Income tax is a tax levied by the government on the yearly income earned by individuals, businesses, or other entities. It plays a key role in funding public services and supporting economic development. In India, the income tax system operates under the Income Tax Act, 1961, which outlines how income is calculated, taxed, and collected each year. Understanding how this system works is important for every taxpayer. In this article, we will explore Income Tax meaning, latest updates, tax slabs, rules, Income Tax Guide FY 2025-26 and more to help you stay informed and financially prepared.
What is income tax?
Income tax is a tax imposed by the government on the income of individuals, businesses, and other entities. It is collected by the government to fund public services such as healthcare, education, defence, and infrastructure. In simple terms, it is a way for the government to raise funds from the earnings of its citizens.
In India, income tax is regulated by the Income Tax Act of 1961, which defines how the tax is to be calculated, collected, and managed. The amount of tax you pay depends on your income, the type of income, and the various deductions available under the law.
Income tax law in India
According to the Indian Constitution, taxes must only be imposed as per established legal provisions. Any tax collected without support from existing laws is considered unconstitutional.
The rules concerning income tax are set out under the Income Tax Act, 1961. This Act provides the legal framework for the assessment and collection of income tax in the country. Since income tax is listed under the Union List, it falls entirely under the jurisdiction of the central government. Hence, only the Parliament can make laws related to this tax.
Every year, the Finance Bill presented during the Budget session brings about amendments to the Act. These are meant to improve compliance and may include new sections or the removal of outdated ones. When these proposed amendments are approved, they become law through the Finance Act.
Besides the main Act, other components of income tax law include rules, notifications, circulars, and judicial decisions. These elements help implement the Act and ensure smooth tax collection.
Income tax department
The Income Tax Department operates as a government body tasked with managing direct tax collection in India.
The administration of income tax and other direct taxes is overseen by the Central Board of Direct Taxes (CBDT), which is a part of the Department of Revenue within the Ministry of Finance. The CBDT frames policies and ensures their execution through the Income Tax Department.
History of income tax
Understanding how income tax developed over time offers context to its current structure.
Following the financial strain caused by the 1857 military rebellion, the British government introduced income tax in 1860 through Sir James Wilson. Over time, the system underwent several changes.
The first comprehensive law, the Income Tax Act of 1886, governed income tax collection for many years. This was followed by the 1918 and 1922 Acts. Eventually, a completely new Act was passed during 1960-61, and the current Income Tax Act came into effect from 1st April 1962.
The 1961 Act applies nationwide, including regions like Jammu & Kashmir and Sikkim. Since its implementation, various amendments have been introduced through successive Union Budgets to reflect evolving economic and administrative needs.
Latest income tax slabs for FY 2025-26 (AY 2026-27)
The new income tax slabs for the financial year 2025-26 under the new tax regime bring notable changes. These adjustments are expected to benefit taxpayers by offering relief to those who previously relied on investments to reduce their tax burden.
Under the revised structure, the top tax rate of 30% now applies to those earning over Rs. 24 lakh annually, whereas earlier this threshold was Rs. 15 lakh.
Income tax slabs (Rs.) |
Income tax rate (%) |
From 0 to 4,00,000 |
0 |
From 4,00,001 to 8,00,000 |
5 |
From 8,00,001 to 12,00,000 |
10 |
From 12,00,001 to 16,00,000 |
15 |
From 16,00,001 to 20,00,000 |
20 |
From 20,00,001 to 24,00,000 |
25 |
From 24,00,001 and above |
30 |
These slab revisions have been made to make the new tax regime more appealing when compared to the old one. In earlier budgets, updates like introducing standard deductions, raising exemption limits, and expanding rebate eligibility were implemented. The July 2024 budget further adjusted income ranges in some slabs, increasing their limits by Rs. 1 lakh each.
11 Income tax changes from April 1, 2025
The financial year 2025-26 officially starts on April 1, 2025, bringing with it a new set of income tax rules. These include revised tax rates, changes in tax deductions, and updates to TDS and TCS provisions. Understanding these adjustments is essential, as they affect your tax obligations on earnings such as salary and interest. Here is a breakdown of the 11 key updates:
1. New income tax slabs and rates in the revised regime
The new regime now features updated tax slabs and rates. Notably, the 30% tax rate will apply to income exceeding Rs. 24 lakh, as opposed to Rs. 15 lakh earlier. Moreover, the basic exemption threshold has gone up from Rs. 3 lakh to Rs. 4 lakh.
Income (Rs.) |
Tax rate (%) |
0 - 4,00,000 |
0% |
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 24,00,001 |
30% |
2. No tax on income up to Rs. 12 lakh for salaried individuals
Under the revised tax regime, if your taxable income is up to Rs. 12 lakh, you will not owe any income tax. This relief is available only if you choose the new regime. To benefit from this, you must file your ITR. The relief is granted through a rebate under Section 87A. With a standard deduction of Rs. 75,000, salaried earners can earn up to Rs. 12.75 lakh without paying tax.
3. Updates to ULIP taxation rules
Budget 2025 has altered the tax rules for specific ULIPs. If the annual premium exceeds Rs. 2.5 lakh, the maturity proceeds will now be considered capital assets under equity-oriented funds. Short-term capital gains will be taxed at 20%, while long-term gains will be taxed at 12.5%, without indexation benefits. Only ULIPs with annual premiums below Rs. 2.5 lakh will continue to enjoy tax exemptions under Section 10(10D).
4. Revised TDS rates and thresholds
Changes to TDS rules include a unified 10% TDS rate under Section 194LBC and updated thresholds across various sections, effective April 1, 2025:
Section |
Description |
Previous Threshold |
New Threshold |
193 |
Interest on Securities |
Nil |
Rs. 10,000 |
194A |
Bank Interest (non-securities) |
Rs. 50,000 (senior citizens) |
Rs. 1 lakh (senior citizens) |
Rs. 40,000 (others) |
Rs. 50,000 (others) |
||
194 |
Dividend income |
Rs. 5,000 |
Rs. 10,000 |
194K |
Income from mutual funds |
Rs. 5,000 |
Rs. 10,000 |
194B |
Lottery and game winnings |
Above Rs. 10,000 (yearly) |
Rs. 10,000 (per transaction) |
194BB |
Horse race winnings |
Above Rs. 10,000 (yearly) |
Rs. 10,000 (per transaction) |
194D |
Insurance commission |
Rs. 15,000 |
Rs. 20,000 |
194G |
Commission on lottery tickets |
Rs. 15,000 |
Rs. 20,000 |
194H |
Brokerage or commission |
Rs. 15,000 |
Rs. 20,000 |
194-I |
Rent payments |
Rs. 2,40,000 (annual) |
Rs. 50,000 (monthly) |
194J |
Professional or technical service fees |
Rs. 30,000 |
Rs. 50,000 |
194LA |
Enhanced compensation payments |
Rs. 2,50,000 |
Rs. 5,00,000 |
5. Relief for non-filers from higher TDS and TCS
Starting April 1, 2025, higher TDS and TCS rates will no longer apply to those who have not filed their ITRs in certain periods. The government has repealed Sections 206AB and 206CCA to ease compliance burdens for deductors and collectors.
6. NPS Vatsalya deductions under Section 80CCD
The Budget has introduced a new deduction for contributions made to the NPS Vatsalya scheme. These deductions are available under Section 80CCD but only for those sticking with the old tax regime.
7. Increased exemption on medical treatment perks
Employers can now cover the cost of overseas medical treatment for employees and their family members without tax implications. This change takes effect from April 1, 2025, raising the perquisite exemption limits.
8. Legal immunity for late TCS in certain cases
In cases where TCS payments are delayed but deposited before the deadline for submitting quarterly statements, the taxpayer will be exempt from legal action. This new safeguard applies from April 1, 2025.
9. Extended deadline for updated ITR filing
Taxpayers now have 48 months instead of 24 to file updated returns after the end of the assessment year. This extension provides more time for corrections or updates in case of missed disclosures or errors.
10. Simplified valuation for self-occupied homes
Calculating notional rental income on self-used homes has been made simpler. Now, up to two self-occupied properties can be reported with zero annual value. This helps reduce confusion and eases tax filing for homeowners.
11. ITR comparison to detect inconsistencies
From April 1, 2025, tax officials will begin reviewing current ITRs against past ones to identify mismatches. While exact discrepancies are yet to be defined, this move aims to improve compliance and transparency.
Who is required to pay income tax?
Anyone earning above Rs. 2.5 lakh per year is liable to pay income tax. Here are the main categories of taxpayers:
Individuals (classified as below 60 years, 60-80 years, and above 80 years)
Hindu Undivided Families (HUFs)
Associations of Persons (AOPs)
Artificial Juridical Persons
Firms
Companies
Types of residential status
Resident and Ordinarily Resident (ROR): Taxed on global income.
Resident but Not Ordinarily Resident (RNOR): Taxed only on income earned or received in India or from a business/profession managed from India.
Non-Resident (NR): Taxed only on income that is earned or received in India.
Knowing your residential status is essential, as it influences the extent of your taxable income under Indian law.
How is income tax calculated?
To calculate your income tax, you need to follow a few basic steps:
1. Determine your gross income: Add up all sources of income, including salary, business income, interest on savings, and others.
2. Apply deductions: Under the Income Tax Act, you can avail of various deductions like Section 80C (for investments), Section 80D (for insurance premiums), and more.
3. Subtract exemptions: Some types of income are exempt from tax, such as income from agricultural activities or income from a pension under certain conditions.
4. Calculate the taxable income: Subtract the deductions and exemptions from your gross income.
5. Apply the tax slabs: Based on your taxable income, apply the appropriate tax rate from the slabs.
The types of income tax
To truly grasp what income tax entails, it's important to understand its various forms. Income tax in India is divided into three main categories, with the amount payable differing based on the taxpayer's classification.
A. Individual income tax
This refers to the tax imposed on an individual's yearly earnings within a financial year. The amount of tax owed depends on the person's residency status and the origin of their income. Tax rates are assigned based on income brackets.
In 2021, a new tax system was introduced. If taxpayers don't choose between the old and new regimes, the new one becomes the default.
B. Business income tax
For businesses, income tax is levied on annual profits. There are two methods to calculate this: the standard method and presumptive taxation. In the standard method, taxable income is determined by subtracting expenses from total sales.
Presumptive taxation estimates taxable income as a percentage of sales, applicable to businesses with turnovers exceeding Rs. 2.00 crores, as per tax regulations.
C. State and local income tax
State governments impose taxes like those on agricultural income, state excise, stamp duty, land revenue, and professional tax. Local authorities can collect taxes such as property tax and charges for services like water and sewage.
What are the types of income to be charged under the Income Tax Act?
Income tax in India can be classified into different types based on the source of income. The main types are:
1. Income from salary: This is the most common type of income tax. If you are employed, your employer will deduct tax at source (TDS) and deposit it on your behalf.
2. Income from business or profession: If you are self-employed or run a business, you will have to calculate and pay tax based on your business income.
3. Income from property: If you own property, such as a house or land, the rental income you earn will be taxable.
4. Income from capital gains: When you sell assets like stocks, bonds, or real estate, the profit earned is considered capital gains and is taxable.
5. Income from other sources: This includes income like interest on savings accounts, dividends, or any other miscellaneous sources of income.
What is tax deducted at source (TDS)?
Tax Deducted at Source (TDS) is a system in which the payer (like your employer, bank, or tenant) deducts tax from the payment made to the payee (you). This is then deposited with the government. TDS helps the government collect tax in advance and avoid evasion.
For example, if you are a salaried employee, your employer will deduct TDS from your salary each month based on the applicable tax slabs. The amount deducted is then deposited with the Income Tax Department on your behalf.
Filing income tax returns
In India, filing an Income Tax Return (ITR) is mandatory for anyone who earns above the exempt income limit. Filing your return helps the government determine if you have paid the correct amount of tax. If you have paid excess tax, you can claim a refund; if you have underpaid, you may have to pay the remaining amount.
There are various forms for filing tax returns based on the type of income you earn. The process of filing an ITR has been simplified over the years, and now you can file returns online through the Income Tax Department's e-filing portal.
Deductions and rebates in income tax
India's tax system allows various deductions and rebates that can help reduce your taxable income. One of the most commonly used deductions is under Section 80C, where you can claim deductions for investments in life insurance, Provident Fund (PF), National Savings Certificates (NSC), and other savings schemes.
Another popular deduction is for home loan interest under Section 24(b), where you can claim up to Rs. 2 lakh on your home loan interest payments. This makes owning a home even more affordable, as you get a tax benefit while repaying your home loan.
How home loans affect your taxes
When you take a home loan, you may be eligible for certain tax benefits. These benefits can significantly lower your taxable income, especially for first-time homebuyers. The tax deductions on home loans are available under two sections:
- Section 80C: You can claim a deduction of up to Rs. 1.5 lakh on the principal repayment of your home loan.
- Section 24(b): You can claim a deduction of up to Rs. 2 lakh on the interest paid on your home loan.
This makes home ownership more affordable and provides you with an additional incentive to invest in your future.
Ready to maximise your tax benefits while purchasing your dream home? Bajaj Finserv offers home loans with quick approval in just 48 hours* and flexible repayment options up to 32 years. Check your home loan offers today! You may already be eligible, find out by entering your mobile number and OTP.
Other topics you might find interesting |
|||
Income tax forms list
Different Income Tax Return (ITR) forms are available in India, chosen based on income type and employment nature.
ITR 1
For residents (excluding those not ordinarily resident) with total income up to Rs. 50 lakh, including salaries, one house property, other sources (like interest), and agricultural income up to Rs. 5,000.
ITR 2
For individuals and Hindu Undivided Families (HUFs) with income over Rs. 50 lakh, not earning from business or profession. Non-Resident Indians (NRIs) without business income can also use this form.
ITR 3
For individuals and HUFs with income over Rs. 50 lakh, including earnings from business or profession. NRIs with such income should also use this form.
ITR 4
For residents (individuals, HUFs, and firms excluding LLPs) with income up to Rs. 50 lakh, deriving from business or profession under sections 44AD, 44ADA, or 44AE, and agricultural income up to Rs. 5,000.
ITR 5
For entities other than individuals, HUFs, companies, and those filing ITR-7.
ITR 6
For companies not claiming tax exemption under Section 11.
ITR 7
For entities required to file returns under Sections 139(4A), 139(4B), 139(4C), 139(4D), 139(4E), and 139(4F).
ITR V
An acknowledgment form for verifying tax returns. If e-verification isn't possible, it must be signed and sent to the Income Tax Department's Centralised Processing Centre (CPC) in Bangalore.
Income tax deduction section list
Section 80C
Allows deductions up to Rs. 1.5 lakh annually for investments like fixed deposits, Public Provident Fund (PPF), National Pension System (NPS), life insurance premiums, and more.
Section 80CCC
Provides deductions up to Rs. 1.5 lakh per year for contributions to pension funds from life insurance companies, covering purchase, renewal, and continuation.
Section 80CCD
Offers deductions for contributions to NPS and Atal Pension Yojana (APY). Up to Rs. 1.5 lakh under Section 80CCD(1) and an additional Rs. 50,000 under Section 80CCD(1B) annually. Combined deductions under Sections 80C, 80CCC, and 80CCD(1) shouldn't exceed Rs. 1.5 lakh per year.
Section 80D
Pertains to medical insurance premiums. Deductions up to Rs. 25,000 annually for self, spouse, and dependent children. An additional Rs. 50,000 per year if any insured is a senior citizen. Maximum deduction can reach Rs. 1 lakh annually.
Section 80DDB
Provides deductions for treatment expenses of specified diseases like certain neurological disorders, cancers, chronic kidney failure, and blood disorders. Up to Rs. 40,000 annually, or actual expenses, whichever is less. For senior citizens, this increases to Rs. 1,00,000 annually.
Section 80E
Offers deductions on interest paid for education loans for up to 8 years or until the interest is paid off, whichever comes first. No upper limit on the deduction amount.
Section 80EE
Provides a deduction up to Rs. 50,000 annually on interest paid for loans taken for residential property.
Section 80RRB
Residents earning royalty from patents registered on or after April 1, 2003, can claim deductions up to Rs. 3 lakh annually or the actual royalty income, whichever is less.
Section 80TTA
Allows deductions up to Rs. 10,000 annually on interest earned from savings accounts in banks, post offices, or co-operative societies.
Section 80U
Provides deductions for individuals with at least 40% disability, certified by a medical authority. Maximum deduction is Rs. 75,000, increasing to Rs. 1,25,000 for 80% disability.
Section 24
Permits house owners to claim deductions up to Rs. 2 lakh annually on interest paid for home loans.
Want to take advantage of Section 24 tax benefits? Bajaj Housing Finance Home Loan offers interest rates starting at just 7.99%* p.a. and EMIs as low as Rs. 722/lakh*. Check your eligibility now and start saving on taxes! You may already qualify for competitive rates, find out by entering your mobile number and OTP.
How to save income tax?
Paying income tax is an important duty, but there are several legal ways to reduce the amount you pay. If you plan wisely and take advantage of government schemes, deductions, and exemptions, you can reduce your tax burden. These options not only help you save money but also encourage good financial habits such as investing, saving for retirement, or buying insurance. Below are some useful methods to save tax under different sections of the Income Tax Act, 1961.
Public Provident Fund (PPF)
The Public Provident Fund is a long-term savings scheme supported by the government. You can start with as little as Rs. 500, and deposit up to Rs. 1.5 lakh each year. The account runs for 15 years and can be extended in blocks of 5 years. It is a good option if you're planning for retirement. The interest you earn is tax-free under Section 10 of the Income Tax Act.
National Savings Certificates (NSC)
The NSC is a savings bond offered by the post office. It runs for 5 years and gives you a fixed return. Adults can also open accounts for minors. It suits those in low to middle-income groups. You can claim up to Rs. 1.5 lakh deduction in a financial year under Section 80C.
Sukanya Samriddhi
This is a savings scheme meant for a girl child. Parents or guardians can open this account before the girl turns 10. It matures when she turns 21, and partial withdrawals are allowed for education. You can invest between Rs. 250 and Rs. 1.5 lakh per year. The investment is eligible for deduction under Section 80C.
National Pension System (NPS)
NPS is a retirement savings scheme open to employees in different sectors. It invests in a mix of equity and fixed income, and is managed by PFRDA. You get tax benefits under Section 80C and can build a sizeable retirement fund over time.
Equity Linked Savings Schemes (ELSS)
ELSS is a mutual fund that invests mainly in shares. It offers both tax benefits and the chance for good returns over the long term. These funds come with a 3-year lock-in period. You can claim up to Rs. 1.5 lakh deduction under Section 80C if you invest in ELSS.
Employees Provident Fund (EPF)
EPF is a savings scheme for salaried individuals, run by EPFO. Both employee and employer contribute 12% of the basic pay and dearness allowance. The current interest rate is 8.25% per year, compounded yearly. Employee contributions are tax-deductible under Section 80C. Employer contributions are tax-free up to 12% of the salary plus dearness allowance.
Fixed Deposits (FD)
Fixed Deposits give a guaranteed return for a fixed term, from 7 days to 10 years. You can open them with banks, post offices, or NBFCs. The interest depends on the deposit term and your age. FDs are a safe choice for cautious investors. If you invest in a tax-saving FD, you can claim up to Rs. 1.5 lakh under Section 80C.
By insuring your and your loved ones' health
You can claim a deduction of up to Rs. 25,000 under Section 80D for health insurance premiums for yourself, your spouse, and children. If you also insure senior citizen parents, you can get an extra Rs. 30,000 deduction. Preventive health check-ups are covered up to Rs. 5,000 within these limits.
By submitting rent receipts
If you live in a rented house and get House Rent Allowance (HRA), you can claim exemption under Section 10(13A). The exemption is the lowest of:
HRA received
Rent paid minus 10% of salary
50% of salary in metro cities or 40% in non-metros
(Salary here includes Basic + Dearness Allowance)
If you do not get HRA or own a home, you can still claim rent expenses under Section 80GG. The lowest of these amounts is allowed:
Rs. 60,000 yearly (Rs. 5,000 per month)
Rent paid minus 10% of total income
25% of total income
By making a charitable donation
Donations to approved charities and relief funds can get you a deduction under Section 80G. Donations in the form of goods like food or medicine do not qualify. You must donate by cheque, draft or online if the amount is over Rs. 2,000. Anyone—individuals, companies, or HUFs—can claim this benefit. You’ll need proof like PAN, address, and donation receipt.
By financing higher education
If you take an education loan for yourself, your spouse, children, or a student you legally support, the interest paid qualifies for tax deduction under Section 80E. There is no upper limit to the amount, but you can claim it for up to 8 years or until the interest is fully paid—whichever comes first.
By buying a house
You can claim up to Rs. 2 lakh under Section 24 for the interest paid on your home loan. If you’re a first-time homebuyer, you can get an extra Rs. 50,000 under Section 80EE—if the loan was sanctioned in FY 2016–17, does not exceed Rs. 35 lakh, and the home value is below Rs. 50 lakh. You must not own any other house at that time.
Looking to purchase a home and save on taxes? Bajaj Housing Finance offers home loans up to Rs. 15 crore* with hassle-free application and 5,000+ approved projects for quick processing. Check your offers for a Bajaj Housing Finance Home Loan today! You may already be eligible, find out by entering your mobile number and OTP.
Life insurance as a tax-saving tool
Life insurance policies help protect your family and save tax. You can claim up to Rs. 1.5 lakh for premiums under Section 80C. The payout received is also tax-free under Section 10(10D), subject to conditions. If your policy includes critical illness cover, that portion of the premium is deductible under Section 80D.
Gratuity
Gratuity is a payment made by the employer to an employee who has worked for at least five years. It is paid at retirement or resignation as a reward for long service. Governed by the Payment of Gratuity Act, 1972, it provides financial support after employment and is tax-free up to a certain limit as defined in the Income Tax Act.
Explore Bajaj Housing Finance Home Loan
If you are planning to buy your dream home, Bajaj Housing Finance Home Loan can be a great option. Not only do you benefit from affordable interest rates and flexible repayment options, but you also maximise your tax benefits.
Here are a few benefits of opting for Bajaj Housing Finance Home Loan:
1. High loan amount: Secure funding up to Rs. 15 crore** to turn your dream home into reality.
2. Low interest rates: Enjoy interest rates starting 7.99%* p.a., and EMIs as low as Rs. 722/lakh**.
3. Quick approval: Get approved within 48 hours* of applying – sometimes even sooner.
4. Flexible repayment tenure: Choose a repayment term of up to 32 years for comfortable EMIs.
5. Simple application: Take advantage of doorstep document collection for a smooth process.
6. Balance transfer facility: Move your existing home loan and get a top-up loan with better terms.
So, why wait? Apply for a Bajaj Housing Finance Home Loan today and start saving on your taxes while making your homeownership dreams come true. You may already be eligible, check your loan offers by entering your mobile number and OTP.
