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 union list, the area which is directly under the control of the central government.
- Only the Parliament has the power to make laws for 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. These changes are called amendments.
- Apart from the IT Act, the other components of the income tax law are income tax rules, circulars, notifications, and case laws. All of these help in the implementation of income tax law and the collection of taxes.
Meaning of Assessee
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 assessee. The Income Tax Act has classified assessees into various categories. Different tax rules apply to different types of assessees.
Below are the categories of taxpayers:
- Individuals
- Hindu Undivided Family (HUF)
- Firms
- Companies
- Association of Persons(AOP)
- Body of Individuals (BOI)
- Local Authority
- Artificial Judicial Person
Some assessees are mandatorily required to file an ITR if they satisfy certain conditions.
Residential Status
The scope of income of an assessee that is subject to tax is determined based on their residential status. Irrespective of their citizenship, if a person is resident in India, all his income is taxable in India.
On the basis of residential status the assessees can be classified as:
- Resident and Ordinarily Resident
- Resident but Not Ordinarily Resident
- Non-Resident
Types of Income – What are the 5 Heads of Income?
For tax calculation, we should properly classify whatever income that we earn under the appropriate heads as prescribed under the act. All kinds of income that is taxable under this act is broadly classified under the following five major heads.
| Head of Income | Nature of Income covered |
| Income from Salary | Income earned from salary and pension. |
| Income from House Property | Income earned from renting a building (house property). |
| Income from Business and Profession | Profits earned by self-employed individuals, businesses, freelancers, professionals or contractors come under business income. |
| Income from Capital Gains | Income from the sale of a capital asset such as mutual funds, shares, property, jewellery, etc. |
| Income from Other Sources | Income which does not fall under above 4 heads |
Deductions Under the Income Tax Act
- If the tax payers make certain investments, or incur certain expenditure, the amount of investment of expense can be reduced from the income and the only net income would be subject to tax. This is called the concept of deduction.
- Further, if the income earned is of a specific nature, or from a specific source, deduction is directly allowed by the act on such income.
Popular Deductions
- Section 80C: Deductions on specified investment and expenses. Up to Rs 1.5 lakh is allowed.
- Section 80CCD(1B): An additional Rs. 50,000 deduction can be claimed under section 80CCD(1B) .
- Section 80CCD(2): Deduction on the Employer's NPS contribution can be claimed as a deduction under section 80CCD(2).
- Section 80D - Deduction on health insurance and medical expenses can be claimed under section 80D.
- Section 80E -Interest paid on loan taken for higher education can be claimed as deduction.
- Section 24 - Under Section 24, taxpayer can claim a deduction for interest on a home loan.
- Section 80TTA and Section 80TTB - Deduction on savings bank interest income (Section 80TTB allows deduction on senior citizens interest income)
Computation of Income
Check out the table below for comprehensive understanding of the above steps. Please note that the below table is not exhaustive, and additional line items may have to be included depending on nature and sources of income and deductions.
| Particulars | Amount | Amount |
| Gross Income from Salary | XXX | |
| Less: Standard Deduction | (XXX) | |
| Income From Salary | XXX | |
| Gross Annual Value of House Property | XXX | |
| Less: Standard Deduction | (XXX) | |
| Less: Munucipal taxes | (XXX) | |
| Less: Interest deduction on Home Loan | (XXX) | |
| Income From House Property | XXX | |
| Profits as per books of Accounts | ||
| Add: Expenses Disallowed/ Income not considered in books | XXX | |
| Less: Expenses claimable / Income taxed under other heads (or) exempt | (XXX) | |
| Profits and Gains from Business or Profession | XXX | |
| Sales consideration | XXX | |
| Less: Cost of Acquisition (indexation as applicable) | (XXX) | |
| Less: Cost of improvement (indexation as applicable) | (XXX) | |
| Capital Gains | XXX | |
| Less: Exemptions as applicable | (XXX) | |
| Taxable Capital Gains | XXX | |
| Income From Other Sources | XXX | |
| Less: Deductions as applicable | (XXX) | |
| Taxable Income from other sources | XXX | |
| (After adjustment of set off of losses) | ||
| Deductions from Total Income: | ||
| Tax Saving Investments and expenditures under Chapter VI A | (XXX) | |
| Other Deductions | (XXX) | |
| Taxable Total Income | XXX | |
| Tax on total income (under slab rates) | XXX | |
| Tax on income taxed in special rates | XXX | |
| Less: Rebate & Marginal Relief on Rebate(as applicable) | (XXX) | |
| Add: Surcharge & Marginal Relief on Surcharge (as applicable) | XXX | |
| Add: Cess | XXX | |
| Total tax payable | XXX | |
| Less: TDS, advance tax and self assessment tax paid | (XXX) | |
| Balance tax payable | XXX |
The government keeps introducing and altering tax slabs, schemes and tax benefits, so it’s a good idea to keep up with the Budget. For calculation of income tax , please refer to income tax calculator
Calculation of Tax
Tax Slabs
- 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. Slab rates are similar.
- Tax is calculated in slab rates for individuals and HUF predominantly. For assessees like companies and trusts, tax is calculated on a flat rate.
Old Income Tax Regime
Tax slab rates applicable for Individual taxpayers below 60 years for the Old tax regime are as below:
| Income Range | Tax rate | Tax to be paid |
| Up to Rs 2.5 lakhs | 0 | No tax |
| Rs 2.5 lakhs - Rs 5 lakhs | 5% | 5% of your taxable income |
| Rs 5 lakhs - Rs 10 lakhs | 20% | Rs 12,500+20% on income above Rs 5 lakh |
| Above 10 lakhs | 30% | Rs 1,12,500+30% on income above Rs 10 lakh |
Note:
The following are popular deductions available under the old tax regime:
- Deductions of allowances like Leave Travel Concession (LTC), House Rent Allowance (HRA), and specific other allowances.
- Deductions for tax-saving investments as per Section 80C (LIC, PPF, NPS, etc) to 80U can be claimed.
- Standard deduction of Rs 50,000 on salary.
- Deduction for interest paid on home loan.
There are two other tax slabs for two other age groups: those 60 and older and those above 80.
People often misunderstand that if they earn, let's say, Rs12 lakh, they will be paying a 30% tax on Rs.12 lakh, i.e. Rs 3,60,000. This is incorrect. Tax is payable slab wise. A person earning Rs 12 lakh in the progressive tax system will pay Rs 1,12,500 + Rs 60,000 = Rs 1,72,500.
New Tax Regime
New tax regime was introduced with an intent to reduce compliance burden on individuals and HUFs. Tax rates and tax deductions were reduced simultaneously. Now individuals don't need to obtain various tax saving investments and document them to lessen their tax. It was made the default regime and the income tax slabs under the new tax regime for FY 2025-26 (AY 2026-27) are as follows:
| Income Tax Slabs | Income Tax Rates |
| Income up to Rs 4 lakh | Nil |
| Rs 4 lakh to Rs 8 lakh | 5% |
| Rs 8 lakh to Rs 12 lakh | 10% |
| Rs 12 lakh to Rs 16 lakh | 15% |
| Rs 16 lakh to Rs 20 lakh | 20% |
| Rs 20 lakh to Rs 24 lakh | 25% |
| Income above Rs 24 lakh | 30% |
Special Tax Rates
One must remember that not all income can be taxed on a slab basis. Certain incomes are taxed at fixed special rates.
- Capital Gains Income: Capital gains are taxed depending on your asset and how long you’ve owned it. The holding period would determine if assets are Long-Term or Short-Term. Long-Term Capital Gains are taxed at 12.5% and Short-Term Capital Gains are taxed at 20% flat rate for listed equity share, and equity-oriented mutual funds.
- Casual Incomes like winnings from lottery, betting and gambling are taxed at 30% flat rate.
- Virtual Digital Assets are taxed at 30%
- Online Gaming Income are also taxed at 30%
The below table summarizes the holding period for determination of whether the capital asset is Long-Term of Short-Term.
| Asset | Short-term Capital Asset | Long-term Capital Asset |
| Securities listed on a recognised stock exchange, units of Unit Trust of India, units of an equity-oriented fund, zero-coupon bonds | ≤ 12 months | > 12 months |
| Other assets | ≤ 24 months | > 24 months |
Rebate u/s 87A and Cess
Rebates under Section 87A allow taxpayers to reduce their income tax liability. If you are a resident individual and the amount of your total income after reducing Chapter VI-A deductions (Section 80C, 80D, 80U, etc) does not exceed a certain limit (Rs 12 lakh under the new regime and Rs. 7 lakhs under the old regime), you can claim a tax rebate. The rebate of Rs. 60,000 and Rs. 12,500 is allowed under old and new tax regime respectively.
Income Tax Payment
Usually, Income tax is collected at the time of filing the returns. But the government would also collect taxes well before filing the returns for preventing non-compliance and generating more tax revenue. The various modes of collection of tax is described below.
Tax Deducted at Source (TDS)
- For certain payments, tax is deducted at source itself, by the person making payment. The payer would deduct tax and deposit to the government on the taxpayer's behalf. This is how TDS works, on a simpler note.
- TDS deducted from the payments needs to be remitted to the government within the specified due dates. Also, a TDS statement should also be filed within applicable due dates. The following table explains the due dates for remitting the TDS amount and filing of TDS statements.
Advance Tax
- The taxpayer must pay advance tax when his estimated income tax liability for the year exceeds Rs 10,000.
- The government has specified due dates for payment of advance tax installments.
Self-Assessment Tax
It is the balance tax that the taxpayer has to pay on the assessed income. The self-assessment tax is calculated after reducing the advance tax and TDS from the total income tax calculated on the assessed income.
E-Payment of Taxes
Taxpayers can pay advance tax and self-assessment tax online from the e-filing website.
Refund
- Refund arises when the tax already paid is greater than the total tax liability.
- Tax already paid can be in the form of advance tax, TDS or even excess Self-Assessment tax paid.
- The excess tax paid would be credited to the taxpayer's bank account.
Important terms
Financial Year
- The financial year is a one-year period that the taxpayers use for accounting and financial reporting purposes.
- According to the Income Tax Act, such a period begins from 1st April of the calendar year to 31st March of the next calendar year. It is abbreviated as “FY”.
- For example, the financial year starting from 1st April 2025 and ending on 31st March 2026 can be written as FY 2025-26.
Assessment Year
- The one year from 1st April to 31st March starting immediately after the financial year is termed an assessment year.
- This is the period in which tax is calculated on the income of the taxpayer.
- For example, for incomes earned during the FY 2025-26, the assessment year will be AY 2026-27.
PAN
- PAN is an abbreviation for the Permanent Account Number.
- It is a unique 10-digit alphanumeric digit issued by the Income Tax Department to Indian taxpayers.
TAN
- TAN is an abbreviation for Tax Deduction and Collection Account Number.
- It is a unique 10-digit alphanumeric digit allotted by the Income Tax Department of India.
Filing Your ITR
Every person whose income is taxable should file Income Tax Returns in online mode.
Meaning of ITR
- The taxpayer shall file an Income Tax Return every year via ITR forms prescribed by the income tax department.
- The government has prescribed seven ITR forms through which the taxpayer can file his income tax return.
- The taxpayer has to choose the appropriate ITR forms and file his income tax return.
Documents Required for ITR Filing
The following are some of the crucial information/documents you need to be ready with before filing your return.
- Form 16
- Form 26AS
- Annual Information Statement (AIS)
- Taxpayer Information Statement (TIS)
- Form 16A,
- Proof of tax saving investments made
- Bank account details
Further, the documents you will need to file your tax return will largely depend on your source of income.
Persons Not Required to File ITR
Every person whose income is taxable should file income tax returns. However, there are a few exceptions to this generic rule:
Taxpayers aged 75 or more and satisfying the following conditions:
- Total income consists of only pension and interest income. Interest income can be from any account maintained with the same bank in which they receive pension.
- They have submitted a declaration to the bank.
- Such bank deducts TDS under Section 194P.
Taxpayers with an taxable income less than the applicable basic exemption limit.
- Basic Exemption Limit for old regime:
- Rs.2,50,000 for individuals under 60 years
- Rs.3,00,000 for resident individuals between 60-80 years.
- Rs. 5,00,000 for resident individuals greater than 80 years.
- Basic Exemption Limit for new regime : Rs. 3,00,000 for all individuals
- For FY 2026-26, the basic exemption limit is relaxed to Rs. 4 lakhs under the new regime.
Note: Age limit can be reckoned as on 31st march of the financial year.
Due Date for Filing ITR
ITR needs to be filed within the due dates specified under the Income Tax Act. These due dates remain the same every year, unless extended by the government. Generally, majority of taxpayers are covered under ‘non-tax audit’ section. And the due date for non tax audit cases is 31st July of the next financial year.
E-Filing
The taxpayer shall electronically file the income tax return through the e-filing platform of the IT department. To file the income tax return, the taxpayer should register at www.incometax.gov.in. After that, the taxpayer can log in to the website and file his ITR.
ITR–V
Form ITR-V is an income tax return verification form generated after the taxpayer files income tax return and submits it to the income tax department.
Did You E-file Your Tax Return For This Year?
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