The Income Tax Act, 1961 is the central law under which the Government of India levies direct tax on income. It defines who is a taxpayer, sorts income into five categories, sets out what is exempt and what can be deducted, and prescribes the rates, filing deadlines, and penalties that apply. It draws its authority from Entry 82 of the Union List, which gives Parliament the power to tax all non-agricultural income across the country.1India Code. Income Tax Act 1961
Who the Act Taxes
The Act reaches almost every kind of earner. Section 2(31) defines “person” to include individuals, Hindu Undivided Families, companies, partnerships, associations of persons, bodies of individuals, local authorities, and artificial juridical persons. If an entity can earn, it falls within the Act.2Indian Kanoon. Income Tax Act 1961 – Section 2(31)
A “person” becomes an “assessee” under Section 2(7) when they owe tax, interest, or a penalty, or are pulled into an assessment. That covers the obvious cases and less obvious ones, such as a legal heir who inherits a deceased taxpayer’s liability.2Indian Kanoon. Income Tax Act 1961 – Section 2(31) Different categories of assessee face different rates and compliance rules, which is why a company’s tax picture looks nothing like an individual’s.
Previous Year and Assessment Year
The Act’s timeline runs on two paired twelve-month periods. Section 3 defines the “previous year” as the financial year in which you earn the income, always running from 1 April to 31 March.3Indian Kanoon. Income Tax Act 1961 – Section 3 Section 2(9) defines the “assessment year” as the twelve months starting the following 1 April, when that income is reported and taxed.4Income Tax Department. Section 2(9) – Assessment Year Income earned in FY 2025–26 is assessed in AY 2026–27.
Residential Status Decides How Far the Tax Reaches
Under Section 6, your citizenship is irrelevant; what counts is physical presence. You are a “resident” if you were in India for 182 days or more during the previous year, or if you were in India for at least 365 days across the four preceding years and at least 60 days in the current year.5Indian Kanoon. Income Tax Act 1961 – Section 6
Section 5 then decides what income the Act reaches. A resident ordinarily resident is taxed on worldwide income. A resident but not ordinarily resident is taxed on Indian income plus foreign income from a business controlled or profession set up in India. A non-resident pays tax only on income that is received in India or arises in India.6Indian Kanoon. Income Tax Act 1961 – Section 5
The Five Heads of Income
Section 14 splits every rupee of taxable income into five categories, and each head has its own computation rules.7Income Tax Department. Treatment of Income from Different Sources
- Salaries (Sections 15–17). Any income from an employer–employee relationship: basic pay, allowances, benefits. Salaried workers and pensioners can claim a standard deduction of ₹75,000 under the new regime or ₹50,000 under the old.7Income Tax Department. Treatment of Income from Different Sources
- Income from House Property (Sections 22–27). The annual value of a building or land you own, whether rented or vacant. You can deduct municipal taxes paid and a further 30% of the net annual value.
- Profits and Gains of Business or Profession (Sections 28–44). Net income from trade, manufacturing, or professional practice after allowable expenses such as depreciation, rent, and salaries.
- Capital Gains (Sections 45–55). Profit from transferring capital assets such as property, shares, or mutual fund units. Short-term and long-term gains are taxed differently based on the holding period.
- Income from Other Sources (Sections 56–59). A catch-all for whatever doesn’t fit elsewhere: bank interest, dividends, lottery winnings, and gifts above specified thresholds.
What Is Exempt and What Can Be Deducted
Not all income enters the calculation. Section 10 lists categories that are completely excluded.8Income Tax Department. Exempt Income Agricultural income under Section 10(1) is the most familiar: the Constitution reserves that power for states, so the central government cannot tax it directly. One catch, though. If your agricultural income exceeds ₹5,000 and your non-agricultural income is above the basic exemption limit, the agricultural amount is factored in to decide which slab applies to the rest, even though it stays untaxed itself.
Other Section 10 exemptions include certain allowances, life insurance payouts, specified scholarships, and gratuity. Non-government employees can receive up to ₹20 lakh in gratuity tax-free under Section 10(10).
After exemptions, you add income from all five heads to get gross total income. Chapter VI-A (Sections 80C to 80U) then allows further subtractions. These are mostly tied to the old regime; the new regime strips most of them away.9Income Tax Department. FAQs on New Tax vs Old Tax Regime
Section 80C is the most widely claimed, with a ceiling of ₹1,50,000 across investments such as PPF, EPF, life insurance premiums, ELSS, NSCs, children’s tuition fees, and home loan principal repayments.10Indian Kanoon. Income Tax Act 1961 – Section 80C Section 80D allows health insurance premiums: ₹25,000 for self and family if you are under 60, an additional ₹25,000 for parents (₹50,000 if a parent is a senior citizen). Section 80E allows an uncapped deduction on education loan interest for up to eight years from the start of repayment.
What remains after these subtractions is your “total income,” and that is the figure on which tax rates finally apply.
Tax Rates: New Regime and Old Regime
Since AY 2024–25, the new regime under Section 115BAC has been the default for individuals, HUFs, and associations of persons. You are placed in it automatically unless you opt out.9Income Tax Department. FAQs on New Tax vs Old Tax Regime The new regime charges lower slab rates but removes most exemptions and deductions. The old regime keeps the deductions and charges higher rates.
New Regime Slabs for AY 2026–27
For individuals in AY 2026–27, the new regime rates are:11Income Tax Department. Salaried Individuals for AY 2026-27
- Up to ₹4,00,000: Nil
- ₹4,00,001 to ₹8,00,000: 5%
- ₹8,00,001 to ₹12,00,000: 10%
- ₹12,00,001 to ₹16,00,000: 15%
- ₹16,00,001 to ₹20,00,000: 20%
- ₹20,00,001 to ₹24,00,000: 25%
- Above ₹24,00,000: 30%
The Section 87A rebate wipes out the liability entirely for taxable income up to ₹12,00,000 under the new regime, making that the effective zero-tax point.
Old Regime Slabs
If you opt out, these rates apply:11Income Tax Department. Salaried Individuals for AY 2026-27
- Up to ₹2,50,000: Nil
- ₹2,50,001 to ₹5,00,000: 5%
- ₹5,00,001 to ₹10,00,000: 20%
- Above ₹10,00,000: 30%
Senior citizens aged 60 to 79 get a higher basic exemption of ₹3,00,000 under the old regime, and super senior citizens aged 80 and above get ₹5,00,000. The new regime uses the same slabs for everyone regardless of age.
Surcharge and Cess
High incomes attract an additional surcharge. Under both regimes: 10% between ₹50 lakh and ₹1 crore, and 15% between ₹1 crore and ₹2 crore. Above ₹2 crore the new regime caps the surcharge at 25%, while the old regime charges 25% up to ₹5 crore and 37% beyond that. A 4% Health and Education Cess is then applied on the combined tax and surcharge.11Income Tax Department. Salaried Individuals for AY 2026-27
Switching Between the Two
Without business or professional income, you can choose freely between the two regimes each year when filing your return. With business or professional income, the rules tighten. You have to file Form 10-IEA to opt out of the new regime, and if you switch back you cannot return to the old regime again.9Income Tax Department. FAQs on New Tax vs Old Tax Regime
TDS: Tax Withheld Before You Get Paid
Most people meet the Act through Tax Deducted at Source long before they meet it through a return. The person paying you (employer, bank, tenant, client) withholds a portion and remits it to the government on your behalf.
Rates depend on the type of payment. Salaries are deducted at applicable slab rates under Section 192. Rent on land or buildings attracts 10% under Section 194-I; rent on plant and machinery, 2%. Section 194J applies to professional and technical fees: 2% for technical services and 10% for most professional payments.12Income Tax Department. TDS Rates
One rule catches people off guard. Section 206AA imposes a flat 20% TDS rate if the recipient has not furnished a valid PAN or if their PAN has become inoperative, even when the normal rate on that payment would be far lower. Keep your PAN linked to Aadhaar and active; if it lapses, the 20% rate applies and any excess has to be claimed back as a refund at return-filing time.
Filing Deadlines and Penalties
For AY 2026–27, individuals and others not subject to a tax audit have to file by 31 July 2026. Where a tax audit is required, the return deadline is 31 October 2026, with the audit report itself due by 30 September 2026. Transfer pricing cases run until 30 November 2026.13Income Tax Department. Income Tax Returns
Miss the deadline and Section 234F applies a late filing fee: ₹5,000 if your total income exceeds ₹5,00,000, or ₹1,000 if it is below that but above the basic exemption. Section 234A then charges simple interest at 1% per month on any unpaid tax from the due date until you actually file.
A belated return can still be filed up to 31 December 2026 or before assessment is completed, whichever comes first. Beyond that, an updated return (ITR-U) is allowed for up to four years, but it carries an extra tax of 25% if filed within the first year and 50% after that.13Income Tax Department. Income Tax Returns
Underreporting and Misreporting
Section 270A adds a penalty of 50% of the tax due on underreported income. If the shortfall is classified as misreporting, meaning false information on the nature, source, or amount of income, or deductions you were never entitled to, the penalty climbs to 200% of the tax due. These sit on top of the unpaid tax itself, so a misreporting finding can leave you owing roughly three times the original liability.