Why Do Only 5% of Indians Pay Income Tax?

Understanding the Truth Behind India’s Low Taxpayer Base

10th May 2025, Gaurav Kumar Singh

When you hear that only 5% of Indians pay income tax, it might sound shocking, especially in a country of over 1.4 billion people. But there’s more to the story than just the numbers. Let’s try to understand why the number of income tax payers in India is so low, who actually pays taxes, and what it means for the Indian economy.

What Does It Mean to Pay Income Tax in India?

Income tax is a direct tax levied by the government on the income of individuals and businesses. In India, not everyone is required to pay income tax—only those who earn above a certain limit.

As per current rules (FY 2024-25), individuals below 60 years of age must pay income tax if their annual income exceeds ₹3.0 lakh. Senior citizens have a higher exemption limit.

So, Why Do Only 5% of Indians Pay Income Tax?

Here are the main reasons:

1. A Large Informal Economy

India has a massive informal sector—over 90% of the workforce is employed in unorganized sectors like agriculture, construction, local shops, and household services. Most of them earn in cash and don’t maintain formal income records.

Example: A vegetable vendor earning ₹500 a day might make around ₹1.5 lakh per year—well below the taxable limit. Plus, since their income isn’t documented, it’s hard to track.

2. Low Per Capita Income

India’s per capita income (average income per person) is still relatively low—around ₹1.8 lakh per year (as of 2024). That means a majority of the population doesn’t even earn enough to cross the basic tax exemption threshold.

3. Agricultural Income is Exempt from Tax

A significant portion of Indians are farmers. And here’s the thing—agricultural income is completely tax-free in India, no matter how much you earn.

Example: A large farmer making ₹10 lakh annually from agriculture doesn’t have to pay any income tax, while a salaried employee earning the same must pay a hefty amount.

4. Tax Evasion and Unreported Income

Some people who should be paying taxes don’t—due to tax evasion, cash transactions, or under-reporting income. This is more common in businesses where cash dealings dominate—like real estate, jewelry, or small retail shops.

5. High Dependence on Indirect Taxes

While very few people pay income tax, everyone pays indirect taxes like GST (Goods and Services Tax). Every time you buy clothes, eat at a restaurant, or fill your petrol tank—you’re paying taxes. The government earns more through indirect taxes than direct ones.

Who Actually Pays Income Tax in India?

The income tax-paying population includes:

Salaried employees in the private and public sectors

Professionals like doctors, lawyers, and consultants

High-income business owners and freelancers

Startups and corporations

As per government data, about 7.4 crore individuals filed income tax returns in 2023, but only 5 crore ended up paying any tax.

What Are the Implications of a Low Taxpayer Base?

High burden on honest taxpayers:

When only a few pay taxes, they shoulder most of the responsibility.

Limited government revenue:

Fewer taxpayers mean fewer funds for infrastructure, education, and healthcare.

Need for reform:

There’s a growing push for tax reforms, wider tax net, and better tracking of income sources.

How Can India Improve Its Taxpayer Base?

Simplify tax filing: Making ITR filing easier, especially for small businesses and freelancers.

Better income tracking: Linking PAN with financial transactions and promoting digital payments.

Create incentives: Reward honest taxpayers with benefits like faster loan approvals or healthcare perks.

Strengthen audit systems to detect under-reporting and evasion.

Conclusion

While it’s true that only about 5% of Indians pay income tax, it doesn’t mean the rest are avoiding it intentionally. Many simply don’t earn enough, while others are outside the formal economy. Still, there’s a need to bring more people under the tax net—not just to collect more revenue, but to create a fairer, more balanced system.

As India grows economically, expanding the taxpayer base will be a key step toward becoming a truly self-reliant and developed nation.

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