Income Tax: A Comprehensive Guide (FY 2025-26)
What is Income Tax?
Income Tax is a direct tax levied by the Central Government on the annual income of individuals, Hindu Undivided Families (HUFs), companies, and other legal entities. Governed by the Income Tax Act, 1961, this tax is calculated based on the taxpayer's total earnings during a Financial Year (FY) and is payable in the following Assessment Year (AY).
Under current laws, the New Tax Regime is the default option, designed to simplify compliance by offering lower tax rates in exchange for the removal of most exemptions and deductions.
The Five Heads of Income
To calculate tax liability, the law classifies all income into five distinct "heads." Each head has its own set of rules for calculation and specific allowances.
1. Income from Salary
This includes any remuneration received by an employee from their employer. It covers basic pay, dearness allowance, bonuses, commissions, and perquisites (non-monetary benefits).
- Key Feature: For FY 2025-26, the Standard Deduction has been increased to ?75,000 under the New Tax Regime (compared to ?50,000 in the Old Regime).
2. Income from House Property
This includes income earned from renting out residential or commercial property. Even if a property is not let out, it may be subject to "Deemed Rent" rules if you own more than two self-occupied properties.
- Key Feature: A standard deduction of 30% of the Net Annual Value is allowed for repairs and maintenance.
3. Profits and Gains of Business or Profession (PGBP)
This head covers the income earned by business owners, freelancers, and professionals (like CAs, Doctors, or Architects).
- Key Feature: Tax is paid on the net profit after deducting all business-related expenses (rent, salaries, utilities, depreciation). Presumptive taxation schemes (u/s 44AD/44ADA) are available for small businesses and professionals to simplify tax filing.
4. Income from Capital Gains
Profits earned from the sale or "transfer" of capital assets like stocks, mutual funds, real estate, or gold fall under this head.
- Short-Term (STCG): Assets held for a shorter period (e.g., 12 months for listed shares, 24 months for property).
- Long-Term (LTCG): Assets held beyond the threshold. Note: As per latest updates, LTCG on listed equity is now taxed at 12.5% for gains exceeding ?1.25 Lakh.
5. Income from Other Sources (IFOS)
This is the residual head for any income that doesn't fit elsewhere. Common examples include:
- Interest from savings accounts and fixed deposits.
- Dividends from shares.
- Lottery or puzzle winnings (taxed at a flat 30%).
- Family pension.
Deductions & Exemptions (The Regime Choice)
The Income Tax Act offers two pathways. Choosing the right one is critical for your financial planning.
| Feature | New Tax Regime (Default) | Old Tax Regime |
|---|---|---|
| Standard Deduction | ?75,000 | ?50,000 |
| Section 80C | Not Available | Up to ?1.5 Lakh (PPF, LIC, ELSS) |
| Section 80D (Health) | Not Available | Up to ?25k - ?50k |
| HRA & LTA | Not Available | Available (subject to limits) |
| Home Loan Interest | Not Available (Self-occupied) | Up to ?2 Lakh |
| Rebate u/s 87A | Up to ?12 Lakh Income | Up to ?5 Lakh Income |