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Quick Guide to the Income Tax Act, 1961 - Key Provisions Explained

Understand how income tax works in India, key provisions of the Income Tax Act and how the new vs old regime impacts your tax savings and liabilities

Written by : Knowledge Centre Team

2026-02-17

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12 minutes read

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Income tax in India is a form of tax that is 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 is a comprehensive statute that sets the rules and regulations that govern taxation in India. The Income Tax Act contains a total of 23 chapters and 298 sections, according to the official website of the Income Tax Department of India.

The Income Tax Act has a few broad provisions that you may need to use in your regular filing of income tax. You have three stages of filing returns as an individual taxpayer:

  • Estimate taxable incomes 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 has added an option for tax estimation for individual taxpayers. While the old slab rates for income tax remain the same, you now have another slab option under section 115BAC.

With this foundation in place, it becomes easier to explore the key provisions of the Income Tax Act, 1961, and understand how they directly shape your tax calculations and filing decisions.

Key Takeaways

  • Taxpayers can now choose between the old and new tax regimes based on their deduction preferences

  • The new tax regime offers lower tax rates but fewer deductions

  • Income is classified under 5 heads: salary, house property, capital gains, business/profession, and other sources

  • Section 115BAC introduced flexibility in tax computation for individuals

  • Tax-saving investments under 80C - 80U are still available under the old regime

  • New slab rates effective FY 2025 - 26 make up to ₹12.75 lakh income effectively tax-free

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Key Features & Provisions of the Income Tax Act 1961

The Income Tax Act 1961 is the law governing income taxation in India that outlines various rules and provisions for levying, collecting, and managing income tax. Below are some of its key features and provisions:

  • 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 is responsible for setting and enforcing income tax laws across the country.

  • The tax liability for any financial year is calculated based on the income earned in the previous year. This ensures that the tax assessments are based on actual earnings.

  • Taxpayers are categorised into different income slabs, and the tax rate varies depending on the 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. These benefits help encourage savings and investments.

Estimating Taxable Income

Income Tax Act, 1961 divides the incomes under the following five heads for taxation:

Other sources will include all incomes that do not fall in any of the other four categories. Most prominent other incomes would be interest on bank deposits, bond coupons, and gifts. Any money you receive from a life insurance company as a taxable maturity benefit or claim amount is also added to other income.

The retirement benefits, however, should count as part of the salary when taxable. Income from house property will only include rental income. If you sell the house the gain or loss is treated as a capital gain.

After the 2020 budget, you have two options to estimate your taxes: the old regime and the new regime. 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.

Basis of Comparison

Old Tax Regime

New Tax Regime

Deductions & Exemptions

Allows multiple deductions and exemptions such as HRA, Section 80C investments, and insurance-related benefits

Offers very limited deductions and exemptions, focusing on simplified taxation

Best Suited For

Ideal for taxpayers who actively invest in tax-saving instruments and plan long-term financial goals

More suitable for individuals with fewer deductions and straightforward income structures

Default Status

Not the default option; taxpayers must specifically opt for it while filing returns

Set as the default tax regime unless the taxpayer chooses otherwise

Standard Deduction

Provides a standard deduction of ₹50,000 for salaried individuals

Allows a higher standard deduction of ₹75,000 for salaried taxpayers

Tax Rebate

Offers a rebate of up to ₹12,500 under applicable income limits

For FY 2025–26, provides a significantly higher rebate of up to ₹60,000

If you incur 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 your tax burden over time, so it’s important to consider this impact carefully before choosing a tax regime.

Click here to use - Income Tax Calculator

Deductions from Gross Total Income

Once you have estimated your taxable income, which is also your gross total income, under the old regime, you could claim certain deductions. These deductions were allowed under sections 80C to 80U. Under the new regime, however, deductions from gross total income include only section 80CCD(2) and 80JJAA.

Section 80CCD(2) is the deduction on the employer’s contribution to your NPS tier-I account, while 80JJAA applies to the income from business and profession.

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Did You Know?

The Income Tax Act, 1961, replaced the 1922 Act and has been amended over 4,000 times to match India’s evolving economy.

 

Source: PIB

 

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

The primary 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, 80D, and HRA), while the new regime offers significantly lower slab rates but removes most of those tax-saving benefits.

For Financial Year 2025-26, the choice has become more distinct due to the enhanced tax-free threshold under the new regime.

Tax Slab Comparison: New vs. Old (FY 2025-26)

Annual Income Range (₹)

New Regime Rate (%)

Old Regime Rate (%)

Up to 2,50,000

Nil

Nil

2,50,001 - 4,00,000

Nil

5%

4,00,001 - 5,00,000

5%

5%

5,00,001 - 8,00,000

5%

20%

8,00,001 - 10,00,000

10%

20%

10,00,001 - 12,00,000

10%

30%

12,00,001 - 16,00,000

15%

30%

16,00,001 - 20,00,000

20%

30%

20,00,001 - 24,00,000

25%

30%

Above 24,00,000

30%

30%

  • Under the new regime, individuals with a taxable income up to ₹12 lakh pay zero tax due to the enhanced rebate under Section 87A. 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.

  • In the old regime, you can claim deductions like Section 80C (up to ₹1.5 lakh), 80D (Health Insurance), HRA, 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.

Glossary

  1. Deduction: An amount that can be subtracted from your gross income to reduce the taxable income
  2. Section 115BAC: The section under which the new tax regime with concessional rates is provided
  3. Rebate: A refund or reduction in the amount of income tax payable.
  4. Assessment Year: The year following the financial year in which your income is assessed and taxed
  5. Financial Year (FY): The 12-month period (April–March) during which income is earned and accounted for taxation.
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FAQs

The Income Tax Act 1961 consists of 298 sections, spread across 23 chapters. These provisions together form the legal framework for income taxation in India and define how income is assessed, taxed, and regulated.

Yes, an income tax section list applicable to individuals exists within the Act. However, not all sections apply uniformly. Different sections of income tax are relevant based on income type, residential status, and deductions claimed.

The Income Tax Act and rules serve different purposes. The act lays down the law and principles, while the Income Tax Rules provide procedural guidelines for implementing those provisions under the Indian Income Tax Act 1961.

The Income Tax Act in India governs direct taxes on income earned by individuals, firms, companies, and other entities. It is a core part of the broader taxation law in India, focusing specifically on income-based taxation.

While the 1961 Income Tax Act applies to all taxpayers, the applicable provisions, rates, and exemptions vary depending on taxpayer category, income level, and residential status, as outlined in the Income Tax Act 1961 overview.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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