What is an Income Tax? Meaning, Types, and Tax slabs (2026 updates)

Income tax in India is a direct tax levied on the income earned by individuals and businesses during a financial year. From 1 April 2026, income tax is governed by the Income-tax Act, 2025, which replaces the six-decade-old Income-tax Act, 1961. The new Act simplifies the language, restructures provisions, and unifies the "Previous Year" and "Assessment Year" concepts into a single Tax Year. Tax rates, slabs, and deduction limits remain unchanged.

Taxpayers must file an Income Tax Return (ITR) annually to report their income and claim refunds if eligible. This article explains the meaning, types, features, and calculation of income tax under the current framework.

What is income tax?

Income tax is a direct tax collected by the Central Government on the earnings of individuals and businesses during a financial year. The revenue funds public services like infrastructure, healthcare, education, and welfare programs.

Income is categorized into five heads:

1. Income from salary: net salaries, bonuses, pensions, and other compensation received by employees.

2. Income from house property: rental income from residential or commercial property.

3. Income from business or profession: earnings from self-employment, freelancing, businesses, and professional services such as those provided by lawyers, doctors, and chartered accountants.

4. Income from capital gains: profits from selling assets such as stocks, mutual funds, real estate, and virtual digital assets.

5. Income from other sources: interest from savings accounts, fixed deposits, lottery winnings, and other earnings not covered above.

What does the Income-tax Act, 2025 say?

The Income-tax Act, 2025 governs how the Income Tax Department administers, collects, and enforces taxes from 1 April 2026. It contains 536 sections across 23 chapters and 16 schedules, significantly leaner than the 819 sections of the 1961 Act.

Key shifts under the new Act:

• Tax Year replaces Previous Year and Assessment Year: A single 12-month April-March period called "Tax Year" applies from Tax Year 2026-27 onwards. Income earned up to 31 March 2026 (FY 2025-26 / AY 2026-27) continues to be governed by the 1961 Act.

• Form renumbering: Form 16 is renumbered to Form 130, and several other forms are renumbered for clarity.

• No new tax: The 2025 Act does not impose any new tax. Tax rates, slabs, deduction limits, filing deadlines, advance tax schedules, and TDS rates are unchanged.

• Plain language and tables: Provisos and explanations have been merged into the main text, and tables and formulas replace verbose narrative provisions.

• Digital-first compliance: The Act emphasizes digital tax administration, faceless assessments, and reduced litigation.

Types of income taxes in India

Income tax in India is broadly classified into three types:

1. Individual income tax Levied on the annual income of individuals, HUFs, AOPs, BOIs, and AJPs. Tax liability depends on residential status and income bracket. Taxpayers can choose between the new tax regime (default) and the old tax regime, which retains traditional exemptions and deductions.

2. Business income tax Levied on the income generated by businesses. Taxable income can be calculated under:

• Normal provisions: Total revenue minus business expenses.

• Presumptive taxation: Fixed percentage of turnover (up to ₹3 crore for businesses, ₹75 lakh for professionals).

3. State and local taxes Taxes levied by state governments and local bodies, such as professional tax, agricultural income tax, stamp duty, land revenue tax, and property tax. These are separate from central income tax.

Features of income tax

• It is a direct tax: borne by the taxpayer and cannot be transferred to anyone else.

• The Central Government is responsible for managing and enforcing income tax laws.

• Tax is calculated on income earned during the Tax Year (or "Previous Year" for FY 2025-26 and earlier).

• Tax rates are determined as per income tax slabs, which vary based on income level and category of taxpayer.

• It follows a progressive structure, higher income attracts higher tax rates.

• Taxpayers can claim deductions and exemptions under specific provisions, subject to maximum limits.

Who is required to pay income tax in India?

Anyone earning taxable income in India, resident or non-resident must pay income tax and file an ITR. Tax liability arises when annual income exceeds the basic exemption limit (₹3 lakh under the old regime; ₹4 lakh under the new regime for FY 2025-26).

Taxpayers are classified into:

• Individuals

• Hindu Undivided Families (HUFs)

• Firms and LLPs

• Companies (domestic and foreign)

• Association of Persons (AOPs)

• Body of Individuals (BOIs)

• Local authorities

• Artificial Juridical Persons

Tax rules for individuals and HUFs depend on:

• Residential status: Residents are taxed on global income; non-residents are taxed only on income earned or accrued in India.

• Age category: Primarily relevant under the old regime for senior citizens (60+) and super senior citizens (80+).

How is income tax calculated?

You can calculate income tax manually or use an online income tax calculator. The basic steps are:

1. Determine gross annual income: sum all earnings across the five heads.

2. Subtract exemptions: such as HRA and LTA (under the old regime).

3. Apply deductions: standard deduction (₹75,000 under new regime, ₹50,000 under old regime) and deductions like section 123, 124, 126, 133 and more where applicable.

4. Calculate net taxable income: gross income minus exemptions and deductions.

5. Compute tax payable: apply slab rates, subtract Section 87A rebate (if eligible), and add 4% Health & Education Cess. Surcharge applies if income exceeds ₹50 lakh.

To simplify this, use you can also use the free online income tax calculator developed by Zoho.

Income tax rates - new tax regime (FY 2025-26 and Tax Year 2026-27)

The new tax regime is the default regime. Slabs introduced by Budget 2025 continue unchanged for Tax Year 2026-27 (Budget 2026 made no changes).

Resident individuals are eligible for a Section 87A rebate of up to ₹60,000 for income up to ₹12 lakh. Combined with the ₹75,000 standard deduction, salaried individuals earning up to ₹12.75 lakh effectively pay zero income tax under the new regime.

Old tax regime income tax slabs(FY 2025-26 and TY 2026-27)

The old tax regime (optional) retains the traditional ₹2.5L / ₹5L / ₹10L slab structure with a Section 87A rebate of ₹12,500 for income up to ₹5 lakh.

Key takeaways

Income tax in India is levied on annual earnings and, from 1 April 2026, is governed by the Income-tax Act, 2025. While the legal framework has been modernised, tax rates, deduction limits, and filing deadlines remain the same. Taxpayers must file their ITR annually, choosing between the default new tax regime and the optional old tax regime based on their income profile and eligible deductions.

For employers, payroll software like Zoho Payroll automates salary calculations, TDS deductions, regime comparison, and Form 16 (Form 130 from Tax Year 2026-27) generation, ensuring complete compliance with the new Act.

Frequently asked questions

• What is the meaning of income tax?

Income tax is a direct tax levied on the income earned by individuals and businesses. A portion of earnings is paid to the Central Government, which uses these funds for public services like healthcare, education, infrastructure, and subsidies.

• Who imposes income tax in India?

The Central Government imposes income tax under the Income-tax Act, 2025 (effective 1 April 2026). The Income Tax Department under the Central Board of Direct Taxes (CBDT) administers, collects, and enforces it.

• What is the difference between Tax Year and Assessment Year?

Under the Income-tax Act, 2025, the term "Tax Year" replaces both "Previous Year" and "Assessment Year". A Tax Year is a 12-month period from 1 April to 31 March. So Tax Year 2026-27 corresponds to what was earlier called Previous Year 2026-27 / AY 2027-28 under the 1961 Act.

• Are tax rates different under the Income-tax Act, 2025?

No. The 2025 Act does not change tax rates, slabs, surcharge rates, or rebate limits. It is primarily a structural and language overhaul aimed at simplifying compliance.

• Which tax regime should I choose?

The new tax regime is the default. It typically benefits salaried individuals earning up to ₹12.75 lakh (zero tax due to the ₹60,000 rebate) and those without significant deductions. The old tax regime suits taxpayers claiming substantial HRA, home loan interest, 80C, 80D, and other deductions. Use an income tax calculator to compare both regimes for your income profile.