What is Income Tax? Meaning, Types, Slabs, and How It Works (FY 2025-26)

Income tax touches nearly every financial decision an earning individual makes, yet the underlying mechanics — who exactly must pay, how the five heads of income work, and which of the seven ITR forms applies to you — remain genuinely confusing for many taxpayers. This foundational guide walks through the complete framework.

This page covers:

• What income tax means and who is legally required to pay it
• The three residential status categories and how they affect taxation
• The five heads of income under the Income Tax Act
• Complete FY 2025-26 tax slabs — new regime vs old regime
• The Rs. 12 lakh and Rs. 12.75 lakh figures explained.
• Key deduction sections every taxpayer should know
• The seven ITR forms and which one applies to you
• Important tax calendar dates for FY 2025-26

Income tax is a charge imposed by the government on the income earned by individuals or businesses during a financial year. In India, the system of income tax is governed by the Income Tax Act, 1961, which provides the rules for calculating, assessing, and collecting income tax. It is a progressive, direct tax, meaning rates increase as income rises, and the person earning the money pays it directly rather than passing the burden to someone else.

Every taxpayer must file an Income Tax Return (ITR) each year within the specified deadline, declaring their income, calculating taxes owed, and requesting a refund where applicable. The system also provides deductions and exemptions that reduce total taxable income and, consequently, tax payable.

Any individual earning more than Rs. 4 lakh (new regime) or Rs. 2.5 lakh (old regime) in a financial year must pay income tax. Taxpayers fall into several categories:

• Individuals — further split by age: under 60, senior citizens (60-80), and super senior citizens (above 80)
• Hindu Undivided Family (HUF) — a family-based entity taxed collectively
• Association of Persons (AOP) — a group taxed as a single entity
• Artificial Juridical Person — legally recognised non-natural entities like trusts
• Firms — partnerships and LLPs
• Companies — corporations registered under the Companies Act

Residential status also matters: Resident and Ordinarily Resident (ROR) individuals are taxed on global income; Resident but Not Ordinarily Resident (RNOR) individuals are taxed only on India-linked income; Non-Residents (NR) are taxed only on income earned or received in India.

New Tax Regime

Old Tax Regime (unchanged for several years)

The new regime is now the default option — unless you explicitly choose the old regime while filing, or inform your employer, the new regime automatically applies.

For FY 2025-26, the enhanced Section 87A rebate under the new regime applies to an eligible resident individual whose total income does not exceed Rs. 12 lakh. The maximum rebate is Rs. 60,000, or the tax payable, whichever is lower.

For a salaried taxpayer, the Rs. 75,000 standard deduction may mean that gross salary income of up to Rs. 12.75 lakh results in taxable income of Rs. 12 lakh before the rebate. In a straightforward case consisting only of eligible salary and other slab-rate income, this can result in zero tax after the rebate.

The figure is not an unconditional tax-free threshold. The Section 87A rebate does not eliminate tax on income that is chargeable at special rates, including certain short-term or long-term capital gains. A taxpayer whose total income includes special-rate income should calculate that income separately and should not assume that the entire tax liability will be removed by the rebate.

The practical takeaway: Treat Rs. 12 lakh (not Rs. 12.75 lakh) as your safe, conservative reference point for tax-free income under the new regime, and don't assume the higher figure without professional confirmation for your specific situation.

Most of these deductions are available only under the old tax regime — the new regime permits just a handful, including Section 80CCD(2) for employer NPS contributions.

The official e-filing portal should be checked before filing because due dates can be extended or modified by notification. Advance tax is generally relevant when the estimated tax payable, after specified credits, exceeds Rs. 10,000.

Understanding income tax's foundational mechanics — who pays, how income is classified, and which deductions genuinely apply to your situation — is the first step toward confident, accurate tax planning each year. 

Effective tax planning extends beyond choosing the right regime — it includes smart investment decisions like homeownership. A home loan not only helps you achieve your property goals but, under the old regime, also provides valuable tax deductions through interest and principal repayment.

Bajaj Finance offers home loans from 7.25% p.a.* with amounts up to Rs. 15 Crore* and tenures up to 32 years. Check your eligibility today.