Basics of Income Tax in India

Income tax can seem complicated, but the core logic is straightforward: add up your income, subtract what the law allows, apply the tax rates, and compare the result with tax already paid. This guide explains each step in plain language for individual taxpayers.

Who has to pay income tax

Individuals pay tax on their income above the basic exemption limit. How your income is taxed depends on your residential status, which is based mainly on how many days you spent in India. Broadly, residents are taxed on their worldwide income, while non-residents are taxed only on income earned or received in India. The detailed rules have conditions and exceptions, so check them if you live or work abroad for part of the year.

Even if your income is below the taxable limit, you may still need to, or benefit from, filing a return, for example to claim a refund of TDS.

The five heads of income

Head	Examples
Salaries	Salary, allowances, bonuses, perquisites, pension
Income from house property	Rent from a property you own
Profits and gains of business or profession	Income from a business, freelancing or professional practice
Capital gains	Profit from selling shares, mutual fund units, property or gold
Income from other sources	Interest from savings accounts and deposits, dividends, certain gifts

Interest income is a frequently forgotten item. Interest from savings accounts and fixed deposits is taxable and must be reported, even if the bank has already deducted TDS. See savings account vs fixed deposit.

Old regime vs new regime

Since financial year 2023-24, the new tax regime has been the default for individuals. You can opt for the old regime instead if it suits you.

	New regime	Old regime
Tax rates	Lower, with more slabs	Higher
Deductions and exemptions	Very few. A standard deduction is available to salaried individuals and pensioners	Many, such as investments and payments under the old section 80C, health insurance premiums, house rent allowance and home loan interest
Suits	People with few deductions to claim	People with large eligible deductions

Salaried individuals without business income can generally choose the regime each year when filing their return. People with business or professional income face restrictions on switching back and forth, so check the rules.

How tax is calculated, step by step

1. Add up gross total income from all five heads.
2. Subtract allowable deductions (very few under the new regime).
3. Apply the slab rates to your taxable income. Some income, such as certain capital gains, is taxed at special rates instead of slab rates.
4. Subtract any rebate you are eligible for.
5. Add health and education cess, currently 4% of the tax.
6. Subtract tax already paid through TDS, TCS and advance tax. The result is tax payable or a refund due.

Slabs are applied in layers

A common misconception is that crossing into a higher slab means all your income is taxed at the higher rate. It does not. Only the portion of income within each slab is taxed at that slab's rate.

New regime slabs for FY 2025-26 (illustration)

Taxable income	Rate
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%

For FY 2025-26, salaried individuals could claim a standard deduction of ₹75,000 under the new regime, and a rebate meant that residents with taxable income up to ₹12,00,000 paid no tax under the new regime, apart from tax on special-rate income such as certain capital gains.

Old regime slabs for FY 2025-26 (illustration, individuals below 60)

Taxable income	Rate
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%

Higher exemption limits apply to senior and very senior citizens under the old regime, and a smaller rebate applies to taxable income up to ₹5,00,000. Surcharge applies at higher income levels under both regimes.

Worked examples

To compare regimes for your own situation, the e-filing portal provides a tax calculator. Enter the same figures under both regimes and compare the result.

TDS, Form 26AS and the AIS

Tax deducted at source (TDS) is tax collected before income reaches you. Employers deduct TDS from salary based on your expected annual tax and issue Form 16. Banks deduct TDS on interest above a threshold, and other payers deduct it on various payments.

Two statements on the e-filing portal show what has been reported against your PAN:

• Form 26AS shows tax deducted or collected and tax paid.
• The Annual Information Statement (AIS) shows a wider range of reported information, such as interest, dividends, securities transactions and some high-value purchases. A simplified Taxpayer Information Summary (TIS) is derived from it.

Check both before filing. If something is wrong, you can submit feedback on the AIS through the portal.

Advance tax

If your tax liability for the year, after TDS, is ₹10,000 or more, you are generally expected to pay advance tax in instalments during the year rather than all at the end. For most individuals, the due dates have been 15 June, 15 September, 15 December and 15 March, with cumulative instalments of 15%, 45%, 75% and 100% of the estimated tax. Resident senior citizens without business income are exempt. Late or short payment attracts interest.

This mostly affects people with significant income that has no TDS or too little TDS, such as freelancers, business owners, landlords, or investors with large capital gains.

Filing your income tax return (ITR)

You file your return online on the e-filing portal. The general steps:

1. Collect Form 16, interest certificates, capital gains statements and other documents.
2. Check Form 26AS and the AIS.
3. Choose the correct ITR form. For example, ITR-1 is for resident individuals with simpler income such as salary, one house property and interest, within an income limit; other forms cover capital gains, business income and more complex cases.
4. Choose your tax regime, enter or verify the pre-filled data and calculate tax.
5. Pay any balance tax, then submit the return.
6. E-verify the return, for example using an Aadhaar OTP or net banking. A return that is not verified within the allowed time is treated as not filed.

For individuals whose accounts do not need to be audited, the due date has generally been 31 July after the end of the financial year, though the government sometimes extends it. Filing late can lead to a fee, interest and the loss of some benefits, such as carrying forward certain losses.

A short primer on GST

Goods and Services Tax (GST) is an indirect tax on the supply of goods and services. Unlike income tax, most individuals do not file GST returns. You pay GST as part of the price of what you buy, and the seller collects it and pays it to the government.

GST matters to individuals in a few situations:

• Freelancers and small businesses must register for GST once their turnover crosses the applicable threshold, which differs for goods and services and for some states. Some activities require registration regardless of turnover.
• Invoices for business purchases show GST separately, which matters if you can claim input tax credit.
• Rates vary by item. The GST Council revised the rate structure in 2025, simplifying it into fewer main slabs.

Common mistakes to avoid

• Not reporting interest income, assuming TDS settles it.
• Not checking the AIS, then receiving a notice for a mismatch.
• Picking a regime without comparing the two.
• Missing the due date or forgetting to e-verify.
• Buying products in March only for a deduction you may not even be able to claim under the new regime. See common personal finance mistakes.