What is Income Tax?
Income tax is a direct tax that the Government of India collects from individuals and organisations on the income they earn in a financial year. The money collected is used to fund public services — roads, schools, hospitals, defence, and government schemes.
It is governed by the Income Tax Act, 1961 and administered by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance.
💡 Simple way to think about it: If you earn money in India — from salary, business, property, or investments — the government takes a small percentage as tax. That percentage depends on how much you earn.
Who Must Pay Income Tax?
In India, income tax applies to the following:
- Individuals — salaried employees, freelancers, self-employed
- Hindu Undivided Families (HUF)
- Companies and firms
- Partnership firms and LLPs
- Trusts and associations
As an individual, you are required to pay income tax if your gross annual income exceeds the basic exemption limit — ₹2.5 lakh under the old regime or ₹3 lakh under the new regime.
📌 Quick Summary
- What it is: Income tax is a direct tax collected by the Government of India on money you earn — from salary, business, property, or investments.
- Who pays: Any individual earning above ₹2.5 lakh (old regime) or ₹3 lakh (new regime) must pay. But if income is under ₹7 lakh (new) or ₹5 lakh (old), you pay zero tax after rebate.
- How it’s calculated: Add all income → subtract deductions → apply slab rates → add 4% cess. Five income types are taxed: Salary, Property, Business, Capital Gains, and Other Sources.
- Key deadline: Salaried individuals must file ITR by July 31 every year — even if their final tax amount is zero.
- Old vs New Regime: New regime has lower slab rates but fewer deductions. Old regime allows 80C, HRA, and other savings — better if you have high investments.
✅ Good news: If your total income is below ₹7 lakh (new regime) or ₹5 lakh (old regime), you pay zero tax after the Section 87A rebate.
Types of Income That Are Taxed
Under the Income Tax Act, income is divided into 5 heads:
| Head of Income | Examples |
|---|---|
| Salary | Wages, basic pay, HRA, bonuses, allowances |
| House Property | Rent received from property owned |
| Business / Profession | Income from freelancing, trade, or profession |
| Capital Gains | Profit from selling shares, mutual funds, property |
| Other Sources | Bank interest, dividends, lottery winnings, gifts |
How is Income Tax Calculated?
Tax calculation follows a simple 4-step process:
- Calculate Gross Total Income — Add income from all 5 heads above.
- Subtract Deductions — Apply 80C, 80D, HRA, standard deduction, etc. (old regime only).
- Apply Tax Slabs — Apply the percentage rates on your taxable income slab-by-slab.
- Add Cess — Add 4% Health & Education Cess on the final tax amount.
⚠️ Don’t forget surcharge: If your income exceeds ₹50 lakh, an additional surcharge applies on top of the base tax.
Tax Slabs at a Glance (FY 2025–26)
| Income Slab | New Regime | Old Regime (Below 60) |
|---|---|---|
| Up to ₹2,50,000 | Nil | Nil |
| ₹2,50,001 – ₹3,00,000 | Nil | 5% |
| ₹3,00,001 – ₹5,00,000 | 5% | 5% |
| ₹5,00,001 – ₹7,00,000 | 5% | 20% |
| ₹7,00,001 – ₹10,00,000 | 10% | 20% |
| ₹10,00,001 – ₹12,00,000 | 15% | 30% |
| ₹12,00,001 – ₹15,00,000 | 20% | 30% |
| Above ₹15,00,000 | 30% | 30% |
Important Deadlines
| Deadline | What to Do |
|---|---|
| July 31 | File ITR for salaried individuals (no audit) |
| October 31 | File ITR for businesses requiring audit |
| March 15 | Pay advance tax (if liability > ₹10,000) |
| December 31 | Belated return deadline |
Quick FAQs
No. TDS (Tax Deducted at Source) is tax deducted by your employer or bank before paying you. It is part of your income tax liability — not a separate tax. When you file your ITR, TDS is adjusted against your total tax due.
Yes, if your gross income exceeds the basic exemption limit, you must file a return even if your final tax is zero after deductions and rebates.
Non-payment or late filing attracts penalties under Section 234A (interest), Section 234B (advance tax default), and Section 271 (concealment penalty). In serious cases, prosecution under Section 276C is possible.
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