Lesson 4: How money works in the real world

Congratulations! You have reached the final lesson of CashClimb’s financial literacy lesson plans. Before you leave, it is important to understand how finance and money work in the real world.

Money is not only about saving and investing and growing your wealth. As you grow older, newer concepts come to light like taxes (money you pay to the government), inflation (rise in prices) and insurance (money that protects you from financial shocks).

Lesson 4 provides a comprehensive guide on what these concepts mean and how you, as a teen, can prepare for them so you are not caught off guard.

Taxes: What they are and why they matter?

Taxes sound complicated, but once simplified, they are easy to understand. Taxes are money you pay to your government so it can run the country. You use government-funded services every day—roads, police, hospitals, parks and transport systems. These are maintained using the tax money citizens pay.

When you start earning an income from your first job, a small percentage will be deducted as tax. This is not a “loss”—it helps the country function smoothly.

Types of Taxes

Direct Tax: is imposed directly on the person or organization from the government that imposed it. A key feature is that the tax cannot be passed on to another person or organization. E.g., income tax

Indirect Tax: is a consumer-based taxation system levied on goods and services. Tax is collected by a retailed or manufacturer and then passed to the final customer. E.g., the government has imposed indirect tax on tobacco and other smoking products and increased cost of production for them. Now, companies have to spend more on making the product directly increasing cost of the product itself so lesser people can afford tobacco.

Right now, you only need to understand income tax, sales tax, property tax and capital gains tax.

Income Tax

Income tax is imposed by governments on money earned by individuals and businesses to fund public services. In India, income tax is collected from April 1–March 31 each financial year.

India uses a progressive tax system where higher earners pay a higher percentage of tax.

If someone earns below the “minimum taxable income” (set by government) then they do not have to pay income tax at all. The "minimum taxable income" in India ₹4,00,000 as of 2025.

Your first salary (gross income) will be higher than the amount you receive (net income) because your company deducts tax before paying you.

GST (Goods and Services Tax)

GST is a tax collected on goods and services you buy clothes, snacks, electronics, salons, etc. Essentials often have low or zero GST, while luxury items have higher GST. It replaces older taxes and simplifies the system.

GST is included in the final price you pay. On bills, you may notice “CGST” and “SGST.”

• 5% - Essentials
• 12% - Standard goods
• 18% - Electronics & services
• 28% - Luxury goods

Capital Gains Tax

Capital gains tax is charged on profit you earn from selling assets like stocks or property. In India, it depends on how long you held the asset:

• Short-term: Held ≤ 12 months — higher tax
• Long-term: Held > 12 months — lower tax

Example: You buy a stock at ₹500 and sell at ₹1000 after one month. Your ₹500 profit is taxable.

Property Tax

Property tax is paid by owners of houses, shops or land. It is collected by local authorities and used for services like street lighting, parks, garbage collection and road repairs.

Each city sets its own rates. Even though this doesn't apply to you yet, you will need to pay it once you own a house or business.