What is the Income Tax in India

What is the Income Tax in India?

Understand what Income Tax in India is, how it's calculated, who pays it, and key changes under the Income Tax Act, 2025

Written by : Knowledge Centre Team

2026-08-07

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10 minutes read

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Every country requires financial resources to carry out essential functions, fund public expenditures, and launch new initiatives for the welfare of its people. One of the primary ways these financial resources are accumulated is by levying taxes on the income of the country's people. This tax is known as income tax.

The income tax levied by each country depends on the regulations and guidelines it sets for the taxation process. Income tax in India is no different. It is subject to the regulations set by the country's government and applies to people who qualify as taxpayers.

Starting from 1 April 2026, India's direct taxation framework is governed by the Income Tax Act, 2025, which replaced the Income Tax Act, 1961. The new legislation simplifies tax laws through clearer language, a reorganised structure, and the introduction of the term Tax Year in place of Assessment Year and Previous Year. However, while the law has been modernised, the applicable income tax rates, tax slabs, and most tax provisions continue unless amended by the Government.

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Read on to understand what is income tax in India, who is required to pay it, how it is calculated, the applicable tax rates, and the key changes introduced under the Income Tax Act, 2025.

What is the Income Tax in India?

Income tax in India is a direct tax imposed by the Government on the income earned by individuals, businesses, and other eligible taxpayers during a Tax Year. Governed by the Income Tax Act, 2025, it is one of the Government's primary sources of revenue and helps finance public services such as healthcare, education, infrastructure, defence, and social welfare programmes.

The amount of income tax payable depends on factors such as your taxable income, taxpayer category, residential status, and the tax regime you choose. Depending on the nature of your income, tax may be paid directly by the taxpayer or collected through mechanisms such as Tax Deducted at Source (TDS) and Tax Collected at Source (TCS).

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Categories of Taxpayers

The first point to consider about income tax in India is who qualifies as taxpayers. Here are the primary categories of income taxpayers:

  • Individuals (Resident and Non-Resident) 

  • Hindu Undivided Families (HUF)

  • Body of Individuals (BOI)

  • Association of Persons (AOP)

  • Corporate Firms

  • Companies

  • Firms, including Limited Liability Partnerships (LLPs)

  • Local Authorities

  • Artificial Juridical Persons

Types of Income Tax in India 2026

Income tax in India is collected through different mechanisms to ensure timely tax collection and compliance. Depending on the nature of the transaction and the taxpayer's source of income, the Government collects income tax using the following methods:

Income tax in India is collected from its citizens by the Government in one of three primary ways:

  • Voluntary Tax Payments: Taxpayers calculate their tax liability and pay taxes directly to the Government. These payments may include advance tax, self-assessment tax, or regular tax payments while filing the Income Tax Return (ITR).
  • Taxes Deducted at Source, or TDS: Taxes Deducted at Source, or TDS, refers to tax deducted by the payer at the time of making specified payments such as salary, interest, commission, professional fees, or rent. The deducted amount is deposited with the Government on the taxpayer's behalf.
Do you know

Did You Know?

You can verify whether your employer has deposited your TDS by checking Form 26AS before filing your Income Tax Return (ITR)
 

Source: Mint

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  • Taxes Collected at Source, or TCS: Taxes Collected at Source, or TCS, are collected by the seller while selling specified goods or services, such as certain high-value transactions, and deposited with the Government.

    Also Read about -     Corporate Tax

What Counts as Income for Tax Purposes?

The other important point to consider about income taxes in India is how the term ‘income’ is defined. Under the Income Tax Act, 2025, taxable income continues to be classified under different heads of income. Understanding these categories helps taxpayers determine how various sources of earnings are taxed and reported while filing their Income Tax Return (ITR).

Here are the categories of income generated by a person that are subject to income taxation:

  • Income generated through salaries or pension

  • Income generated from capital gains, such as earnings from the sale of capital assets

  • Income from house property, which typically refers to rental income

  • Income from business/profession, such as earnings of freelancers and business owners

  • Income from other sources

Five Heads of Income Under the Income Tax Act, 2025

Head of Income

What It Includes

Examples

Income from Salary

Earnings received from an employer, including retirement benefits

Salary, wages, bonus, allowances, pension

Income from House Property

Income earned from owning and letting out a property

Rental income from residential or commercial property

Profits and Gains from Business or Profession

Income earned from carrying on a business or practising a profession

Business profits, consultancy fees, freelance income

Capital Gains

Profit earned from transferring capital assets

Sale of shares, mutual funds, land, buildings, gold

Income from Other Sources

Income that does not fall under any of the above heads

Interest from bank deposits, dividends, gifts (subject to conditions), family pension

What is the Income Tax Rate in India Under the Old Tax Regime?

The income tax rate in India paid by a taxpayer depends on the amount of income he or she earns over a financial year. These income amounts are categorised into ranges or slabs, and an income tax rate applies to each slab. Based on the income tax slab a taxpayer falls under, he or she is subject to pay that rate of income tax.

In order to lower one’s tax burden, a taxpayer can make certain tax-saving investments and opt for the appropriate tax deductions that apply to them. If that is the case, the taxpayer’s income will be subject to the old tax regime, and the applicable rates for an individual (less than 60 years of age) are as follows:

Income tax slab

Applicable tax rate

₹0 to ₹2,50,000

Nil

₹2,50,001 to ₹5,00,000

5% 

₹5,00,001 to ₹10,00,000

20% 

Above ₹10,00,000

30% 

Key Features of the Old Tax Regime:

The old tax regime may be suitable for taxpayers who wish to claim various deductions and exemptions to reduce their taxable income.

Some commonly claimed tax benefits include:

  • Deductions under eligible provisions of the Income Tax Act

  • House Rent Allowance (HRA), where applicable

  • Leave Travel Allowance (LTA), subject to conditions

  • Interest deduction on eligible home loans

  • Eligible life and health insurance premium deductions, subject to the applicable provision

What is the Income Tax Rate in India Under the New Tax Regime? 

The new tax regime is the default tax regime under the Income Tax Act, 2025. It offers a simplified tax structure with lower tax rates across multiple income slabs while allowing only limited deductions and exemptions. Taxpayers who wish to claim a wider range of eligible deductions and exemptions may opt for the old tax regime, subject to the prescribed conditions.

Here are the income tax slabs and rates as per the new tax regime for FY 2026-27) AY 2027-28:

Income Tax Slab

Applicable Tax Rate

₹0 to ₹4,00,000

Nil

₹4,00,001 to ₹8,00,000

5%

₹8,00,001 to ₹12,00,000

10%

₹12,00,001 to ₹16,00,000

15%

₹16,00,001 to ₹20,00,000

20%

₹20,00,001 to ₹24,00,000

25%

Above ₹24,00,000

30%

Key Features of the New Tax Regime:

The new tax regime aims to simplify tax compliance by reducing the dependence on multiple deductions and exemptions.

Some of its key features include:

  • Lower tax rates across more income slabs

  • Default tax regime for individual taxpayers

  • Limited deductions and exemptions compared to the old regime

  • Simpler tax calculation and return filing process

  • Suitable for taxpayers who do not claim significant tax-saving deductions

Income Tax Act, 1961 vs Income Tax Act, 2025: What Has Changed?

The Income Tax Act, 2025, which came into effect on 1 April 2026, replaces the Income Tax Act, 1961. While the new legislation simplifies the structure and language of India's direct tax laws, it does not automatically change the tax rates, tax slabs, or the overall tax burden for taxpayers. Instead, its primary objective is to make tax laws easier to understand, interpret, and comply with.

Here's a quick comparison between the two Acts:

Particular

Income Tax Act, 1961

Income Tax Act, 2025

Effective Period

Up to 31 March 2026

From 1 April 2026

Terminology

Previous Year (PY) & Assessment Year (AY)

Tax Year

Language

Technical and legalistic

Simpler and easier to understand

Structure

Amended multiple times over six decades

Reorganised with a streamlined structure

Number of Sections

More than 800 sections

Around 536 sections

Tax Rates & Slabs

As notified by the Government

Continue unless amended through the Finance Act

Objective

Governing direct taxation

Simplifying tax laws while maintaining continuity

Key Changes Introduced by the Income Tax Act, 2025:

While the fundamental principles of income taxation remain largely unchanged, the Income Tax Act, 2025 introduces several noteworthy updates to simplify compliance and improve the overall tax framework.

Some of the key changes include:

  • Replaces the Income Tax Act, 1961 from 1 April 2026

  • Introduces the term Tax Year, replacing Previous Year and Assessment Year

  • Uses simpler language and a more logical structure to improve readability

  • Consolidates and reorganises provisions, reducing the number of sections

  • Retains the existing tax framework unless amended through subsequent Finance Acts

Conclusion

Understanding income tax in India plays a vital role in effective financial planning and helps you stay compliant with the country's tax laws. As tax laws continue to evolve, staying informed about the applicable tax regime, available tax benefits, and filing requirements can help you make better financial decisions throughout the year instead of rushing at the time of filing your Income Tax Return (ITR).

With the introduction of the Income Tax Act, 2025, taxpayers can expect a more streamlined and user-friendly legal framework without significant changes to the underlying tax structure. Reviewing your income, investments, and eligible deductions regularly can help you choose the most suitable tax regime and remain compliant with the latest tax provisions.

Glossary

  1. Income Tax: A direct tax charged by the Government on the income earned by individuals, businesses, and other taxpayers
  2. Tax Year: The 12-month period used to calculate taxable income under the Income Tax Act, 2025
  3. TDS (Tax Deducted at Source): Tax deducted by the payer before making specified payments to the recipient
  4. TCS (Tax Collected at Source): Tax collected by the seller from the buyer on specified transactions
  5. Income Tax Return (ITR): A form used by taxpayers to report income, deductions, taxes paid, and tax liability
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FAQs

Income tax in India is a direct tax levied by the Government on the income earned by individuals, businesses, and other eligible taxpayers. The revenue collected through income tax helps fund public services, infrastructure development, healthcare, education, defence, and various welfare schemes across the country.

Income tax in India is payable by eligible taxpayers, including individuals, Hindu Undivided Families (HUFs), firms, companies, Limited Liability Partnerships (LLPs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), local authorities, and other entities. The tax liability depends on factors such as the taxpayer's residential status, total taxable income, and the applicable tax regime.

Under the Income Tax Act, 2025, taxable income is classified into five heads:

  • Income from Salary

  • Income from House Property

  • Profits and Gains from Business or Profession

  • Capital Gains

  • Income from Other Sources

 

These categories help determine how income tax in India is calculated and reported while filing an Income Tax Return (ITR).

The income tax rates for FY 2026-27 (Tax Year 2026-27) depend on whether you choose the old tax regime or the new tax regime while filing your income tax return.

 

  • Old Tax Regime: Tax rates range from Nil to 30%. This regime allows taxpayers to claim various deductions and exemptions, such as those under Sections 123, 126 (or the corresponding provisions under the Income Tax Act, 2025), HRA, and home loan benefits, subject to eligibility.

  • New Tax Regime: Tax rates also range from Nil to 30%, but income is taxed across multiple slabs with lower tax rates for certain income ranges. However, most deductions and exemptions are not available under this regime.

The tax you ultimately pay depends on your taxable income, eligible deductions (if applicable), and the tax regime you choose. Comparing both regimes before filing your return can help you determine which one results in a lower tax liability.

The old tax regime allows taxpayers to claim various eligible deductions and exemptions, which can reduce their taxable income. In contrast, the new tax regime offers lower tax rates across more income slabs but permits only limited deductions and exemptions. The choice depends on your income, eligible deductions, and overall tax planning needs.

The basic exemption limit depends on the tax regime selected. Under the new tax regime, the basic exemption limit is ₹4 lakh for FY 2026-27. Under the old tax regime, the exemption limit varies based on the taxpayer's age and applicable provisions.

To calculate income tax in India, the total income earned under different heads is first determined. Eligible deductions or exemptions are then applied, depending on the chosen tax regime, to arrive at the taxable income. The applicable income tax slab rates are then used to compute the final tax liability.

Taxpayers can reduce their tax liability by choosing the most suitable tax regime and claiming eligible deductions and exemptions under the applicable provisions of the Income Tax Act. Reviewing investments, home loan benefits, and other eligible tax-saving options can help optimise tax planning while remaining compliant with tax laws.

A tax deduction reduces the amount of income on which tax is calculated, thereby lowering the taxable income. A tax exemption, on the other hand, excludes specific income from taxation altogether, subject to the applicable provisions of the Income Tax Act.

The due date for paying or filing income tax in India depends on the type of taxpayer and whether an audit is applicable. For most individual taxpayers who are not subject to audit, the due date for filing the Income Tax Return (ITR) is generally 31 July of the relevant assessment year, unless extended by the Government.

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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