What is Income Tax in India?
Posted by : sachet | Thu Sep 18 2025
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To run a nation judiciously, the government needs to collect taxes from the eligible citizens. Paying taxes to the local government is an integral part of everyone’s life, no matter where we live in the world. Now, taxes can be collected in any form, such as state taxes, central government taxes, direct taxes, indirect taxes, and much more. For the ease of investors, the types of income taxation in India are categorised into two main types: Direct Taxes and indirect taxes.
History: Income Tax in India
Income Tax in India was introduced in 1860 by Sir James Wilson to offset the losses incurred by the government due to the 1857 Military Mutiny. Thereafter, several amendments were made to it over time. In 1886, a separate Income Tax was passed. This act remained in force up to, with various amendments from time to time. In 1918, a new income tax was passed, and again it was replaced by another new act, which was passed in 1922. This Act remained in force up to the assessment year 1961-62 with numerous amendments. The Income Tax Act 1961 came into force on 1st April 1962. It applies to the whole of India and Sikkim (including Jammu and Kashmir). Since 1962, several amendments of far-reaching nature have been made in the Income Tax Act by the Union Budget every year.
Income Tax Meaning:
Income tax is a type of tax charged by the government on the income earned by individuals or businesses during a specific financial year. Based on the income tax slab, it is computed every financial year. Decoding the income tax meaning, it refers to the type of direct tax levied by the government on the income earned by people and corporations during a fiscal year. The government generates revenue through taxes and must spend money on infrastructure development, healthcare, education, farm subsidies, and other government welfare programs.
The Income Tax in India is a financial and legal obligation to pay the tax, on the condition that all individuals earning above a certain amount are required to pay income tax on their earned income. The government regulates the income tax rates, income slabs, and rules, which are subject to change from time to time. All taxpayers are responsible for accurately reporting their income and filing their taxes on time.
What is an Income Tax Return?
The Income Tax Return (ITR) is a document that all taxpayers are required to file with the Income Tax Department of India. It consists of details on the income earned during a financial year and the taxes owed to the government. It is mandatory to submit the tax return each year under Section 139 of the Income Tax Act, 1961. Failure to file the return of income on time can result in a late fee under Section 234FF of the Income Tax Act, 1961.
All taxpayers are required to submit an Income Tax Return (ITR) annually by the respective due dates, as mandated by law, to report their income and claim a tax refund, if applicable. An Income Tax return can be filed online or offline on the Income Tax Department’s official website or through a verified third-party website. Income taxation in India also includes various deductions and exemptions that can be used to reduce the tax for a given financial year.
What are the eligibility criteria to Pay Income Tax in India?
An individual earning more than ₹2.5 lakh annually in a financial year is required to pay income tax to the Government of India. Here are the different types of taxpayers in India. The lists of different types of taxpayers in India are given below:
- Individuals: An individual under the age of 60, between the ages of 60 and 80 years, and individuals aged over 80 years are required to pay income tax in India.
- Hindu Undivided Family (HUF): A Hindu Undivided Family(HUF) is a collective family entity created to save on taxes by investing in the assets of the family. Eligible members include Hindus, Buddhists, Jains, and Sikhs, and include a 0% tax for income up to ₹3,00,00.
- Association of Persons (AOP): An Association of Persons(AOP) or a body of individuals, whether incorporated or not, is treated as a person u/s 2(31) of the Income Tax Act.
- Artificial Judicial Person: Taxability of Artificial Judicial Persons under the Income Tax Act. An Artificial Judicial Person is subject to income tax on its total income.
- Startups: The Startup should be incorporated as a private limited company, registered as a partnership firm, or a limited liability partnership, and its annual turnover should be less than ₹ 100 crores.
- Companies: As per Section 2(22A), a Domestic Company means an Indian Company, or any other company which, in respect of its income, is liable to tax under this Act.
For Income Taxation in India, an individual must have any one of the following residential statuses:
- Resident and ordinarily resident in India (ROR)
- Resident but not ordinarily resident in India (RNOR)
- Non-resident (NR)
Under Income Tax in India, the scope of taxation differs as per the residential status of an individual:
- ROR refers to the income taxation in India based on the global income, wherever received.
- RNORs are subject to tax in India only in respect to income that accrues/arises or is deemed to accrue/arise or is deemed to accrue/arise in India, or is received or deemed to be received in India, or is from a business controlled from India, or is from a profession set up in India.
- NRs refers to the income taxation in India, only with respect to income that accrues/arises or is deemed to be received in India.
What is the Income Tax Act?
The Income Tax Act, 1961, is the primary law governing the collection, computation, and administration of income tax in India. The act lays down all the rules and regulations, as well as the rights and responsibilities of taxpayers. It also highlights the role of the Income Tax Department in collecting taxes and processing tax returns.
The Income Tax Act, 1961, includes various sections and sub-sections, like Section 80C, Section 80G, Section 10(10D), and several others, highlighting the exemptions, deductions, as well as limits to help taxpayers reduce their taxable income and compute their tax liabilities accurately.
Income Tax slab under the New tax regime for FY2024/AY2025:
Here are the income tax slabs for FY2024 & AY2025 under the new tax regime:
1. For individual resident and non-resident taxpayers under the age of 60 years:
| Income Tax Slab | Tax Rate |
| Up to ₹2,50,000 | Nil |
| ₹2,50,001-₹5,00,000 | 5% above ₹2,50,000 |
| ₹5,00,001-₹7,50,000 | ₹12,500+10% above ₹5,00,000 |
| ₹7,50,001-₹10,00,000 | ₹37,500+15% above ₹7,50,000 |
| ₹10,00,001-₹12,50,000 | ₹75,000+20% above ₹10,00,000 |
| ₹12,50,001-₹15,00,000 | ₹1,25,000+25% above ₹12,50,000 |
| Above ₹15,00,000 | ₹1,87,500+30% above ₹15,00,000 |
2. For individual resident and non-resident taxpayers between the ages of 60 and 80 years:
| Income Tax Slab | Tax Rate |
| Up to ₹2,50,000 | Nil |
| ₹2,50,001-₹5,00,000 | 5% above ₹2,50,000 |
| ₹5,00,001-₹7,50,000 | ₹12,500+10% above ₹5,00,000 |
| ₹7,50,001-₹10,00,000 | ₹37,500+15% above ₹7,50,000 |
| ₹10,00,001-₹12,50,000 | ₹75,000+20% above ₹10,00,000 |
| ₹12,50,001-₹15,00,000 | ₹1,25,000+25% above ₹12,50,000 |
| Above ₹15,00,000 | ₹1,87,500+30% above ₹15,00,000 |
3. For individual resident and non-resident taxpayers over the age of 80 years
| Income Tax Slab | Tax Rate |
| Up to ₹2,50,000 | Nil |
| ₹2,50,001-₹5,00,000 | 5% above ₹2,50,000 |
| ₹5,00,001-₹7,50,000 | ₹12,500+10% above ₹5,00,000 |
| ₹7,50,001-₹10,00,000 | ₹37,500+15% above ₹7,50,000 |
| ₹10,00,001-₹12,50,000 | ₹75,000+20% above ₹10,00,000 |
| ₹12,50,001-₹15,00,000 | ₹1,25,000+25% above ₹12,50,000 |
| Above ₹15,00,000 | ₹1,87,500+30% above ₹15,00,000 |
Forms List of Income Tax in India
There are different ITR forms to pay income tax in India that taxpayers can choose from, based on the type of income and nature of employment.
ITR 1
Individuals who are residents of India and have a total income up to ₹ 50 Lakh, having Income from Salaries, one house property, other sources(Interest, etc), and agriculture income up to ₹5,000/-
ITR 2
For individuals and HUFs having a total income of more than ₹50 lakh. Also, individuals and HUFs that do not have income from profits and gains of business or profession can opt for this form. Individuals and Non-Resident Indians (NRIs) do not have income from profits and gains.
ITR 3
For individuals and HUFs having a total income of more than ₹50 Lakh. Also, individuals and HUFs that do not have income from profits and gains of business or profession can opt for this form. Individuals and Non-Resident Indians(NRIs) who do not have income from profits and gains of business and profession.
ITR 4
For individuals, HUFs and Firms (other than LLP), being a resident having a total income up to ₹50 Lakh and having income from business and profession, which is computed under Sections 44AD, 44ADA or 44AE and agricultural income up to ₹5,000/-
ITR 5
For persons other than individuals, HUF, company and other persons filing Form ITR-7.
ITR 7
For persons, including companies, who need to file their tax returns under Section 139(4A), Section 139(4C), Section 139(4D), and Section 139(4F).
ITR V
ITR V is the acknowledgement form that is used for the verification of a tax return. This should be duly e-verified, and if the e-verification is not possible, it is to be signed and sent to the Income Tax Department, Centralised Processing Centre(CPC) in Bangalore.
What are the Tax Saving Investment Options?
- Fixed Deposit: Tax-saving fixed deposits are a low-risk savings tool with a guaranteed return. Fixed deposits are time deposits that have a lock-in period of five years, and they are considered the best income tax saving option in India.
- Public Provident Fund: The Public Provident Fund is a government-backed savings scheme. It has a maturity period of 15 years, and account owners are allowed to make withdrawals every year from the seventh financial year onward.
- Unit Linked Insurance Plan ( ULIP): A Unit Linked Insurance Plan is a type of insurance product, apart from life insurance, and allows investors to invest their money in the funds of their choice. This unique product secures the life insured financially while enabling them to fulfil various financial goals by investing in equity, debt, and hybrid funds.
- National Savings Certificate: The National Savings Certificate is another one of the Government of India-backed savings schemes. However, it can only be opened in a post office. It is a low-risk plan with a guaranteed return and tax deductions under Section 80C.
- New Pension Scheme: The New Pension Scheme is a voluntary defined pension plan. The scheme has two accounts: Tier 1 and Tier 2, and Tier 1 shall be mandatory for all government servants who joined the service on or after 1st January 2004.
List of Deductions from the Income Tax in India
These sections relate to deductions under the Income Tax Act. Section 80C of the Income Tax Act,1961, allows for tax deductions on several types of investments and expenses, such as contributions to fixed deposits, PPF, NPS, and life insurance premiums. Section 80CCC offers tax deductions of up to ₹1.5 lakh per annum for contributions towards pension funds by a life insurance company. Section 80CCD provides tax deductions on contributions made to the National Pension Schemes(NPS), which can be claimed as tax deductions of up to ₹ 1.5 Lakh, and many more helpful deductions for the taxpayers.
Types of Income-Taxable Heads of Income
We have discussed the income tax meaning and who the taxpayers are; now, we have to understand the various heads of income as per the Income Tax Act 1961.
- Income from Salary: Salary and pension income are taxable under this category of income tax in India.
- Income from House Property: Renting a residence is taxable under this kind of income tax in India.
- Income from Profits and Gains from Business or Profession: Profits made by self-employed persons, businesses, freelancers, or contractors, as well as income made by professionals such as life insurance agents, chartered accountants, doctors, and lawyers who have their own practice, and tuition teachers.
- Income from Capital Gains: Surplus income from the sale of capital assets, such as mutual funds, stocks, or real estate, is taxable under this category of income.
- Income from Other Sources: Under this heading, income from savings bank account interest, fixed deposits and lottery winnings are taxable.
Understanding the terms of Income Tax in India
The following are the key terms related to the income tax in India:
- Financial Year: The fiscal year is a one-year term used by taxpayers for accounting and financial reporting. It is the fiscal year in which income is earned. Such a period runs from 1st April of the calendar year to 31st March of the following calendar year.
- Assessment Year: The assessment year is the one year from 1st April to 31st March, beginning immediately after the fiscal year. This period is known as the assessment year because all taxpayers must assess their income received throughout the fiscal year and pay taxes during this period.
- PAN: The Permanent Account Number is abbreviated as PAN. It is a unique 10-digit alphanumeric code assigned to Indian taxpayers by the Income Tax Department, containing all of a person’s tax-related transactions and information.
- Assessee: An assessee is a person or group who determines the income and pays tax in accordance with the Income Tax Act. The assessee could be an individual, a partnership, or any corporation.
- Indian Residents and NRIs: In India, income tax is levied based on a taxpayer’s residency status. Individuals who qualify as Indian residents must pay tax on their worldwide income in India, which includes money generated both in India and abroad.
- TAN: It is a one-of-a-kind ten-digit alphanumeric digit assigned by the Income Tax Department of India. All personnel in charge of a tax deduction (TDS) or collection (TCS) are responsible for obtaining a TAN. The TAN must be included in any TDS/TCS return income tax in India.
How to Calculate Income Tax?
The calculation of the income tax in India is based on the nature of their earnings. The guidelines through which the calculation of income tax has been possible are:
- List all the earnings, whether they be salary, rental income, interest income, capital gains, or profits from the business and profession.
- Legally exempt income tax in India should be removed.
- Claim all appropriate deductions for each source of income. For example, claim a standard deduction of ₹ 50,000 from the income from salary, municipal taxes from rental revenue, business-related costs from business turnover, and so on.
- Claim any appropriate deductions from your total income, such as the 80C, 80D, 80TTA, 80TTB, and so on.
- Now, investors can calculate their taxable income and check the eligibility for Income Tax in India.
E-Filing Income Tax in India
The government allows taxpayers to file their returns online from the comfort of their homes and offices. Electronically filing (e-filing) tax returns offers several advantages. It takes less time. The computation of tax becomes simpler as the process is straightforward and streamlined. Taxpayers also do not necessarily need to hire tax professionals or chartered accountants to file their returns, but can do so themselves.
This helps save their money, too. Moreover, e-filing is a 24/7 service, and taxpayers can easily track the status of their claims/refunds online.
Difference between Income Tax and GST
| Basis | Income Tax | GST |
| Basis of Taxation | Imposed on income from salary, capital gains, house property, etc. | Imposed on the consumption of goods and services |
| Tax Burden | Tax burden cannot be transferred from one person to another. | Levied on different levels, but the final consumer bears the ultimate burden. |
| Registration Threshold | Individuals with an annual income above ₹3 lakhs for the new regime. | Mandatory for businesses exceeding a yearly turnover of ₹40 lakh. |
| Levied by | Only by the Central government. | Both the central and state governments |
| Purpose | Generate revenue for the government. | Simplify indirect taxes and limit the cascading effect of multiple indirect taxes. |
| Applicable To | All individuals and entities earning an income. | Businesses providing goods and services to consumers. |
| Frequency of filing | Annually | Monthly, quarterly, and annually |
Conclusion
Income tax in India is a direct tax that individuals and businesses pay on their income to the government. It is regulated by the Income Tax Act, 1961. This law provides rules, tax slabs, deductions, and filing requirements. As a taxpayer, you must file your ITR annually and accurately report your income earned from all sources. ITR filing can even be done online (e-filing) using the official Income Tax portal. Be aware that to file taxes, you have two options: the Old and new regimes ( default option). The new regime offers lower tax rates but fewer deductions, while the old regime provides various exemptions, such as HRA, Section 80C, and medical insurance premiums.
Effective tax planning goes beyond choosing the right regime-it includes smart investment decisions like homeownership of income tax in India. A home loan not only helps you achieve your property dreams but also provides valuable tax benefits through interest deductions.
FAQs
1. What is the Income Tax?
Ans. The income tax meaning in relation to the defining terms, is the income taxation in India, which is a tax charged on the annual income of an individual or business earned in a financial year. The system of Income Tax in India is governed by the Income Tax Act, 1961. All taxpayers are required to submit an Income Tax Return (ITR) annually by the respective due dates, as mandated by law, to report their income and claim a tax refund, if applicable.
2. What is the standard deduction in Income Tax?
Ans. Under Section 16 of the Income Tax Act 1961, salaried individuals can claim a standard tax deduction on their gross salary. It was reintroduced in the 2018 Union Budget. During income tax in India calculation, salaried individuals can opt for a flat deduction of ₹40,000.
3. What is the minimum salary to pay income tax?
Ans. Under the new tax regime for the financial year 2024, individuals below 60 years of age with an income up to ₹2.5 lakh are exempt from tax. The income tax in India rates then increase progressively, starting from 5% for income between ₹2.5 lakh and 3 lakh, up to 30% for income above ₹15 lakh.
4. Why does the government collect income tax?
Ans. The government of India collects income tax of India to nurture welfare programmes, pay salaries of the state and central government employees, enhance development projects, etc. It is a significant source for the government to improve the overall development.
5. What is exempt income and taxable income?
Ans. An exempt income is not charged to tax, i.e, Income-tax Law grants explicit exemption from tax to such income. Incomes which are chargeable to tax are called taxable incomes.
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