How different is filing taxes in India versus filing taxes in the USA?

Written by : Knowledge Centre Team

2024-08-02

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How different is filing taxes in India versus filing taxes in the USA?

The government of every country is entrusted with the responsibility of providing adequate resources and facilities for its citizens to thrive. In return, the citizens are liable to pay a portion of their annual income - that is, taxes - to the country’s government to ensure that its operations run smoothly. However, not all countries function the same way and therefore, no two tax systems are alike.

In order to understand how tax systems can differ from country to country, let us take a closer look at our own tax system and compare it with that of another - the United States of America. Here are some of the major differences between tax systems, tax filing and tax saving in India and the US.

Tax Rates

In order to understand the difference between tax saving in India and the US, we must first understand how their tax rates are determined. In this context, both India and the USA employ a progressive tax system. Progressive tax systems are those under which the applicable tax rate for an individual increases with their taxable income. Therefore, lower-income individuals are charged a lower tax rate while high-income individuals are charged taxes at higher rates.

Tax Slabs

To consider tax saving in India and the US, you must familiarize yourself with how the tax rates are divided into categories.

In the Indian tax system, these categories are referred to as ‘tax slabs’. They specify tax rates as they apply to specific ranges of taxable income. Moreover, they differ based on the age of the individual being taxed. These categories are split into:

Individuals up to age 60
Senior Citizen - of age more than 60 but less than 80
Super Senior Citizen - of age more than 80
In the American tax system, these categories are known as ‘tax brackets’ and unlike the Indian tax system, are not determined by age. Instead, they are mainly split based on marital status. The tax brackets for the tax system in the US are as follows:
Single - For unmarried or divorced individuals.
Married Filing Jointly - For married couples who wish to combine their incomes.
Married Filing Separately - For married couples who do not wish to combine their incomes and thereby lower their individual income.
Head of Household - For unmarried individuals, who pay at least half the amount of money required to keep a home for a Qualifying Person (that is, a dependent).
Qualifying Widow/Widower - For surviving spouses who have dependents, such as children.

Forms

There is considerable similarity in the type of standard forms required to file taxes in both India and the US. If you are a salaried employee in India, the standard form you require to file your IT returns is the Form 16. The same function is served in the American tax system by the W-2 form.

For other sources of income, the Indian tax system provides for forms such as ITR-2, ITR-4. Meanwhile, the American tax system has a series of 1099 forms such as the 1099-R for annuities, 1099-G for unemployment compensation and 1099-MISC for miscellaneous sources of income.

Deductions

Now, let us closely explore the differences between tax saving in India and the US, by the means of tax deductions.

Under the Indian tax system, an annual taxable income under Rs 2.5 lakhs is considered exempt from tax. This means that an income ranging from Rs 0 to Rs 2.5 lakhs will be levied 0% tax. Even if your income is above this threshold, you can lower your taxable income by availing the standard deduction of Rs 50,000 if you are a salaried individual or various other tax deductions such as Section 80C, 80CCD and 80E.

Under the American tax system, there is no threshold that is exempted from tax. The minimal tax that must be levied on a taxable income, even if it is $0, is 10%.

However, the tax system in the US does provide all its taxpaying citizens with the option of availing a Standard Deduction. If you opt for the Standard Deduction as a US taxpayer, that amount is deducted from your taxable income. The applicable tax rates are then levied on the resulting amount.

Alternatively, you can choose to not go for the Standard Deduction and instead personally itemize your tax returns. With this option, you can get to choose your own specific deductions as they apply to you. As a US taxpayer, you can choose whichever one of these options results in the lowest taxable income for you.

Conclusion

At the end of the day, examining the differences in tax filing and tax saving in India and the US helps shed light on how every process can have its own pros and cons. Yet, when it comes to filing your taxes, both countries share considerable similarities today.

Tax returns in both India and the US can be filed manually, entirely online or with the aid of tax filing software programs. Alternatively, you can hire a professional such as a financial consultant or CA to help you out with your tax filings.

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