Governments collect taxes to pay for various expenses that they incur for the benefit of people. Both central government and state governments collect taxes. State governments collect taxes in various forms such as municipal tax, property tax, professional tax, road tax, and local sales tax. The central government or the federal government on the other hand collects taxes like excise duty, central sales tax, and income tax.

Taxes are payable for each assessment year. Assessment year differs from the Gregorian calendar, as well as financial year. Therefore, if the financial year corresponds to Gregorian calendar, then the assessment year would be the year following the Gregorian calendar. However, if the financial year is spread across two years as per Gregorian calendar, for example the financial year starts on April 1st, 2010, and ends on March 31st, 2011, then the assessment year would be 2011-2012.

Income tax paid directly by an individual, business enterprise, or organizations to the government is referred to as direct tax. Unlike it, taxes collected through other sources, such as taxes on toothpaste, or other purchases in malls, are indirect taxes as it is the manufacturer who pays such taxes. Therefore, the individual does not have to keep a record of indirect taxes.

There are some taxes such as property tax, which are paid to the State government, but they can be reduced from the total income for arriving at the taxable income for any assessment year. There are other tax deductions and rebates also available to individuals, business enterprises, and organizations. These may be altered periodically in annual budgets.

Therefore, any amount paid in a financial year to a lender towards interest on home loan may be exempt from being taxed, subject to a ceiling. Likewise, any amount that a person contributes to any recognized charitable organization may be totally or partially exempt from income taxes. Business enterprises are entitled to set off expenses such as remuneration paid to employees, rents paid for office, any utility expenses, depreciation on vehicles and machinery, etc., to arrive at taxable income. Corporate tax rates differ from the tax rates applicable to individuals.

Incomes from different sources are classified into different categories and tax rebates / exemptions associated exclusively with them are reduced to arrive at net taxable income from each such category. There is a predefined sequence of presenting these categories of income in the computation of income tax. Such net taxable income from each source is then totaled. This is then reduced further by other general exemptions such as basic tax exemption, rebates on charity, savings for retirement, etc. The final amount is the net taxable income. Taxes are calculated telescopically, i.e., there are different tax slabs. Suppose a person has a taxable income of 250000. If the basic exemption is 50000, and the tax rate applicable on first 100000 is 10 percent, and thereafter 20 percent then the person would be paying tax of 10000+20000 = 30000. If it were not telescopic, the person would have paid 40000 towards taxes.