Related guide summary
Income tax is the tax that individuals and businesses must pay to the government on the income they earn in a financial year. In India, income tax is governed by the Income Tax Act and is calculated based on income tax slabs, deductions, and exemptions available to taxpayers.
Key Highlights of Income Tax for FY 2025-26 (AY 2026-27): New tax regime is the default for individuals and HUFs. Income up to Rs. 12 lakh is effectively tax-free under the new tax regime. Most income is taxed as per slab rates, while some income like capital gains is taxed at special rates. Excess tax deducted as TDS can be claimed as a refund when filing the ITR.
What is Income Tax?
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.
Who needs to pay Income Tax?
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.
What is the Income Tax Act?
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 Slabs and Old vs New Regime
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.
EXAMPLE: People often misunderstand their tax burden. If you earn Rs 12 lakh, you will not pay a massive flat percentage on the entire 12 lakh. Instead, due to the Rs 12 Lakh tax-free threshold in the new regime for FY 25-26, your liability is functionally zero.
PRO TIP: It is important to remember that if you have substantial investments like a Rs 2 Lakh home loan interest deduction, an Rs 1.5 Lakh 80C PF contribution, and medical insurance, the Old Regime might still save you money if your income is in the 15+ Lakh bracket.
Major Deductions Under the Income Tax Act
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.
Tax Deducted at Source (TDS) and Advance Tax
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.
Example: why gross income and taxable income are different
EXAMPLE: A person may earn Rs. 900,000 in gross salary and still not pay tax on the full Rs. 900,000. Standard deduction, eligible deductions, exempt allowances, and regime choice can reduce the taxable base. Another person with the same gross salary but fewer deductions may owe a different amount.
That difference is why tax planning starts with classification. Salary, interest, rent, capital gains, business income, and freelance receipts are not always treated the same way. Before using a calculator, list each income source and the document that proves it: Form 16, bank interest certificate, rent agreement, broker statement, or invoice ledger.
Common questions
Can I file return of income voluntarily even if my income is less than the Basic Exemption Limit?
Yes, you can file a return of income voluntarily even if your income is less than the Basic Exemption Limit.
How do I e-verify my ITR?
You can e-verify ITR by Aadhaar OTP, bank ATM, Electronic Verification Code (EVC), and net-banking.
Is standard deduction allowed under the new tax regime?
Yes, standard deduction is allowed under the new tax regime. Further, the limit for standard deduction has been increased to Rs. 75,000 under the newest regime rules.
Is there any age limit for filing the returns?
There is no age limit for filing the returns.