How income tax works in India

Income tax is a direct tax you pay to the central government on the income you earn in a year. “Direct” means it is charged on you personally and cannot be passed on to someone else. It is governed by India’s income tax law and administered by the Income Tax Department.

The five heads of income

Indian tax law looks at your income under five separate “heads”. Adding them up gives your gross total income:

• Salary — pay from an employer, including allowances and perquisites.
• House property — rent you earn (and a notional treatment for some properties).
• Profits and gains of business or profession — income from running a business or working as a professional.
• Capital gains — profit from selling assets such as shares, mutual funds or property.
• Other sources — interest, dividends, family pension and similar income.

From income to tax: the steps

1. Add income under all five heads to get gross total income.
2. Subtract the deductions you are allowed (the new regime allows far fewer than the old one).
3. This gives your total (taxable) income.
4. Apply the slab rates to work out tax.
5. Apply the section 87A rebate if you are eligible, then add 4% cess (and surcharge for high incomes).

Slab rates — new regime, FY 2025-26

The new regime under section 115BAC is the default. For FY 2025-26 (assessment year 2026-27) the slabs for individuals are:

Slabs are “marginal”: only the slice of income inside each band is taxed at that band’s rate. You do not pay 30% on your whole income just because the top rupee falls in the 30% band.

A worked example (illustrative)

Suppose a salaried person has a gross salary of Rs 15,00,000 in FY 2025-26 and chooses the new regime. The salaried standard deduction of Rs 75,000 brings taxable income to Rs 14,25,000. Applying the slabs:

• First Rs 4,00,000: nil
• Rs 4,00,000 to Rs 8,00,000 at 5% = Rs 20,000
• Rs 8,00,000 to Rs 12,00,000 at 10% = Rs 40,000
• Rs 12,00,000 to Rs 14,25,000 at 15% = Rs 33,750

Tax = Rs 93,750. Add 4% cess (Rs 3,750), and the total comes to Rs 97,500. These are illustrative numbers to show the method — your own figures depend on your actual income and choices.

Rebate, cess and surcharge

Section 87A rebate: for FY 2025-26, resident individuals with total income up to Rs 12 lakh can get a rebate of up to Rs 60,000 in the new regime, which can bring the tax to nil. The rebate does not apply to income taxed at special rates (for example certain capital gains). A marginal relief applies just above Rs 12 lakh so that a small rise in income does not create a disproportionate jump in tax.

Cess: a 4% health and education cess is added on the tax. Surcharge: higher percentages apply to very large incomes (from 10% above Rs 50 lakh up to higher rates for incomes above Rs 1 crore, Rs 2 crore and Rs 5 crore; the new regime caps the top surcharge lower than the old regime). Most individuals never reach the surcharge thresholds.