Income tax in India

Income tax in India is the direct tax levied on the income of individuals, Hindu Undivided Families (HUFs), companies, firms, associations of persons, and other taxpaying entities under the Income Tax Act, 1961. The Act is administered by the Income Tax Department under the Central Board of Direct Taxes (CBDT) within the Department of Revenue of the Ministry of Finance. Income tax is the principal direct-tax revenue source for the Government of India, contributing approximately Rs 15 lakh crore in gross collections in financial year 2024-25 (corporate and personal income tax combined), representing the largest single component of central-government direct-tax revenue.

The Indian income-tax framework is structured around the principle of taxing income under five heads: salary, income from house property, profits and gains of business or profession, capital gains, and income from other sources. Each head has its own computation rules, exemptions, deductions, and rate structure. The aggregate of incomes under the five heads, less permitted deductions under Chapter VI-A and other provisions, produces the total income on which the applicable tax rate structure is applied. For individuals, the rate structure is progressive with multiple slabs; for companies, a flat rate structure applies (currently 22 per cent base rate plus surcharge and cess for most domestic companies). For specific income categories (capital gains, lottery winnings, virtual digital assets), separate concessional or special rates apply under dedicated sections.

The tax administration has undergone substantial digitalisation since the early 2010s. The e-filing portal at incometax.gov.in is the principal channel for return filing, with paper filing now restricted to a narrow set of categories. The post-2020 Annual Information Statement (AIS) framework consolidates the taxpayer’s complete financial-transaction footprint across banks, brokers, AMCs, depositories, and other reporting entities, enabling pre-filled return data and substantially reducing the manual reconciliation burden. The post-July-2024 capital gains tax regime reforms under the Finance (No. 2) Act, 2024 represent the most consequential structural change in personal taxation since the introduction of the default new regime in 2020.

Statutory framework

The Income Tax Act, 1961

The Income Tax Act, 1961, is the principal statute governing income tax in India. The Act was enacted by Parliament with effect from 1 April 1962 (replacing the Income Tax Act, 1922). The 1961 Act has been substantially amended every year through the annual Finance Act and through occasional taxation laws (amendment) acts. By 2026, the Act has been amended several hundred times, with cumulative amendments producing a Code that is substantially more complex than the original 1961 enactment.

The Act is organised into 23 chapters covering:

Chapter IV (heads of income) and Chapter VI-A (deductions) are the most operationally significant chapters for typical taxpayers.

Income Tax Rules, 1962

The Income Tax Rules, 1962, prescribe the procedural and computational details under the Act. Key rules include Rule 114 (PAN application), Rule 114B (transactions requiring PAN quotation), Rule 114E (Statement of Financial Transactions reporting), and the various rules governing TDS, return filing, and procedural matters.

Annual Finance Acts

The annual Finance Act (typically passed in March or April each year following the Union Budget) substantially amends the Income Tax Act for the upcoming financial year. The Finance Act contains:

• Rate amendments (slab rates, surcharge rates, cess rates).
• Threshold adjustments (basic exemption limit, deduction limits).
• Substantive amendments to specific sections.
• Procedural changes.

Recent consequential Finance Acts:

• Finance Act, 2020: Introduced the default new tax regime under Section 115BAC.
• Finance Act, 2023: Inserted Section 50AA for specified mutual fund taxation (Section 50AA debt MF reform).
• Finance (No. 2) Act, 2024: Comprehensive capital gains tax reform.

Tax administration

Central Board of Direct Taxes (CBDT)

The CBDT is the apex statutory body responsible for direct-tax administration, constituted under the Central Boards of Revenue Act, 1963. The CBDT operates under the Department of Revenue in the Ministry of Finance. CBDT functions include:

• Policy formulation for direct taxes.
• Drafting of Finance Bill provisions.
• Issuance of CBDT Circulars and Notifications.
• Oversight of the Income Tax Department’s operational functioning.
• Administration of the international tax framework including DTAA negotiations.

CBDT Circulars are administrative guidance documents that the Income Tax Department issues to clarify interpretation of provisions. While not legally binding on taxpayers, CBDT Circulars are persuasive and are typically followed by the Income Tax Department’s assessing officers.

Income Tax Department

The Income Tax Department is the operational arm of the CBDT, with personnel deployed across Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, Commissioner, Joint Commissioner, Deputy Commissioner, Assistant Commissioner, and Income Tax Officer hierarchical levels. The department is organised into:

• Operational wings (Assessment, Investigation, Intelligence).
• Functional verticals (TDS, International Taxation, Transfer Pricing, Exemption).
• Geographic principal Chief Commissioner zones covering different regions of India.

Income Tax Appellate Tribunal

Tax disputes follow a multi-tier appellate structure:

• Assessing Officer: Initial assessment authority.
• Commissioner (Appeals): First-level appellate authority.
• Income Tax Appellate Tribunal (ITAT): Quasi-judicial body, final fact-finding authority.
• High Court: Appeals on questions of law.
• Supreme Court: Final appellate authority.

The ITAT is constituted under Chapter XX of the Act and operates across multiple benches throughout India.

Five heads of income

Indian income tax classifies all income into five heads under Chapter IV of the Act.

Salary income

Salary income covers compensation for employment under an employer-employee relationship. Includes:

• Basic salary, dearness allowance, bonuses.
• House Rent Allowance (HRA), with partial exemption under Section 10(13A).
• Leave Travel Allowance (LTA), with conditional exemption.
• Perquisites (housing, car, medical, ESOPs), valued under Rule 3.
• Retirement benefits (gratuity, leave encashment, pension), with exemptions under Section 10.

Salary income is computed under Sections 15 to 17. Standard deduction (Rs 75,000 per year under the post-Finance Act 2024 regime) is permitted against salary income.

Income from house property

Income from owned house property is taxed on a notional or actual rental basis under Sections 22 to 27. The Annual Value is computed as the higher of:

• Reasonable expected rent (typically municipal valuation).
• Actual rent received.

Deductions include:

• 30 per cent of Annual Value as standard deduction for repairs.
• Interest on borrowed capital for property purchase or construction (subject to limits).

A taxpayer can claim a loss under this head only up to Rs 2 lakh per year against other income under the new tax regime.

Profits and gains of business or profession

Business and professional income is computed under Sections 28 to 44DB. The principal computation:

• Gross receipts from business or profession.
• Less allowable business expenses.
• Less depreciation under Section 32.
• Plus deemed income under various sections.

Specific provisions include:

• Presumptive taxation: Sections 44AD (small business), 44ADA (professionals), 44AE (transport).
• Tax audit: Section 44AB requires audit for prescribed turnover thresholds.
• MAT and AMT: Minimum Alternate Tax (Section 115JB) and Alternate Minimum Tax (Section 115JC).

Capital gains

Capital gains are taxed under Sections 45 to 55A. The principal framework is treated in detail at the capital gains tax in India reference. Key sections:

• Section 45: Charging section.
• Section 48: Mode of computation.
• Section 112A: LTCG on listed equity and equity-MF.
• Section 111A: STCG on listed equity and equity-MF.
• Section 112: LTCG on other capital assets.
• Section 50AA: Specified mutual fund regime (post-1-April-2023).
• Section 54 to 54GB: Exemptions on reinvestment.

The post-23-July-2024 regime under the Finance (No. 2) Act, 2024 substantially restructured the framework with harmonised 12.5 per cent LTCG rates across asset classes.

Income from other sources

Residual category under Sections 56 to 59. Includes:

• Interest income (bank deposits, debt mutual fund redemptions where Section 50AA applies, bond interest).
• Dividend income (taxed at slab rate since the abolition of DDT in 2020).
• Casual incomes (lottery, gambling, gameshow winnings, taxed at flat 30 per cent under Section 115BB).
• Virtual digital asset income (Section 115BBH, 30 per cent flat).
• Family pension, gifts above prescribed thresholds, etc.

Tax rates: individuals

Default (new) regime under Section 115BAC

The default tax regime (since Finance Act 2020, with Section 115BAC made the default from financial year 2023-24 onwards) has the following slabs as of financial year 2025-26:

The default regime offers a Section 87A rebate that effectively makes income up to Rs 7 lakh tax-free for resident individuals. The default regime has limited deductions (the principal allowed deductions are the standard deduction of Rs 75,000 on salary, Section 80CCD(2) employer NPS contribution, and a few specific deductions; most Chapter VI-A deductions are not available).

Old regime

The old regime (available as an option for taxpayers who elect under Section 115BAC(5)) has the following slabs:

The old regime permits the full range of Chapter VI-A deductions (Section 80C up to Rs 1.5 lakh, Section 80D for medical insurance, Section 80E for education loan interest, Section 80G for charitable donations, Section 80TTA for savings interest, etc.) and additional HRA and LTA exemptions.

Choice between regimes

Most taxpayers find that the default (new) regime produces lower tax liability due to its lower slab rates, particularly at income levels above Rs 10 lakh. The old regime is typically beneficial only for taxpayers with substantial Chapter VI-A deductions, principally:

• High home loan interest deduction.
• High Section 80C utilisation (PF, PPF, ELSS, life insurance).
• Substantial Section 80D medical insurance.
• Section 80G donations.

The choice between regimes is made at the time of return filing and can be revisited annually for non-business taxpayers (business taxpayers face one-time election limitations).

Surcharge

For high-income individuals, surcharge is levied on the basic tax amount:

Health and Education Cess

A flat 4 per cent Health and Education Cess is levied on the basic tax plus surcharge.

Tax rates: corporates

Domestic company rates

Domestic companies are taxed under different rate regimes depending on the option exercised:

Most large domestic companies have transitioned to the Section 115BAA flat-22-per-cent regime since 2019.

Foreign company rates

Foreign companies are taxed at 35 per cent (with surcharge and cess) on income arising in India, subject to applicable DTAA relief.

Securities Transaction Tax (STT)

Securities Transaction Tax , introduced in 2004, is a separate levy on equity-market transactions. It is a transaction-level tax rather than an income-tax provision but is administered alongside income-tax matters by the Income Tax Department. STT-paid status is the gateway to concessional Section 112A and Section 111A treatment for equity capital gains.

TDS regime

Section 192 (Salary TDS)

Employers deduct TDS on salary at the average rate applicable to the employee’s projected annual income. The TDS is reconciled at year-end through the employee’s annual return.

Section 194 series (Various)

Other TDS provisions cover:

• Section 194A: Interest on bank deposits, NBFC deposits.
• Section 194-IB: Rent.
• Section 194J: Professional fees, technical services.
• Section 194Q: Purchase of goods.
• Section 194S: Virtual digital asset transfers (since 2022).
• Section 195: Payments to non-residents (including NRI mutual fund redemptions ).
• Section 196D: FPI income.

TDS deducted is credited against the taxpayer’s final tax liability, with excess deductions producing refunds.

Tax Collected at Source (TCS)

Section 206C requires sellers in certain categories to collect tax at source from buyers. Notable TCS categories:

• Foreign remittances under the Liberalised Remittance Scheme (LRS) beyond defined thresholds.
• Sale of motor vehicles above prescribed value.
• Sale of goods above turnover thresholds (Section 206C(1H)).

Deductions

Chapter VI-A deductions (old regime)

The principal Chapter VI-A deductions available in the old regime:

Section 80C is the most-utilised deduction. The Rs 1.5 lakh limit covers eligible investments including ELSS mutual funds , Public Provident Fund (PPF), Equity-Linked Savings Schemes, life insurance premium, NPS Tier 1 contributions, and home loan principal repayment.

Default regime deductions

The default (new) regime permits only a limited set of deductions:

• Standard deduction of Rs 75,000 on salary.
• Section 80CCD(2) employer NPS contribution.
• Section 80CCH (Agniveer Corpus Fund, where applicable).

Most Chapter VI-A deductions are not available in the default regime. This is the structural trade-off that defines the choice between the two regimes.

Return filing

ITR forms

The Income Tax Department prescribes different ITR forms for different taxpayer categories:

The most common forms for individual taxpayers with mutual fund investments are ITR-2 (capital gains) and ITR-3 (business income).

Filing deadlines

Standard filing deadlines for individual taxpayers:

• Non-audit cases: 31 July of the assessment year (i.e., for FY 2024-25 income, 31 July 2025).
• Tax audit cases: 31 October of the assessment year.
• Transfer pricing cases: 30 November of the assessment year.
• Belated returns: 31 December of the assessment year (with late filing fees).
• Updated returns (Section 139(8A)): Within 24 months of the end of the relevant assessment year, with additional tax under Section 140B.

E-filing portal

The e-filing portal at incometax.gov.in is the principal return-filing channel:

• Pre-filled return data sourced from the Annual Information Statement (AIS) and Form 26AS .
• E-verification through Aadhaar OTP, net banking, demat or DigiLocker.
• Refund processing through ECS to the registered bank account.
• Notice and order viewing.
• Grievance escalation through e-Nivaran.

The post-2021 portal has substantially digitalised the filing experience, with the pre-filled return data substantially reducing manual entry.

Tax administration digitalisation

AIS framework

The Annual Information Statement framework, introduced in November 2021, aggregates the taxpayer’s complete financial-transaction footprint across approximately 70 categories of reportable transactions. The AIS is now the primary reconciliation source against which the filed return is matched.

Form 26AS (legacy)

Form 26AS is the legacy TDS-and-tax-credit summary, now substantially superseded by AIS for most purposes. Form 26AS remains operational for TDS-specific reconciliation.

Faceless assessment

The Faceless Assessment Scheme, introduced in 2020, removes the geographic and personal interaction between the taxpayer and the assessing officer. Assessments are conducted electronically by a national e-assessment centre, with case allocation based on team-based review rather than territorial jurisdiction.

Faceless appeal

The Faceless Appeal Scheme, introduced subsequently, extends the faceless framework to first-level appeals before the Commissioner (Appeals).

Data integration

The Income Tax Department has progressively integrated with banking, capital-markets, mutual fund, real-estate, and other reporting ecosystems through the SFT framework. The integration is the foundation of the AIS framework and of the pre-filled return data.

Recent developments

Finance (No. 2) Act, 2024 capital gains reform

The Finance (No. 2) Act, 2024 reform of the capital gains tax regime , effective 23 July 2024, is the most consequential capital-gains-specific change since 2004. The reform:

• Harmonised LTCG rates at 12.5 per cent across asset classes.
• Raised the Section 112A exemption threshold from Rs 1 lakh to Rs 1.25 lakh.
• Raised the Section 111A STCG rate from 15 per cent to 20 per cent.
• Removed indexation for non-equity capital assets (with limited transition).
• Simplified holding-period thresholds.

Default regime as the new normal

The post-2023 establishment of the new regime under Section 115BAC as the default has produced a substantial shift in taxpayer behaviour. By FY 2024-25, approximately 70 per cent of individual taxpayers filed under the default regime, with most of the remaining 30 per cent being taxpayers with substantial home loan interest deductions or other Chapter VI-A claims that produce net benefit under the old regime.

Updated return mechanism

The Section 139(8A) updated return mechanism, introduced by the Finance Act 2022, provides a 24-month window for taxpayers to file updated returns addressing missed disclosures or under-reported income. The mechanism has substantially reduced the formal scrutiny burden by enabling self-correction.

Crypto and VDA taxation

The Finance Act, 2022 inserted Section 115BBH, taxing income from Virtual Digital Assets (VDAs) at a flat 30 per cent without permitted set-off. Section 194S requires 1 per cent TDS on every VDA transfer. The VDA framework remains under interpretive evolution.

Pre-filled return improvements

The 2024 to 2026 enhancements to the e-filing portal’s pre-filled return have substantially expanded the auto-populated fields, drawing on AIS, Form 26AS, broker capital gains statements, and AMC RTA statements. For most individual taxpayers with simple capital gains, the pre-filled return arrives nearly complete.

International taxation maturity

India’s Common Reporting Standard (CRS) and FATCA exchange-of-information frameworks have matured operationally through 2024 to 2026, with foreign-asset reporting through Schedule FA becoming substantially more accurate. The post-2024 international-taxation framework continues to evolve with negotiations on the OECD/G20 BEPS 2.0 framework.

Criticism and debates

Default-regime feature limitations

The default (new) regime’s limited deductions have been argued to disadvantage taxpayers who genuinely benefit from home-loan and insurance deductions. Industry commentary has suggested adding more deductions to the default regime, but the policy direction has been to maintain the rate-cut-and-deduction-removal trade-off.

Compliance burden

Despite the digitalisation, the income-tax compliance burden remains substantial for taxpayers with complex income (multiple capital gains transactions, foreign assets, business income). The pre-filled return helps but does not eliminate the need for careful reconciliation.

Faceless assessment criticism

The Faceless Assessment Scheme has been criticised for producing remote-assessment quality issues, with some assessing officers lacking direct context of the taxpayer’s business. The Income Tax Department has progressively refined the scheme but criticism continues.

High surcharge rates

The 37 per cent surcharge rate (in the old regime) for income above Rs 5 crore, combined with the 30 per cent basic rate and 4 per cent cess, produces effective tax rates exceeding 42 per cent for high-income taxpayers. The 25-per-cent cap in the new regime addresses this partially.

GAAR uncertainty

The General Anti-Avoidance Rule under Chapter X-A, operational since 1 April 2017, has produced interpretive uncertainty for sophisticated tax-planning. The CBDT’s guidance has reduced but not eliminated this uncertainty.

See also

• Capital gains tax in India
• Section 112A
• Section 111A
• Grandfathering rule for LTCG
• Annual Information Statement (AIS)
• AIS mutual fund
• Form 26AS mutual fund TDS
• Permanent Account Number (PAN)
• ITR-2
• ITR-3
• NRI MF TDS Section 195
• FATCA US Canada NRI MF
• Securities Transaction Tax
• SEBI debt mutual fund tax 2023
• Debt MF indexation removal 2023
• Arbitrage fund taxation
• Mutual fund stamp duty
• SIP taxation FIFO
• Mutual fund
• Mutual fund industry in India
• ELSS mutual fund in India
• Reserve Bank of India
• SEBI Investment Management Department
• SEBI Act, 1992
• Demat account
• CAMS-KFin capital gains statement
• Mutual fund ITR capital gains statement

References

1. Income Tax Act, 1961, as amended through Finance (No. 2) Act, 2024.
2. Income Tax Rules, 1962, as amended.
3. Finance Act, annual (latest: Finance (No. 2) Act, 2024).
4. CBDT Circulars and Notifications, Central Board of Direct Taxes.
5. Section 115BAC (new tax regime), Income Tax Act, 1961.
6. Section 139A and 139AA (PAN and Aadhaar linkage).
7. Section 285BA (Statement of Financial Transactions).
8. Constitution of India, Schedule VII (Union List entries on taxation).
9. Central Boards of Revenue Act, 1963.
10. Income Tax Department e-filing portal, incometax.gov.in.