Understanding income tax is essential for every earning individual or business. These basic rules are governed by the Income Tax Act, which outlines how different types of income are taxed and what deductions you can claim. Knowing these principles not only helps you save money but also keeps you legally compliant.
1. What is Income Tax and Why Does it Matter?
Income tax is a direct tax levied by the government on the income of individuals and businesses. The Income Tax Act of 1961 in India serves as the legal framework that defines how tax is calculated, collected, and managed.
It funds essential services like infrastructure, education, and healthcare. Anyone earning above a minimum threshold must pay this tax based on income type and amount.
2. Who Has to Pay Income Tax?
According to the Income Tax Act, the following entities are liable to pay income tax:
- Individuals
- Hindu Undivided Families (HUFs)
- Firms
- LLPs
- Companies
- Associations of Persons (AOPs)
For instance, a salaried employee earning ₹6,00,000 annually must file taxes, while someone earning ₹2,00,000 may not need to, unless they fall under special conditions.
3. Types of Taxable Income
The Income Tax Act divides income into five heads:
| Type of Income | Examples |
|---|---|
| Salary | Monthly wages, bonuses |
| House Property | Rental income |
| Business/Profession | Profits from self-employment |
| Capital Gains | Profit from selling shares/property |
| Other Sources | Interest, dividends, lottery |
This classification ensures clear taxation rules for different income streams.
4. Tax Slabs and Rates
In India, the tax is levied based on income slabs, which vary under the old and new regimes. Salaried employees receiving income under ₹12,75000 won’t be charged any tax, income above this will be charged according to the tax slab as follows:
New Tax Regime (FY 2024-25):
| Annual Income | Tax Rate |
|---|---|
| Up to ₹2.5 lakhs | Nil |
| ₹2.5 – ₹5 lakhs | 5% |
| ₹5 – ₹7.5 lakhs | 10% |
| ₹7.5 – ₹10 lakhs | 15% |
| ₹10 – ₹12.5 lakhs | 20% |
| ₹12.5 – ₹15 lakhs | 25% |
| Above ₹15 lakhs | 30% |
You can choose the tax regime based on which offers better savings through deductions and exemptions.
5. Deductions and Exemptions
The Income Tax Act provides several ways to reduce taxable income:
- Section 80C: Investments in PPF, ELSS, LIC, up to ₹1.5 lakhs
- Section 80D: Medical insurance premiums
- Section 24(b): Interest on home loan (up to ₹2 lakhs)
Example: If you earn ₹9,00,000 and invest ₹1.5 lakhs in a PPF account, your taxable income drops to ₹7.5 lakhs, reducing your tax liability significantl
6. Tax Deducted at Source (TDS)
TDS is a mechanism where tax is deducted from income before it’s paid. Employers, banks, and other institutions deduct TDS and deposit it with the government. This ensures regular tax inflow and reduces the burden during filing.
7. Filing Income Tax Returns (ITR)
Filing your ITR is mandatory if your income crosses the basic exemption limit or under specific scenarios like foreign income or multiple bank accounts.
Due date: September 15th 2025.
Benefits of filing ITR:
- Easier loan approvals
- Visa processing
- Carry forward of losses
- Refund claims
8. Advance Tax and Self-Assessment
If your tax liability exceeds ₹10,000 in a year, you need to pay advance tax in four installments. After adjusting TDS and advance tax, any remaining tax must be paid as self-assessment tax before filing your return.
9. Penalties and Prosecution
Non-compliance with the Income Tax Act may lead to:
- Penalties up to ₹10,000 for late filing
- 1% monthly interest on due tax
- Prosecution in cases of intentional tax evasion
Being aware of deadlines and correct filing helps avoid these issues.
FAQs
1. What is the purpose of the Income Tax Act?
To regulate income taxation, ensure collection, prevent evasion, and provide guidelines for deductions and exemptions.
2. Can I change my tax regime every year?
Yes, salaried individuals can switch annually; others must stick with one regime unless certain conditions are met.
3. What happens if I don’t file ITR on time?
You may incur penalties and miss out on refunds or the ability to carry forward losses.
4. Are gifts taxable under income tax?
Yes, if the gift exceeds ₹50,000 in value and isn’t from a close relative, it becomes taxable.
5. Is rental income fully taxable?
Not fully—standard deductions and municipal taxes paid are allowed deductions under the Income Tax Act.
6. How do I know my applicable tax slab?
Refer to your total annual income and the current tax slabs under your chosen regime.
