What is Income Tax in India? — A Complete Beginner's Guide

Updated: 3 June 2026

Income tax is a direct tax levied by the Indian government on the income you earn in a financial year. It applies to individuals, companies, HUFs, firms, and other entities. Income from salary, business, property, capital gains, and other sources is combined, deductions are subtracted, and tax is computed on the net figure using the applicable slab rates. For FY 2025-26, salaried individuals with income up to ₹12.75 lakh effectively pay zero tax under the new regime.

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Zero income tax for salaried employees with income up to ₹12.75 lakh in FY 2025-26 — via ₹75,000 standard deduction + Section 87A rebate (new tax regime).

Who Administers Income Tax in India?

Income tax in India is governed by the Income-tax Act 2025 (the consolidated, cleaner successor to the Income-tax Act, 1961 — the underlying law is the same). It is administered by the Central Board of Direct Taxes (CBDT), which falls under the Department of Revenue, Ministry of Finance. The Income Tax Department has its headquarters in Delhi and field offices (Commissioners, Assessing Officers) across the country. All filings, payments, and communications happen on the official portal: incometax.gov.in.

Five Heads of Income

All income earned by a taxpayer is classified under one of five heads. The total income is the sum of income (or losses) across all heads, after set-off of losses:

Head of Income	What it Covers	Examples
1. Salaries	Remuneration for employment — salary, allowances, perquisites, pension	Monthly salary, HRA, bonus, gratuity, EPS pension
2. House Property	Income from owning property — actual or notional rent; interest deduction	Rental income from flat; home loan interest deduction under Section 24(b)
3. Business / Profession	Profits and gains from any trade, commerce, manufacture, or profession	Shopkeeper's profit, freelancer's fees, CA/doctor practice income
4. Capital Gains	Profit on sale of capital assets — short-term (STCG) and long-term (LTCG)	Profit on selling shares, mutual funds, property, gold
5. Other Sources	Income not covered by the above four heads — residual head	FD/savings interest, dividends, lottery winnings, gifts above ₹50,000

New Tax Regime Slabs — FY 2025-26 (AY 2026-27)

The new tax regime is the default for FY 2025-26. These are the slab rates applicable to individuals:

Income Slab	Tax Rate
Up to ₹4,00,000	0% (Nil)
₹4,00,001 – ₹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%

Add: 4% Health & Education Cess on tax. Add surcharge if income exceeds ₹50 lakh. Section 87A rebate: up to ₹60,000 (making zero tax effective up to ₹12L income; ₹12.75L for salaried with standard deduction).

ITR Forms — Who Should File Which Form?

ITR Form	Who Should File
ITR-1 (Sahaj)	Resident individuals with income from salary/pension + one house property + other sources (interest, etc.) — total income up to ₹50 lakh
ITR-2	Individuals/HUFs with income from salary, house property, capital gains, other sources — but no business/profession income
ITR-3	Individuals/HUFs with income from business or profession (including partners of firms)
ITR-4 (Sugam)	Individuals, HUFs, and firms (other than LLP) opting for presumptive taxation schemes (44AD, 44ADA, 44AE) — total income up to ₹50 lakh
ITR-5	Firms, LLPs, AOPs, BOIs, co-operative societies, and other entities (not individuals, HUFs, or companies)
ITR-6	Companies other than those claiming exemption under Section 11 (charitable/religious trusts)
ITR-7	Persons/entities required to file under Section 139(4A), 139(4B), 139(4C), 139(4D) — trusts, political parties, research institutions

Frequently Asked Questions

What is income tax in India?

Income tax in India is a direct tax levied by the central government on the income earned by individuals, Hindu Undivided Families (HUF), companies, firms, and other entities in a financial year. It is governed by the Income-tax Act 2025 (the consolidated successor to the Income-tax Act, 1961) and administered by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance. Income from all sources — salary, business, property, capital gains, interest, dividends — is added up to arrive at total income, and tax is computed based on applicable slab rates after accounting for deductions and exemptions.

How is income tax calculated in India?

Income tax is calculated as follows: (1) Add income from all five heads — Salary, House Property, Business/Profession, Capital Gains, and Other Sources — to get Gross Total Income. (2) Subtract eligible deductions (Section 80C, 80D, etc., under the old regime) to get Net Taxable Income. (3) Apply the applicable slab rates (old or new regime) to compute tax. (4) Add surcharge (if income exceeds ₹50L) and Health & Education Cess at 4%. (5) Subtract rebate under Section 87A if applicable. The result is your total tax payable. Subtract TDS already deducted and advance tax paid — the balance is tax payable, or the excess becomes a refund.

What is an Income Tax Return (ITR)?

An Income Tax Return (ITR) is an annual declaration filed with the Income Tax Department disclosing your income, deductions claimed, and tax paid during the financial year. It is filed on incometax.gov.in. The due date for most individuals is 31 July of the assessment year (e.g., 31 July 2026 for FY 2025-26). Salaried individuals with no other income file ITR-1 (Sahaj); those with capital gains file ITR-2; business owners file ITR-3 or ITR-4. Filing ITR is mandatory if income exceeds the basic exemption limit, or if you have refund claims, foreign assets, or other specified transactions — even if tax payable is zero.

Is income tax mandatory for everyone in India?

Income tax filing is mandatory if your total income (before deductions) exceeds the basic exemption limit — ₹3 lakh under the new regime or ₹2.5 lakh under the old regime for individuals below 60 years. It is also mandatory regardless of income if you: deposited more than ₹1 crore in bank accounts in the year; spent more than ₹2 lakh on foreign travel; paid more than ₹1 lakh on electricity; have income from foreign assets; are a company or firm. Under the new regime, individuals with salary income up to ₹12.75 lakh effectively pay zero tax due to the ₹75,000 standard deduction and Section 87A rebate — but filing ITR may still be mandatory.

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