Income tax in India is a form of tax that is payed 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 which you may need to use in your regular filing of income tax. You have three stages of filing returns as an individual taxpayer:
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. Let’s go step by step with the estimate of tax liability and slab rate regime:
Key Takeaways
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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. If you're wondering how many sections are there in the Income Tax Act, it consists of 298 sections and 23 chapters, covering everything from income classification to tax rebates. 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.
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Income Tax Act, 1961 divides the incomes under following five heads for taxation:
Other sources will include all incomes which 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 taxable maturity benefit or claim amount is also added to other incomes.
The retirement benefits, however, you should count under salary when taxable. Income from house property will only include rental incomes. If you sell the house the gain or loss are treated as a capital gain.
After 2020 budget you have two options to estimate your taxes, 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.
| Type of Income | Old Regime | New regime |
| Salary | Deductible Allowances including HRA | Only travel allowance and reimbursements are deductible |
|---|---|---|
| Estimate income or loss from self-occupied house | Self-occupied property is not included for income/loss calculation | |
| House Property | Loss from house property adjustable with other incomes | Loss from house property cannot be adjusted from any other income or carried forward |
| Carry forward the unadjusted loss |
Capital gain, business and professional income and Income from other sources have not seen any changes in the new regime.
Click here to use - Income Tax Calculator
Once you have estimated your taxable income, which is also your gross total income, under old regime you could claim certain deductions. These deductions were allowed under section 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 employer’s contribution to your NPS tier-I account, while 80JJAA applies to the income from business and profession.
India’s first Income Tax was introduced in 1860 by Sir James Wilson to fund the British war expenses after the 1857 revolt.
Source: PIB
The difference is not much if your income is above Rs 15 lakh a year. However, for lower incomes, you can have a huge difference, based on how much tax-saving investments you have committed. If you have not invested enough in the tax-saving schemes, using the new regime slabs will be useful in bringing your tax liabilities down.
If your taxable income is below Rs. 5 lakhs in 2020-21, you may not have to pay any tax.
Tax Slabs Under New Regime (effective for FY 2020-21)
| New Tax Slab: Section 115B | ||||
|---|---|---|---|---|
| Sl. No. | Total income | Margin | Rate of tax | Max Tax |
| 1 | Up to Rs. 2,50,000 | 2,50,000 | Nil | 0 |
| 2 | From Rs. 2,50,001 to Rs. 5,00,000 | 2,50,000 | 5% | 12,500 |
| 3 | From Rs. 5,00,001 to Rs. 7,50,000 | 2,50,000 | 10% | 25,000 |
| 4 | From Rs. 7,50,001 to Rs. 10,00,000 | 2,50,000 | 15% | 37,500 |
| 5 | From Rs. 10,00,001 to Rs. 12,50,000 | 2,50,000 | 20% | 50,000 |
| 6 | From Rs. 12,50,001 to Rs. 15,00,000 | 2,50,000 | 25% | 62,500 |
| 7 | Above Rs. 15,00,000 | 30% |
Under the new slabs, there are no distinctions based on age or gender of the taxpayer. Under old regime estimates the tax liability comes around Rs 2.3 lakhs due to the deductions from gross total income.
So, use the old tax regime if:
Otherwise, switching to the new regime will reduce your tax liability.
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The Union Budget 2025 introduced revised income tax slabs under the new tax regime, effective for the Financial Year 2025-26 (Assessment Year 2026-27). These changes aim to provide significant relief to taxpayers, especially the middle class. Here are the revised Income Tax Slabs for FY 2025-26:
Annual Income Range (₹) | Tax Rate (%) |
Up to 4,00,000 | Nil |
4,00,000 - 8,00,000 | 5% |
8,00,001 - 12,00,000 | 10% |
12,00,001 - 16,00,000 | 15% |
16,00,001 - 20,00,000 | 20% |
20,00,001 - 24,00,000 | 25% |
Above 24,00,000 | 30% |
Note that individuals with an annual income up to ₹12 lakh will not have to pay any income tax due to the enhanced rebate under Section 87A. Additionally, salaried employees are entitled to a standard deduction of ₹75,000, effectively raising the tax-free income threshold to ₹12.75 lakh.
For those opting for the old tax regime, various deductions and exemptions are available, such as those under Sections 80C and 80D. It's important to compare both regimes to find out which is more beneficial based on individual financial situations.
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