Income tax is a direct tax imposed on the income of a person according to the provisions of the income-tax law applicable in India. The income-tax law provides the legal framework for the levy, administration, collection, and recovery of income tax.
For more than six decades, the Income-tax Act, 1961 was the principal legislation governing income tax in India. It provided rules relating to taxable income, residential status, computation of income, deductions, exemptions, tax administration, assessment, and recovery of tax.
The Income-tax Act, 2025 replaced the Income-tax Act, 1961 with effect from 1 April 2026. The new Act reorganises and simplifies the income-tax law. However, the provisions of the Income-tax Act, 1961 continue to apply to tax years beginning before 1 April 2026 and to relevant earlier proceedings according to the repeal and savings provisions.
Purpose of the Income Tax Act
The Income Tax Act provides the statutory framework for the taxation of income in India. It determines the income that is chargeable to tax and provides rules for computing the taxable income of a person.
The law also deals with the administration and collection of income tax. It specifies the tax obligations of taxpayers and provides the framework for assessment, compliance, and recovery of tax.
Thus, the basic functions of the income-tax law are the levy, administration, collection, and recovery of income tax.
Persons Covered under the Income Tax Law
The income-tax law applies to different categories of persons earning taxable income.
These may include individuals, Hindu Undivided Families, companies, and other entities covered by the provisions of the law.
The tax liability of a person depends on factors such as the nature and amount of income, residential status, and the tax provisions applicable to the relevant tax year.
Therefore, income tax is not restricted only to individuals. Different persons and entities may become liable to tax according to the applicable provisions.
Meaning and Computation of Income
Income-tax law determines the amounts that are included in the total income of a person.
The income earned by a taxpayer is classified under specified heads of income. Income is first computed according to the provisions applicable to the relevant head and is then considered for determining total income.
Applicable deductions and exemptions may affect the amount of income chargeable to tax.
After determining the total taxable income, tax is calculated according to the rates applicable for the relevant year.
Heads of Income
For the purpose of computation of total income, income is classified under five heads of income.
These are:
- Income from Salary
- Income from House Property
- Profits and Gains from Business or Profession
- Capital Gains
- Income from Other Sources
Income is computed separately under the relevant head according to the applicable provisions.
The income calculated under these heads is considered in determining the total income of the taxpayer.
For examination purposes, it is important to remember that agricultural income is not one of the five heads of income.
Income from Salary
Income received by a person in the nature of salary is considered under the head Income from Salary.
The income is computed according to the provisions applicable to salary income.
This head deals with income arising from an employment relationship and forms one of the five heads used for the computation of total income.
Income from House Property
Income relating to house property is computed under the head Income from House Property.
The income falling under this head is determined according to the specific provisions applicable to house property.
It is treated separately from business income and income from other sources for the purpose of computing total income.
Profits and Gains from Business or Profession
Income earned from carrying on a business or profession is computed under the head Profits and Gains from Business or Profession.
The income from business or professional activities is determined according to the relevant provisions of the income-tax law.
This head is particularly important for businesses, firms, and persons engaged in professional activities.
Capital Gains
Income arising from transactions relating to capital assets may be taxable under the head Capital Gains.
Capital gains are computed according to the applicable provisions of the income-tax law.
This head is separate from ordinary business income and salary income.
Income from Other Sources
Income that is taxable but is not properly chargeable under the other specified heads may be considered under Income from Other Sources.
This head forms one of the five heads of income and covers taxable income according to the applicable provisions.
Scope of Total Income and Residential Status
The scope of total income depends significantly on the residential status of the taxpayer in India.
A person who is resident in India may be liable to tax in India on income according to the wider scope applicable to a resident, including worldwide income as provided under the law.
On the other hand, a non-resident is generally liable to tax in India in respect of income having the required connection with India or Indian income according to the applicable provisions.
Therefore, residential status is important in determining the scope of income chargeable to tax in India.
The important examination concept is:
Resident → Wider scope of taxable income
Non-Resident → Tax liability generally restricted to Indian income according to the applicable provisions
Tax Rates and Progressive Taxation
Income tax is calculated according to the tax rates applicable for the relevant year and category of taxpayer.
The income-tax system may provide different tax rates or slabs based on the level of taxable income and the applicable tax regime.
Under a progressive tax structure, the applicable tax burden generally increases as taxable income moves into higher tax slabs.
Therefore, the amount of tax payable depends on the taxable income and the tax rates applicable for the relevant period.
Deductions and Exemptions
The income-tax law provides for various deductions and exemptions according to the applicable provisions.
A deduction may reduce the amount considered for determining taxable income. An exemption may provide specified tax treatment to particular income or amounts according to law.
The availability of deductions and exemptions depends on the conditions prescribed under the applicable provisions.
Therefore, taxpayers must determine whether the required conditions are satisfied before claiming a deduction or exemption.
Compliance and Penalties
The income-tax law contains provisions relating to tax compliance.
Taxpayers may be required to file returns, provide information, pay applicable taxes, and comply with other statutory requirements.
Failure to comply with the provisions of the income-tax law may result in penalties or other consequences according to the applicable provisions.
Therefore, proper compliance with income-tax requirements is important for taxpayers.
Income Tax Return
An Income Tax Return is a statement through which a taxpayer reports income and other prescribed information to the Income Tax Department according to the applicable law.
A person is required to file an Income Tax Return when the conditions prescribed under the income-tax law are satisfied.
The due date for filing the return depends on the category of taxpayer and the applicable provisions. Therefore, 31 July should not be treated as the universal due date for every taxpayer.
The applicable due date must be determined according to the category of the taxpayer and the provisions relevant to the particular return.
Income-tax Act, 1961
The Income-tax Act, 1961 was Act 43 of 1961 and served as the principal charging statute for income tax in India for more than six decades.
The Act provided for the levy, administration, collection, and recovery of income tax.
During its operation, the Act was amended numerous times to reflect changes in taxation policy, economic conditions, and compliance requirements.
From 1 April 2026, the Income-tax Act, 2025 replaced the Income-tax Act, 1961 for tax years beginning on or after that date.
Income-tax Act, 2025
The Income-tax Act, 2025 is the new income-tax legislation that came into effect from 1 April 2026.
It replaced the Income-tax Act, 1961 and introduced a simplified and reorganised structure for India’s income-tax law.
The new Act uses the concept of a Tax Year. The Tax Year is a period of twelve months contained in a financial year and replaces the earlier terminology of Previous Year for income earned from the financial year 2026-27 onwards.
The replacement of the 1961 Act does not automatically terminate matters relating to earlier years. The repeal and savings provisions preserve the application of the old Act to relevant earlier tax years and proceedings.
Transition from the 1961 Act to the 2025 Act
The Income-tax Act, 2025 became effective from 1 April 2026.
Tax years beginning before 1 April 2026 continue to be governed by the Income-tax Act, 1961 according to the savings provisions.
For example, income relating to the financial year 2025-26 continues to be governed by the old Act for the relevant assessment and return requirements.
Income earned during the financial year 2026-27 onwards is governed by the Income-tax Act, 2025 according to the applicable provisions.
Therefore:
Tax Years beginning before 1 April 2026 → Income-tax Act, 1961
Tax Years beginning on or after 1 April 2026 → Income-tax Act, 2025
Amendments through the Finance Bill
The Government of India presents the Union Budget and introduces the Finance Bill containing taxation proposals.
The Finance Bill may propose amendments relating to income-tax provisions and tax rates.
After the legislative process and the required approval, the amendments become part of the applicable tax law.
Tax amendments are generally applicable according to the effective dates specified in the relevant provisions.
Therefore, the Finance Bill and subsequent Finance Act play an important role in making changes to income-tax law.
Vote on Account
A Vote on Account is a temporary financial arrangement used to provide funds for essential government expenditure for a limited period.
It may be used when a full Budget is not immediately available, such as in circumstances associated with a General Election year.
The purpose is to ensure the continuation of necessary government expenditure and the smooth functioning of administration.
A full Budget may subsequently be presented by the government.
Simplification of Income-tax Law
The Government undertook efforts to simplify and reorganise India’s income-tax law.
A task force was constituted to examine and draft a new direct tax law to replace the Income-tax Act, 1961.
The objective was to simplify the legal framework and make income-tax provisions easier to understand and administer.
These simplification efforts ultimately led to the replacement of the Income-tax Act, 1961 by the Income-tax Act, 2025.
Exam Focus
The Income-tax Act provides the legal framework for the levy, administration, collection, and recovery of income tax in India.
The Income-tax Act, 1961 was Act 43 of 1961 and governed India’s income-tax system for more than six decades.
The Income-tax Act, 2025 replaced the Income-tax Act, 1961 with effect from 1 April 2026.
The five heads of income are:
Income from Salary
Income from House Property
Profits and Gains from Business or Profession
Capital Gains
Income from Other Sources
Agricultural income is not a separate head among the five heads of income.
The scope of total income depends on the residential status of the taxpayer.
The new Act introduces the term Tax Year for the period of twelve months contained in a financial year.
The most important examination point is:
Before 1 April 2026 → Income-tax Act, 1961 applies to earlier tax years according to the savings provisions
From 1 April 2026 → Income-tax Act, 2025 applies to tax years beginning on or after that date