What is Income Tax? Meaning, Rules, Tax Slabs, Types and Tax Guide FY 2025-26

Income tax is levied on the income earned by the taxpayer in the relevant financial year. Income tax is classified as a direct tax because it is borne by the taxpayer directly, and the tax burden cannot be passed on further, unlike indirect taxes.

India follows a progressive tax rate for individuals, meaning the tax rate increases with the assessee's income. Income tax implications vary based on the taxpayer's legal entity, age, residential status, and the nature of the income earned.

According to the Income Tax Act, everyone in India who earns taxable income has to file income tax returns. The person whose income is considered for tax is called an assessee. The Income Tax Act has classified assessees into various categories.

Below are the categories of taxpayers: Individuals, Hindu Undivided Family (HUF), Firms, Companies, Association of Persons (AOP), Body of Individuals (BOI), Local Authority, and Artificial Judicial Person.

Some assessees are mandatorily required to file an ITR if they satisfy certain conditions.

The Constitution of India clearly states that tax can be imposed only under the provisions of any law. All the rules regarding levy and collection of income tax in India are governed by the Income Tax Act of 1961.

Income tax is covered under the union list, the area which is directly under the control of the central government. Only the Parliament has the power to make laws for the collection of Income Tax.

Every year the Finance Bill presented during the Budget session introduces changes to the Act. Once the finance bill is approved, these changes are incorporated in the Income Tax Act, known as amendments.

Tax liability is calculated based on slab rates. Tax slab rates increase with an increase in income. Imagine a staircase: it rises at a point and remains flat until a certain point, and rises again.

The New Tax Regime was introduced to reduce the compliance burden by offering lower tax rates while simultaneously removing most tax deductions. It was made the default regime.

If taxpayers make certain investments or incur certain expenses, they can reduce their taxable income. Notably, the old regime relies heavily on these:

Section 80C allows up to Rs 1.5 lakh deduction on EPF, PPF, ELSS, life insurance, and home loan principal. Section 80CCD(1B) offers an additional Rs. 50,000 for NPS.

Section 80D allows deductions on health insurance (up to Rs. 25,000 for self/family, and Rs. 50,000 for senior citizens). Section 24 covers home loan interest.

For certain payments, tax is deducted at source itself by the person making the payment. The payer deducts tax and deposits it to the government on the taxpayer's behalf (TDS).

Taxpayers must also pay advance tax in installments if their estimated income tax liability for the year exceeds Rs 10,000. Balance taxes due after TDS and advance tax are referred to as Self-Assessment tax.