What is income tax? It’s a question almost every earning individual asks at some point, whether they’re a salaried employee, a business owner, or a freelancer. In simple terms, income tax is the portion of your earnings from your job, business, or investments that you pay to the government. It’s a direct contribution that helps run the country, from building roads and schools to funding healthcare and public welfare programs.
Once you know the basics, the real questions start: how much do you actually owe, and why? In this guide, we’ll go through the five categories of income, how tax is calculated, and cover what’s changed under the Income Tax Act, 2025, which came into effect on 1 April 2026.
What Is Income Tax?
Income tax is a direct tax imposed on a person’s taxable income. Unlike an indirect tax such as GST, its legal burden falls on the taxpayer whose income is being taxed, although part of it may be collected in advance through TDS.
It can apply to income from salary, business or profession, property, investments and other sources. The government uses tax revenue to fund public services such as roads, defence, healthcare, education, subsidies and welfare programmes.
In India, income tax is administered by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance. The Income Tax Department handles practical administration: processing returns, issuing refunds, sending notices and operating the e-filing portal.
The Income Tax Act, 2025 replaced the Income Tax Act, 1961 from 1 April 2026. The replacement was primarily a structural and drafting reform. Tax rates and monetary limits can still change separately through annual Finance Acts.
Who Has to Pay Income Tax in India?
Income tax law covers more than salaried employees. It applies to several categories of taxpayers:
- Individuals — salaried, self-employed, freelancers, retirees
- Hindu Undivided Families (HUFs) — a distinct entity under Indian tax law, covered in our guide on what is a Hindu Undivided Family
- Partnership firms and LLPs
- Companies and corporations
- Trusts, associations of persons, and local authorities
For individuals, residential status determines the scope of income taxable in India:
| Residential Status | Broad Scope of Income Taxable in India |
|---|---|
| Resident and Ordinarily Resident (ROR) | Worldwide income, subject to applicable relief and treaty provisions |
| Resident but Not Ordinarily Resident (RNOR) | Income received or accruing in India, plus certain foreign income from a business controlled or profession set up in India |
| Non-Resident (NRI) | Broadly, Indian-sourced and India-received income, including income deemed taxable in India |
Filing is generally mandatory when total income before specified deductions exceeds the applicable basic exemption limit. Additional filing triggers may also apply in cases involving prescribed high-value transactions, foreign assets, specified expenditure or other statutory conditions, even when income is below that limit.
When Does Income Tax Actually Apply?
Under the new regime for 2026-27, the first ₹4 lakh is taxed at nil. Tax is then calculated slab by slab.
For eligible resident individuals, Section 87A can reduce normal slab tax to zero when taxable income does not exceed ₹12 lakh. This is a tax rebate, not a ₹12 lakh basic exemption limit.
The distinction becomes important when income is taxed at specified special rates. The rebate is not available against tax on certain special-rate income, including specified capital gains under Sections 111A, 112 and 112A. The treatment depends on the type of income, so a ₹12 lakh total-income figure does not automatically guarantee zero tax in every case.
The 5 Heads of Income
Think of five buckets. Every taxable receipt must be placed under the correct legal head because each head has different rules for deductions, set-off, and tax calculation. These are sometimes loosely described as types of taxable income, but the legally correct term is the five heads of income.
1. Income from Salary
Income received from an employer under a contract of employment falls under the salary head. This can include basic pay, dearness allowance, bonus, commission, House Rent Allowance (HRA), Leave Travel Allowance (LTA), and taxable benefits.
HRA and eligible LTA exemptions may be claimed under the old tax regime when the required conditions are met. These exemptions are generally unavailable under the new regime.
Eligible salaried taxpayers and pensioners can claim a standard deduction of ₹75,000 under the new regime and ₹50,000 under the old regime. No separate bills are required for this deduction.
2. Income from House Property
Rental income from a property owned by the taxpayer is generally taxed under the house property head. The law determines the annual value, reduces eligible municipal taxes, and then allows a flat 30% deduction from the net annual value.
An individual may generally treat up to two properties as self-occupied with nil annual value. If more than two properties are claimed as self-occupied, the remaining properties are generally treated as deemed let-out, which can create taxable notional rent even when no rent is received.
Home-loan interest may be deducted under Section 24(b). The limits and loss-set-off treatment differ between self-occupied and let-out properties. For a qualifying self-occupied property, the deduction of up to ₹2 lakh is generally available only under the old regime, subject to conditions.
3. Profits and Gains of Business or Profession
Income from running a business or carrying on a profession is taxed under this head. Legitimate business expenses such as rent, staff costs, depreciation, professional subscriptions and utilities may be deducted when calculating taxable profit.
Eligible small businesses and specified professionals can consider presumptive taxation under Sections 44AD or 44ADA. It can reduce detailed bookkeeping and audit requirements when all conditions are met, but not every freelancer or consultant automatically qualifies.
4. Capital Gains
A profit arising from the transfer of a capital asset, such as shares, mutual fund units, property or gold, may be taxed as a capital gain. The applicable rate depends on the asset, holding period, acquisition date, and other statutory conditions.
| Asset | Short-Term Treatment | Long-Term Treatment | Typical LTCG Holding Period |
|---|---|---|---|
| Listed equity shares and equity-oriented mutual funds | 20% under Section 111A, subject to applicable conditions | 12.5% under Section 112A on eligible aggregate gains exceeding ₹1.25 lakh | More than 12 months |
| Land or building | Generally taxed at applicable slab rates | Generally 12.5% without indexation; transitional protection may apply to eligible resident individuals/HUFs for property acquired before 23 July 2024 | More than 24 months |
| Gold or jewellery | Generally taxed at applicable slab rates | Generally 12.5% | More than 24 months |
| Certain debt-oriented mutual fund units acquired on/after 1 April 2023 | May be taxed at applicable slab rates | Treatment depends on scheme composition, acquisition date and the definition of specified mutual fund | Check current rules |
The Section 87A rebate is not available against tax on specified special-rate capital gains. Capital gains taxed at normal slab rates may be treated differently. Property transactions and debt-fund taxation can be complex, so the acquisition date and exact asset category should be checked carefully.
5. Income from Other Sources
Income that does not fall under the first four heads is generally classified as income from other sources. Common examples include:
- Interest from fixed deposits, recurring deposits and savings accounts. Eligible old-regime taxpayers may claim deductions under Section 80TTA or 80TTB, subject to conditions.
- Dividends from shares and mutual funds, generally taxable at applicable rates.
- Lottery and game-show winnings, generally taxed at a special rate without normal deductions.
- Gifts from non-relatives: if the aggregate value of taxable gifts exceeds ₹50,000 during the year, the entire taxable amount
- may be included in income, subject to exceptions for specified relatives, marriage, inheritance and other protected situations.
Family pension received by an eligible recipient.
Banks may deduct TDS when interest crosses the applicable threshold. The rate can depend on PAN availability, while an eligible and valid Form 15G or Form 15H may prevent deduction altogether. TDS is only tax collected in advance; the final liability depends on total income and applicable tax rules.
How the Five Heads Add Up
The following illustration separates total income from income taxed at normal slab rates:
| Income Component | Amount (₹) | Treatment |
|---|---|---|
| Salary from software firm | 12,00,000 | Salary income |
| Less: Standard deduction | 75,000 | Allowed deduction |
| Net salary income | 11,25,000 | Normal-rate income |
| House-property income after 30% deduction | 1,26,000 | Normal-rate income |
| FD interest | 40,000 | Normal-rate income |
| Eligible equity LTCG under Section 112A | 90,000 | Included in total income; no Section 112A tax if aggregate eligible gain remains within ₹1.25 lakh |
| Total income | 13,81,000 | ncludes normal-rate and special-rate components |
| Normal-rate income | 12,91,000 | Used for normal slab calculation |
Each head is computed separately. The resulting amounts are combined, eligible deductions are applied where permitted, and special-rate income is separated for the correct tax calculation. This is why total income and normal slab-rate income are not always the same number.
How Income Tax Is Calculated: A Salary Example
Meera is a 29-year-old marketing manager in Pune. Her annual gross salary is ₹13 lakh; she has no other income, and she uses the new tax regime.
Step 1 — Apply the Standard Deduction
₹13,00,000 gross salary − ₹75,000 standard deduction = ₹12,25,000 taxable income.
Step 2 — Calculate Normal Slab Tax
| Income Slab | Rate | Tax (₹) |
|---|---|---|
| Up to ₹4,00,000 | Nil | 0 |
| ₹4,00,001–₹8,00,000 | 5% | ₹20,000 |
| ₹8,00,001–₹12,00,000 | 10% | ₹40,000 |
| ₹12,00,001–₹12,25,000 | 15% | ₹3,750 |
| Total normal tax before relief and cess | ₹63,750 |
Step 3 — Apply Marginal Relief
Meera’s taxable income exceeds ₹12 lakh by ₹25,000. She does not qualify for the full Section 87A rebate, but marginal relief limits her income tax to the amount by which taxable income exceeds ₹12 lakh.
Tax after marginal relief: ₹25,000.
Step 4 — Add Health and Education Cess
₹25,000 + 4% cess of ₹1,000 = ₹26,000 total tax payable.
Spread evenly across 12 months, that is approximately ₹2,167 per month. The example assumes no other income, surcharge or special-rate tax.
How Marginal Relief Works Above ₹12 Lakh
| Taxable Income | Normal Slab Tax | Marginal Relief Position | Final Tax incl. 4% cess |
|---|---|---|---|
| ₹12,00,000 | ₹60,000 | Full Section 87A rebate | ₹0 |
| ₹12,25,000 | ₹63,750 | Tax limited to ₹25,000 | ₹26,000 |
| ₹12,50,000 | ₹67,500 | Tax limited to ₹50,000 | ₹52,000 |
| ₹12,75,000 | ₹71,250 | No additional relief required because normal tax is below the ₹75,000 excess income | ₹74,100 |
| ₹13,00,000 | ₹75,000 | Normal slab tax applies | ₹78,000 |
Why Crossing a Tax Slab Does Not Tax Your Entire Income at the Higher Rate
India uses progressive slab taxation. Only the part of income that falls inside a particular slab is taxed at that slab’s rate. The income below it continues to be taxed at the lower applicable rates.
For example, a salaried person with ₹13 lakh gross salary may have taxable income of ₹12.25 lakh after the ₹75,000 standard deduction. In that example, only ₹25,000 falls in the 15% slab before marginal relief is considered. Tax on lower slabs is calculated normally and then reduced by the Section 87A rebate or marginal relief where eligible.
A surcharge may also apply when total income exceeds ₹50 lakh. It is calculated on income tax before the 4% health and education cess, subject to applicable limits and marginal relief rules.
New Tax Regime vs Old Tax Regime
India currently operates both regimes. The new regime is the default, while taxpayers who are eligible to use the old regime must opt for it. Business-income taxpayers face additional restrictions when switching between regimes.
| Feature | New Regime | Old Regime |
|---|---|---|
| Default regime | Yes | No, must be chosen when eligible |
| Standard deduction | ₹75,000 for eligible salary/pension income | ₹50,000 for eligible salary/pension income |
| Section 80C | Generally unavailable | Available up to ₹1.5 lakh, subject to conditions |
| HRA exemption | Generally unavailable | Available when conditions are met |
| Self-occupied home-loan interest | Generally unavailable | Up to ₹2 lakh, subject to conditions |
| Section 80D | Generally unavailable | Available within prescribed limits |
| Section 87A effective level | Up to ₹12 lakh taxable income for eligible resident individuals; ₹12.75 lakh gross salary in a simple salary-only case after standard deduction | Up to ₹5 lakh total income for eligible resident individuals |
The new regime may produce lower tax when deductions and exemptions are limited. The old regime may remain competitive when substantial claims such as HRA, Section 80C, health-insurance deductions and home-loan interest are available. The comparison should be made using actual numbers rather than a general rule.
Income Tax Slabs for 2026-27
The following tables keep the two regimes separate to avoid mixing their different slab boundaries.
New Tax Regime
| Annual Taxable Income | Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001–₹8,00,000 | 5% |
| ₹8,00,001–₹12,00,000 | 10% |
| ₹12,00,001–₹16,00,000 | 15% |
| ₹16,00,001–₹20,00,000 | 20% |
| ₹20,00,001–₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Eligible resident individuals may receive a Section 87A rebate of up to ₹60,000 when taxable income does not exceed ₹12 lakh, subject to the nature of income and other conditions.
Old Tax Regime, Individuals Below 60 Years
| Annual Taxable Income | Rate |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001–₹5,00,000 | 5% |
| ₹5,00,001–₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Eligible resident individuals may receive a rebate of up to ₹12,500 when total income does not exceed ₹5 lakh. Basic exemption limits differ for eligible senior and super-senior citizens under the old regime.
Health and education cess of 4% is added after income tax and surcharge. Surcharge rates vary by income level and the nature of income.
What the Income Tax Act 2025 Changed
The Income Tax Act, 2025 replaced the Income Tax Act, 1961 from 1 April 2026. It was introduced mainly to simplify and reorganise the tax law, not to introduce an entirely new tax system. Before becoming law, it was introduced in Parliament as the Income Tax Bill 2025, the name you may still see in older news reports.
According to the Income Tax Department’s official FAQs, the objective was to make the law easier to read and navigate while keeping the overall tax policy largely unchanged. The old Act had grown to 819 sections and 14 schedules over more than six decades of amendments. The new Act has 536 sections and 16 schedules, making it much shorter and better organised.
What Changed
- Fewer, better-organised sections: 536 sections instead of 819
- Complex provisos and explanations have been merged into the main provisions, making the law easier to read.
- One “Tax Year” replaces the old “Previous Year”, while the separate “Assessment Year” concept has been discontinued. Learn more in our complete guide to What Is Tax Year Under the Income Tax Act 2025.
- TDS and TCS provisions have been reorganised to improve clarity and compliance.
What Stayed the Same
- Tax rates, income tax slabs, and most deductions remained unchanged under the Finance Act, 2026.
- Both the old tax regime and the new tax regime continue to be available.
- Your AY 2026–27 income tax return (covering income earned up to 31 March 2026) is still governed by the Income Tax Act, 1961.
Income earned from 1 April 2026 onwards falls under the Income Tax Act, 2025 and will first be reported in the return filed in 2027 through the official Income Tax e-Filing portal.
What Is an Income Tax Return?
An Income Tax Return (ITR) is the annual statement filed with the Income Tax Department showing income, deductions, taxes already paid, and the final amount payable or refundable.
TDS and ITR filing are separate concepts. TDS is tax collected in advance by a payer such as an employer or bank. The return reconciles that collection with the taxpayer’s final annual liability. A refund of excess TDS generally has to be claimed through a valid return.
Filing can also provide income documentation for lenders or visa applications and may be necessary to carry forward certain eligible losses.
ITR-1 may be used by eligible resident individuals with total income up to ₹50 lakh from permitted sources, subject to exclusions. ITR-2 generally covers eligible individuals with capital gains or foreign assets/income, while ITR-3 is generally relevant for business or professional income. From AY 2026-27, eligible ITR-1 filers may report income from up to two house properties, subject to the form’s other conditions.
Important Filing and Advance-Tax Deadlines for AY 2026-27
| Requirement | General Due Date | Broad Category |
|---|---|---|
| ITR filing, non-audit individuals, generally ITR-1/ITR-2 | 31 July 2026 | Eligible salaried taxpayers and investors |
| Specified non-audit business/profession cases, including eligible ITR-4 filers | 31 August 2026 | Eligible presumptive and other specified cases |
| Tax-audit cases | 31 October 2026 | Taxpayers requiring audit, subject to applicable provisions |
| Belated or revised return | 31 December 2026 | Where permitted after missing or revising the original return |
| Advance tax — 15% cumulative | 15 June 2026 | Where applicable |
| Advance tax — 45% cumulative | 15 September 2026 | Where applicable |
| Advance tax — 75% cumulative | 15 December 2026 | Where applicable |
| Advance tax — 100% cumulative | 15 March 2027 | Where applicable |
These dates are stated as of July 2026 and can be changed through official notifications. If the due date applicable to a taxpayer’s category is missed, a late filing fee may apply. The maximum fee is generally ₹1,000 when total income does not exceed ₹5 lakh and up to ₹5,000 otherwise, subject to the law. Late filing may also prevent the carry-forward of certain capital and business losses, while some categories follow different rules.
Frequently Asked Questions
Q. 1 Is TDS the same as income tax?
No. Income tax is the final annual liability. TDS is a method of collecting part of that tax in advance. The ITR reconciles TDS with the final liability, resulting in additional tax payable, no balance, or a refund.
Q. 2 Does crossing a slab tax my entire income at the higher rate?
No. Only the portion within that slab is taxed at the higher rate. In the ₹13 lakh gross-salary example, taxable income becomes ₹12.25 lakh after the standard deduction, so ₹25,000 falls in the 15% slab before marginal relief.
Q. 3 What is the difference between an exemption, deduction and rebate?
An exemption keeps eligible income outside the taxable calculation. A deduction reduces income before tax is calculated. A rebate reduces the tax amount after calculation. Section 87A is a rebate.
Q. 4 Can NRIs claim the Section 87A rebate?
No. Section 87A is available only to eligible resident individuals. It is not available to NRIs, HUFs, firms or companies.
Q. 5 What is marginal relief?
Marginal relief prevents the tax increase just above the ₹12 lakh threshold from exceeding the amount of additional income. It applies only under the relevant conditions and after the normal slab calculation.
Q. 6 Is agricultural income tax-free?
Agricultural income earned in India is generally exempt. However, partial integration may affect the slab rate when agricultural income and non-agricultural income cross prescribed limits.
Q. 7 What happens if I miss the filing deadline?
A belated return may still be permitted up to the applicable statutory date. A late fee can apply, interest under Section 234A may apply when tax remains unpaid, and certain losses may no longer be carried forward.
Conclusion
Income tax becomes easier to understand once three ideas are clear: income is classified under specific legal heads, tax is calculated progressively, and TDS is only an advance collection rather than the final answer.
The Income Tax Act, 2025 changed the structure and terminology of the law, but taxpayers still need to identify the correct income period, regime, deductions, return form and deadline. The right tax result comes from applying the rules to the taxpayer’s actual income, not from relying on a headline threshold alone.
Disclaimer
This article is for general informational and educational purposes only and does not constitute tax, legal, or financial advice. Tax laws can change through Finance Acts, CBDT notifications, Rules, and judicial decisions. Readers should verify current provisions on official government websites and consult a qualified Chartered Accountant for advice based on their individual facts.