How income tax works in India

Part of Income tax. 6 min read. Free lesson with a short video, quiz and practice.

Income tax is the tax you pay to the central government on what you earn in a year. It funds roads, defence, schools and much more. If your income is above a set limit, you must work out your tax, pay it and file a return.

A new law from 1 April 2026

India's income tax now runs under the Income-tax Act, 2025, which replaced the 60-year-old Income-tax Act, 1961 on 1 April 2026. The new law is shorter and simpler to read. Two things change for most people:

The old pair "financial year" and "assessment year" is replaced by one idea: the tax year, from 1 April to 31 March. Income earned from 1 April 2026 to 31 March 2027 belongs to tax year 2026-27.
Section and form numbers changed. Many people still use the old names, such as "80C", so you will see both.

Tax rates and slabs did not change because of the new law.

Five kinds of income

The law sorts your income into five groups (called heads):

Salary or pension.
House property: rent from a house you own.
Business or profession: freelancing, a shop, and also F&O trading.
Capital gains: profit from selling shares, mutual funds, gold or property.
Other sources: interest from FDs and savings, dividends, gifts above limits.

How the tax is worked out

Add your income from all heads.
Subtract allowed deductions (such as the standard deduction for salary).
The result is your taxable income. Apply the slab rates.
Subtract any rebate, then add 4% health and education cess (and a surcharge if income is very high).
Subtract tax already paid during the year (TDS, advance tax). Pay the rest, or get a refund.

A worked example

Priya earns a salary of ₹15,00,000 in tax year 2026-27 and uses the default new regime. After the ₹75,000 standard deduction, her taxable income is ₹14,25,000.

First ₹4,00,000: nil
₹4–8 lakh at 5%: ₹20,000
₹8–12 lakh at 10%: ₹40,000
₹12–14.25 lakh at 15%: ₹33,750

Tax: ₹93,750. Cess at 4%: ₹3,750. Total: ₹97,500, about 6.5% of her salary. Her employer deducts it month by month as TDS.

Tax rules change every year in the Budget. Check the income-tax portal (incometax.gov.in) or a chartered accountant before you file.

Key takeaways

Income tax is charged on what you earn in a tax year, from 1 April to 31 March.
The Income-tax Act, 2025 replaced the 1961 Act on 1 April 2026; rates did not change.
Income is grouped into five heads: salary, house property, business, capital gains and other sources.
Tax = slab tax on taxable income, minus rebate, plus 4% cess.
Tax already paid as TDS or advance tax is subtracted; you pay the rest or get a refund.

Quick quiz

Which law governs income tax in India from 1 April 2026?
Answer: Income-tax Act, 2025. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026.
What is the 'tax year' 2026-27?
Answer: 1 April 2026 to 31 March 2027. A tax year runs from 1 April to 31 March.
Profit from selling mutual fund units falls under which head?
Answer: Capital gains. Profit from selling an asset such as shares or fund units is a capital gain.
What is added on top of the slab tax for everyone who pays tax?
Answer: 4% health and education cess. A 4% health and education cess is added to the tax.