Income tax in India is a tax paid to the government based on one’s income/profits. The tax collected by the government is then used for various public services, infrastructure development, defence spending and subsidies, among other welfare purposes. While it is mandatory to pay tax if you earn a certain amount of income every year, there are ways to reduce your tax burden and make use of tax-saving plans.

The Income Tax Act of 1961 was a comprehensive statute that laid down the rules and regulations that governed taxation in India. At the time it was in force, the Income Tax Act, 1961 contained a total of 23 chapters and 298 sections, according to the official website of the Income Tax Department of India.

Effective 1st April 2026, the Income Tax Act, 1961 stands replaced by the Income Tax Act, 2025, passed to simplify and modernise India's direct tax law. The new Act consolidates the erstwhile 298 sections of the IT Act 1961, into roughly 536 sections and replaces the older "Previous Year" and "Assessment Year" terminology with a single, unified "Tax Year" concept. Tax rates, slabs, and deduction limits largely carry over unchanged. So wherever this guide references a section of the Income Tax Act, 1961, we've noted its renumbered counterpart under the 2025 Act alongside it.

Key Filing Stages Under the Income Tax Act, 1961

The Income Tax Act, 1961 laid down a few broad provisions that taxpayers needed to work with while filing their returns. Under this framework, you have three stages of filing returns as an individual taxpayer:

• Estimate taxable income under different sources (heads of income)

• Estimate total income by deducting eligible deductions from gross total income or total taxable income

• Pay the tax on total income

The budget of 2020 had added an option for tax estimation for individual taxpayers. While the old slab rates for income tax remain the same, taxpayers now have another slab option under Section 115BAC (now Section 202 of the Income Tax Act, 2025). Since then, this new tax regime has become the default option, and Budget 2025 went a step further, raising the rebate threshold so that income up to ₹12 lakh attracts no tax liability for eligible taxpayers under Section 202.

With this foundation in place, it becomes easier to explore the key provisions of the Income Tax Act and understand how they directly shape your tax calculations and filing decisions.

Key Features & Provisions of the Income Tax Act 1961

The Income Tax Act, 1961 governed income taxation in India and outlined rules and provisions for levying, collecting, and managing income tax. Below are some of its key features and provisions, most of which continue to apply under the Income Tax Act, 2025 in renumbered form:

• Income tax is a direct tax, which means it must be paid by the individual or entity earning the income and cannot be transferred to someone else.

• The Indian Central Government sets and enforces income tax laws across the country.

• Under the Income Tax Act, 1961, the tax liability for any financial year was calculated based on the income earned in the “previous year”. This concept is now referred to as the "Tax Year" under Section 3 of the Income Tax Act, 2025, which merges the previous Previous Year and Assessment Year into a single 12-month period. This ensures that the tax assessments are based on actual earnings.

• Taxpayers are categorised into different income slabs, and the tax rate varies by income level. This helps determine the amount of tax owed.

• India follows a progressive tax structure, meaning that individuals with higher incomes pay taxes at higher rates. This ensures fair taxation and contributes to economic balance.

• The Act allows certain deductions and exemptions, reducing taxable income for individuals and businesses. Under the Income Tax Act, 1961, these were largely housed in Chapter VI-A (Sections 80C to 80U); the Income Tax Act, 2025 retains the same benefits under Sections 122 to 154. These benefits help encourage savings and investments.

Estimating Taxable Income

The Income Tax Act, 1961 divided income under the following five heads for taxation. These heads continue, in renumbered form, under Section 13 of the Income Tax Act, 2025, which corresponds to the previous Section 14:

• Salary (now under Sections 15-19 of the Income Tax Act, 2025)

• Income from house property (now under Sections 20-24 of the Income Tax Act, 2025) 

• Capital gains (now under Section 67 of the Income Tax Act, 2025)

• Profits and gains from a business or profession (now under Section 24 onwards of the Income Tax Act, 2025)

• Income from other sources

Other sources include all income that did not fall into any of the other four categories. Common sources included interest on bank deposits, bond coupons, and gifts. Any money you received from a life insurance company as a taxable maturity benefit or claim amount was also added to other income.

However, retirement benefits were counted as part of salary when taxable. Income from house property will only include rental income. If a house was sold, the gain or loss was treated as a capital gain.

Following the 2020 Budget, taxpayers have two options to estimate their taxes: the old regime and the new regime. Both regimes continue under the Income Tax Act, 2025; the new regime is now under Section 202. The old regime continues to allow the deductible allowances and deductions on savings. However, the new regime focuses on reducing the tax for those not participating in these schemes.

If a taxpayer incurs losses from sources such as house property, capital gains, or business income, the new tax regime does not allow these losses to be adjusted against other income or carried forward to future years. This restriction can increase the tax burden over time, so it’s important to consider this impact carefully before choosing a tax regime.

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Deductions from Gross Total Income

After estimating your taxable income (your gross total income), under the old regime you could claim certain deductions. These deductions were allowed under Sections 80C to 80U of the Income Tax Act, 1961 (now Sections 122 to 154 of the Income Tax Act, 2025). Under the new regime, however, deductions from gross total income included only Section 80CCD (now Section 124) and 80JJAA (also renumbered under the Income Tax Act, 2025).

Section 80CCD(2) (now Section 124) was the deduction on the employer’s contribution to your NPS Tier-I account, while 80JJAA applied to the income from business and profession, and both continue to apply under the new regime today.

How Much is the Difference Between the New & Old Regime?

The main difference between the two regimes lies in their approach to your taxable income: the old regime offers higher tax rates but allows for multiple exemptions and deductions (like 80C (now Section 123), 80D (now Section 126), and HRA) under Schedule III read with Section 11 of the Income Tax Act, 2025, previously Section 10(13A)), while the new regime offers significantly lower slab rates but removes most of those tax-saving benefits.

For Tax Year 2026-27 (this period was earlier referred to as Financial Year 2025-26 under the old Act), the choice has become more distinct due to the enhanced tax-free threshold under the new regime, and these slab rates and thresholds continue unchanged into Tax Year 2026-27 under Section 202 of the Income Tax Act, 2025.

Tax Slab Comparison: New vs Old (Tax Year 2026-27, formerly FY 2025-26)

Here's how the tax rates compare across income slabs under both regimes for Tax Year 2026-27:

Standard Deductions and Trade-offs Between the Two Regimes

Beyond the slab rates, the two regimes also differ in what you can deduct before arriving at your final tax outgo. Here's a closer look:

• Under the new regime, individuals with a taxable income up to ₹12 lakh pay zero tax due to the enhanced rebate under Section 87A (now Section 156). For salaried employees, adding the ₹75,000 standard deduction effectively raises the tax-free limit to ₹12.75 lakh.

• Salaried professionals receive ₹75,000 in the new regime, compared to ₹50,000 in the old regime.

• Under the old regime, taxpayers can claim deductions like Section 80C (up to ₹1.5 lakh), 80D (Health Insurance), HRA (now under Schedule III of the Income Tax Act, 2025), and home loan interest. However, under the new regime, Most of these are forfeited in exchange for the lower rates.

Wrapping Up

Choosing between the old and new tax regimes depends on your income structure and saving habits. The old regime suits those who claim deductions and invest regularly, while the new regime offers simpler taxation with lower rates and fewer exemptions. Evaluating your income, deductions, and long-term goals before selecting a regime can help you minimise tax liability and make better financial decisions.

Remember that from Tax Year 2026-27 onwards, these provisions fall under the Income Tax Act, 2025, which has replaced the Income Tax Act, 1961. So while the section numbers referenced throughout this guide have changed, the underlying deductions, exemptions, and regime choice discussed above remain the same.