A Complete Guide to Income Tax: Meaning, Rules, Slabs & Types for FY 2025-26

What is Income Tax? Meaning, Rules & Overview for FY 2025–26

Income tax is a mandatory levy imposed by the government on the earnings of individuals and businesses during a financial year. In India, it is regulated by the Income Tax Act and calculated based on applicable slab rates, along with deductions and exemptions available to taxpayers.

Key Highlights of Income Tax for FY 2025–26 (AY 2026–27)

• The new tax regime is set as the default option for individuals and HUFs.
• Income up to ₹12 lakh is effectively tax-free under the new regime.
• Most income is taxed according to slab rates, while certain incomes like capital gains are taxed at special rates.
• Any excess tax deducted at source (TDS) can be claimed as a refund while filing the Income Tax Return (ITR).

What is Income Tax?

Income tax is charged on the total income earned by a taxpayer in a financial year. It is classified as a direct tax, meaning the liability falls directly on the taxpayer and cannot be transferred to another person.

India follows a progressive taxation system, where tax rates increase as income levels rise. The amount of tax payable depends on several factors such as the taxpayer’s category, age, residential status, and the nature of income earned.

Who is Required to Pay Income Tax?

As per the Income Tax Act, any person earning taxable income in India is required to file an Income Tax Return (ITR). The person whose income is assessed for tax purposes is known as an assessee.

Taxpayers are classified into different categories, each governed by specific tax rules:

• Individuals
• Hindu Undivided Family (HUF)
• Firms
• Companies
• Association of Persons (AOP)
• Body of Individuals (BOI)
• Local Authorities
• Artificial Judicial Persons

Certain taxpayers are required to file ITR mandatorily if they meet specified conditions, even if their income is below the taxable limit.

What is the Income Tax Act?

The Constitution of India provides that taxes can only be imposed through a valid law. In India, the levy and collection of income tax are governed by the Income Tax Act, 1961.

Key points about the Act:

• Income tax falls under the Union List, meaning it is controlled by the Central Government.
• Only Parliament has the authority to legislate income tax laws.
• Amendments are introduced each year through the Finance Bill presented during the Union Budget.
• Once approved, these changes become part of the Income Tax Act.

Apart from the Act, income tax laws are also supported by rules, circulars, notifications, and judicial decisions, which guide implementation and interpretation.

The upcoming Income Tax Act 2025 is expected to come into force from 1st April 2026, bringing structural changes to the existing framework.

Deductions Under the Income Tax Act

Taxpayers can reduce their taxable income by making certain investments or incurring eligible expenses. These reductions are known as deductions, meaning only the net income (after deductions) is subject to tax.

Additionally, in some cases, deductions are allowed directly on specific types of income based on their nature or source.

Popular Deductions

• Section 80C: Deduction up to ₹1.5 lakh on specified investments and expenses
• Section 80CCD(1B): Additional deduction of ₹50,000 for NPS contributions
• Section 80CCD(2): Employer’s contribution to NPS is also eligible for deduction
• Section 80D: Deduction for health insurance premiums and medical expenses
• Section 80E: Deduction on interest paid on education loans
• Section 24: Deduction on interest paid on home loans
• Section 80TTA & 80TTB: Deduction on savings interest (80TTB applies to senior citizens)

Calculation of Income Tax

1. Tax Slabs

Income tax is calculated based on slab rates, where the tax rate increases as income rises—similar to a staircase structure.

For individuals and HUFs, tax is calculated using slab rates, while entities like companies and trusts are generally taxed at a flat rate.

2. New Tax Regime (FY 2025–26)

The new tax regime aims to simplify taxation by reducing deductions while offering lower tax rates. It is now the default regime.

Tax Slabs:

• Up to ₹4 lakh – Nil
• ₹4 lakh to ₹8 lakh – 5%
• ₹8 lakh to ₹12 lakh – 10%
• ₹12 lakh to ₹16 lakh – 15%
• ₹16 lakh to ₹20 lakh – 20%
• ₹20 lakh to ₹24 lakh – 25%
• Above ₹24 lakh – 30%

3. Old Tax Regime

For individuals below 60 years:

• Up to ₹2.5 lakh – Nil
• ₹2.5 lakh to ₹5 lakh – 5%
• ₹5 lakh to ₹10 lakh – 20%
• Above ₹10 lakh – 30%

Separate slab benefits apply to senior citizens (60+) and super senior citizens (80+).

Illustration of Slab-Based Tax

A common misconception is that the highest tax rate applies to the entire income.

For example, if someone earns ₹12 lakh, they are not taxed entirely at 30%. Instead, tax is calculated slab-wise, resulting in a lower overall tax liability (e.g., ₹1,72,500 approx.).

4. Special Tax Rates

Not all income is taxed using slab rates. Certain incomes are taxed at fixed rates:

• Short-Term Capital Gains (STCG): 20%
• Long-Term Capital Gains (LTCG): 12.5%

These rates typically apply to listed shares and equity-oriented mutual funds, depending on the holding period.

5. Rebate (Section 87A) and Cess

• Tax rebates help reduce overall tax liability for eligible individuals
• Available if total income is within specified limits:
  • ₹12 lakh (new regime)
  • ₹7 lakh (old regime)
• Rebate amounts:
  • ₹60,000 (new regime)
  • ₹12,500 (old regime)

Cess is added to the final tax payable as per applicable rates.

Filing Your Income Tax Return (ITR)

1. What is ITR?

An Income Tax Return (ITR) is a form used to report income and taxes to the Income Tax Department. Taxpayers must file returns annually using the prescribed ITR forms.

2. Documents Required

• Form 16
• Form 26AS
• Annual Information Statement (AIS)
• Taxpayer Information Statement (TIS)
• Form 16A
• Proof of deductions/investments
• Bank account details

Additional documents may be required based on income sources.

3. Who is Not Required to File ITR?

Certain exceptions include:

• Individuals aged 75+ with only pension and interest income (subject to conditions)
• Individuals with income below the basic exemption limit

Basic Exemption Limits:

• Old regime:
  • ₹2.5 lakh (<60 years)
  • ₹3 lakh (60–80 years)
  • ₹5 lakh (>80 years)
• New regime:
  • ₹3 lakh (general)
  • ₹4 lakh (for FY 2025–26 as updated)

Due Date for Filing ITR

For most taxpayers (non-audit cases), the due date is 31st July of the following financial year, unless extended by the government.

E-Filing of ITR

Tax returns must be filed online through the Income Tax Department portal. Taxpayers need to register, log in, and submit their returns electronically.

Computation of Income (Overview)

Taxable income is calculated after considering:

• Income from salary
• Income from house property
• Business/profession income
• Capital gains
• Other sources

After adjusting losses and claiming deductions, the final taxable income is computed, and tax is calculated accordingly.

Payment of Income Tax

Taxes are collected in multiple ways:

1. Tax Deducted at Source (TDS)

Tax is deducted at the time of payment and deposited with the government on behalf of the taxpayer.

2. Advance Tax

Payable if total tax liability exceeds ₹10,000 in a year, in instalments as per due dates.

3. Self-Assessment Tax

The remaining tax payable after adjusting TDS and advance tax.

4. Online Tax Payment

Taxes can be paid through the official e-filing portal.

Tax Refund

A refund arises when the total tax paid exceeds the actual tax liability. The excess amount is credited to the taxpayer’s bank account.

Important Terms

Financial Year (FY)

The period from 1st April to 31st March used for earning income.
Example: FY 2025–26.

Assessment Year (AY)

The year following the financial year in which income is assessed.
Example: AY 2026–27 for FY 2025–26.

PAN (Permanent Account Number)

A unique 10-digit alphanumeric number issued to taxpayers for identification.

TAN (Tax Deduction and Collection Account Number)

A unique number required for entities responsible for deducting or collecting tax at source.

Final Note

Tax rules, slabs, and benefits are updated regularly through the Union Budget. Staying informed helps in better tax planning and compliance.