Understanding Income Tax In India – A Practical Guide For Taxpayers (updated 2025)
- Mayur Bhadani
- 2 days ago
- 3 min read
India’s income tax system may appear complex, but with the right and updated information, it becomes far more manageable. This guide explains Income Tax in India strictly as applicable for Financial Year (FY) 2025-26 / Assessment Year (AY) 2026-27, ensuring you do not rely on outdated rules or slabs. The focus is on helping taxpayers understand who pays tax, how tax is calculated under the current law, and how to remain compliant while legally minimizing tax liability.
Overview of Income Tax in India (FY 2025-26)
Income tax in India is governed by the Income-tax Act, 1961 and administered by the Income Tax Department under the Central Board of Direct Taxes (CBDT). Income tax is levied on individuals, HUFs, firms, companies, LLPs, trusts, and other entities.
India follows a progressive tax system, where tax rates increase with income levels. The financial year runs from 1 April 2025 to 31 March 2026, and income earned during this period is assessed in AY 2026-27.
From FY 2023-24 onwards, the New Tax Regime is the default regime, and this position continues for FY 2025-26. Taxpayers may opt for the Old Regime only if specifically eligible and beneficial.
Heads of Income (Applicable for FY 2025-26)
For computation of income tax, income is classified under the following five heads:
Income from Salary – Salary, wages, bonus, allowances, perquisites, and pension
Income from House Property – Rental income or deemed rental value
Profits and Gains from Business or Profession – Business income, professional receipts, freelancing income
Capital Gains – Gains from transfer of capital assets such as shares, mutual funds, land, or buildings
Income from Other Sources – Interest income, dividends, winnings, etc.
Each head has specific computation rules that must be followed while filing the return.
Income Tax Slabs – New Tax Regime (FY 2025-26)
For FY 2025-26, the New Tax Regime slabs applicable to individuals and HUFs are as follows:
Total Income (₹) | Tax Rate |
Up to 3,00,000 | Nil |
3,00,001 – 6,00,000 | 5% |
6,00,001 – 9,00,000 | 10% |
9,00,001 – 12,00,000 | 15% |
12,00,001 – 15,00,000 | 20% |
Above 15,00,000 | 30% |
Health and Education Cess at 4% is applicable on the tax amount.
Section 87A Rebate – No Tax up to ₹12 Lakh (FY 2025-26)
A major relief for individual taxpayers in FY 2025-26 is the enhanced rebate under Section 87A in the New Tax Regime.
Key Points:
Rebate available if total taxable income does not exceed ₹12,00,000
Maximum rebate amount: ₹60,000
If tax payable (before cess) is within this limit, net tax becomes NIL
As a result, individuals with taxable income up to ₹12 lakh will effectively pay zero income tax, provided their income is taxed at normal slab rates.
Standard Deduction Benefit
Salaried taxpayers are eligible for a standard deduction, which further helps in keeping taxable income within the rebate threshold. Due to this, even a gross salary higher than ₹12 lakh may result in NIL tax liability.
Important Exception – Capital Gains and Special Rate Income
The rebate under Section 87A does not apply to income taxed at special rates, such as:
Short-term capital gains under section 111A
Long-term capital gains under sections 112 and 112A
Other incomes taxed at fixed special rates
Tax on such income remains payable even if total income is below ₹12 lakh.
Practical Tax Illustration (FY 2025-26)
Case 1: Only Salary Income
Taxable income: ₹11,90,000
Tax as per slabs: ₹59,500 (approx.)
Rebate under Section 87A: ₹59,500
Net tax payable: NIL
Case 2: Salary + Capital Gains
Salary income (slab-rate): ₹10,00,000
Short-term capital gains (111A): ₹2,00,000
Tax on salary income: Fully covered by rebate
Tax on STCG @15%: ₹30,000
Net tax payable: ₹30,000 + cess
Filing and Compliance Requirements (FY 2025-26)
Filing of Income Tax Return (ITR) is mandatory if income exceeds the basic exemption limit or other prescribed conditions are met
Due date for most individual taxpayers is 31 July 2026
Late filing may attract fees, interest, and loss of carry-forward benefits
Advance tax is applicable if total tax liability exceeds ₹10,000 in a financial year
Practical Tips for Taxpayers (FY 2025-26 Focused)
Always compute tax under the New Tax Regime first, as it is the default
Maintain proper records of income and TDS
Do not assume NIL tax if you have capital gains or special-rate income
File returns well before the due date to avoid errors and penalties
Seek professional guidance for business income or complex transactions
Final Thoughts
This blog has been prepared exclusively based on the Income Tax provisions applicable for FY 2025-26. Tax laws change frequently through Finance Acts, notifications, and circulars. Staying updated and planning with current rules ensures compliance, avoids penalties, and provides peace of mind.
With correct understanding and timely action, income tax compliance becomes a structured and manageable part of your financial planning rather than a burden.
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