Account Number) is a 10-character alphanumeric unique identification number issued by the Income Tax Department. It is mandatory:
- For filing income tax returns
- For opening a bank account (mandatory for all account holders since 2017)
- For transactions above ₹50,000 (property, vehicles, foreign exchange)
- For investing in mutual funds, stocks, fixed deposits above threshold
- For obtaining a credit card
Linking PAN with Aadhaar: Mandatory for all PAN holders. Unlinked PAN will become inoperative.
⚡ Exam tip: GST was implemented on July 1, 2017. GST slabs are 5%, 12%, 18%, 28% (plus cess on sin goods). CGST + SGST = Total GST collected within a state. IGST is for inter-state transactions. Section 80C allows deduction up to ₹1.5 lakh per year. Section 80D allows deduction for health insurance. Section 80E allows deduction for education loan interest (no upper limit). Sukanya Samriddhi Yojana has EEE status. Budget is presented on February 1 each year. Fiscal deficit is total expenditure minus revenue receipts.
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