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What is Income Tax in India — Complete Guide

Updated: 3 June 2026  |  Income-tax Act 2025  |  Beginners Guide

Income tax is a direct tax on income earned during a financial year (April–March), collected by the Central Government under the Income-tax Act 2025. Zero tax for salary up to ₹12.75L (new regime, FY 2025-26). Filed as ITR by July 31 each year.
5 Heads
All income in India is taxed under 5 heads: Salary, House Property, Business, Capital Gains, Other Sources.
Total of all heads minus deductions = taxable income. Apply slab rates → add 4% cess → subtract TDS.

Five Heads of Income

HeadWhat it IncludesKey Deductions
SalaryWages, pension, HRA, LTA, allowances, perquisitesStandard deduction ₹75K, HRA exemption, 80C
House PropertyRent from owned property; notional rent on 2nd home30% standard deduction + home loan interest (Sec 24)
Business / ProfessionSelf-employment, freelance, practice, company profitsBusiness expenses, depreciation, 44AD/44ADA
Capital GainsProfit on sale of shares, MF, property, goldIndexation (some assets), exemption 54/54F (property)
Other SourcesFD interest, dividends, lottery, gifts >₹50K, any otherInterest deduction under Section 57 (dividends)

ITR Forms — Which Form to File?

FormWho Should File
ITR-1 (Sahaj)Salaried individuals: salary + 1 house + FD interest + agri income ≤₹5K (income ≤₹50L)
ITR-2Individuals with capital gains, more than 1 house property, NRI, foreign income/assets
ITR-3Individuals with business/professional income + capital gains
ITR-4 (Sugam)Presumptive taxation (44AD/44ADA/44AE) — turnover ≤₹2Cr / receipts ≤₹75L
ITR-5Partnership firms, LLPs, AOP, BOI (not individuals/companies)
ITR-6Companies (other than those claiming 11/12 exemption)
ITR-7Trusts, political parties, universities under specific sections

Frequently Asked Questions

What is income tax and who pays it in India?
Income tax is a direct tax levied by the Central Government on the income earned by individuals, Hindu Undivided Families (HUF), companies, firms, and other entities during a financial year. Who pays: Any person whose total income exceeds the basic exemption limit — ₹2.5 lakh (old regime) or effective ₹12 lakh (new regime with 87A rebate). Governed by the Income-tax Act 2025. Administered by the Income Tax Department under CBDT (Central Board of Direct Taxes). Revenue collected: Income tax is one of the largest sources of Central Government revenue — funding roads, defence, healthcare, education.
What are the five heads of income in India?
All income is classified under 5 heads: (1) Income from Salary — wages, pension, HRA, allowances, perquisites; employer-employee relationship required. (2) Income from House Property — rent from property owned; annual value minus 30% standard deduction and home loan interest. (3) Profits and Gains from Business or Profession — self-employed, freelancers, business owners, doctors, lawyers. (4) Capital Gains — profits from selling assets: shares, property, gold, MF units. (5) Income from Other Sources — FD interest, dividends, lottery winnings, gifts above ₹50K, any income not covered above. Total of all heads = Gross Total Income; after deductions (80C etc.) = Total Taxable Income.
What is a Financial Year and Assessment Year in income tax?
Financial Year (FY): April 1 to March 31 — the year you EARN income. Example: FY 2025-26 = April 1, 2025 to March 31, 2026. Assessment Year (AY): The year AFTER the FY — when you FILE ITR and pay tax. AY 2026-27 corresponds to income earned in FY 2025-26. ITR due date: July 31 of the Assessment Year. Current year: FY 2025-26 (income being earned); ITR for this FY due July 31, 2026. TDS certificates, Form 26AS, Form 16 all refer to the Financial Year. Income Tax Return is filed in the Assessment Year referencing the previous Financial Year.
What is PAN and why is it needed for income tax?
PAN (Permanent Account Number) is a 10-character alphanumeric code issued by the Income Tax Department. Format: AAAAANNNNA (5 letters + 4 numbers + 1 letter). Why needed: Mandatory for: filing ITR; opening bank accounts; transactions >₹50,000 cash; property transactions >₹10L; buying mutual funds >₹50K; car purchase >₹10L; foreign travel >₹50K. PAN identifies you in all financial transactions and links to your income tax record. Aadhaar-PAN linking: Mandatory (deadline: 31 March 2023); unlinked PAN becomes inoperative — ITR cannot be filed with inoperative PAN. Apply PAN: Form 49A on NSDL/UTIITSL portals (₹107 for physical card, instant e-PAN free).
How do you calculate and pay income tax?
Step-by-step income tax calculation: (1) Add all income under 5 heads = Gross Total Income. (2) Subtract deductions (80C up to ₹1.5L, 80D, 80G etc.) = Total Taxable Income. (3) Apply tax slabs: New regime FY 2025-26: 0-4L:0%, 4-8L:5%, 8-12L:10%, 12-16L:15%, 16-20L:20%, 20-24L:25%, 24L+:30%. (4) Subtract 87A rebate if income ≤ ₹12L (new) or ≤ ₹5L (old) = Tax Payable. (5) Add 4% cess + surcharge if applicable. (6) Subtract TDS already deducted = Balance payable or refund. Payment: Employer deducts TDS monthly; self-employed pay advance tax quarterly; balance tax via Challan 280 at incometax.gov.in before ITR filing.

Related Pages

Tax Slabs 2025-26 Tax Calculator File ITR New Tax Regime Section 80C Apply PAN Card What is TDS
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