Introduction to Income Tax in India

Learning Objectives

• Understand what income tax is and why the assessment year concept exists
• Distinguish Resident, Not-Ordinarily Resident, and Non-Resident and apply the 182-day rule
• Read and interpret the FY 2025-26 tax slabs under both regimes — including the correct 8-band new regime
• Apply the Section 87A rebate correctly, including the ₹12L effective zero-tax threshold under the new regime
• Identify who must file an ITR and which form applies to a company vs an individual director

What Is Income Tax?

Income tax is a direct tax levied by the Central Government on income earned by a person during a financial year. "Direct" means the person who earns pays the tax — unlike GST, which is collected from customers and remitted.

The legal authority is the Income Tax Act, 1961 (the Act), supplemented by the Income Tax Rules, 1962, and Finance Acts passed each year. The Finance Act 2025 governs the rates for FY 2025-26.

The Financial Year and Assessment Year

Every income tax obligation is tied to two years:

When you file an ITR for income earned in FY 2025-26, you are filing for AY 2026-27. Tax professionals say "AY 26-27 return" to identify which year's income is being declared.

Why Two Years?

You earn income throughout FY 2025-26 (April 2025 to March 2026). The ITR can only be filed after the year closes — after 31 March 2026 — once all income is known and accounts are finalised. The assessment year is the window during which you file and the government assesses.

Who Is Liable to Pay Income Tax?

Section 2(31) of the Act defines "person" to include seven categories:

All seven categories are taxpayers. The rules differ — rates, deductions, and exemptions vary by category.

Basic Exemption Limits (FY 2025-26)

Not all income is taxable from the first rupee. A basic exemption limit applies before any tax is charged.

The new regime has a uniform ₹3,00,000 basic exemption regardless of age. The old regime rewards age with a higher slab for senior and super senior citizens.

Tax Slabs for Individuals (FY 2025-26)

New Regime — Default from AY 2024-25

The Finance Act 2025 restructured the new regime slabs into eight bands:

Add 4% health and education cess on the income tax computed.

Old Regime — Requires Explicit Opt-In

Add 4% health and education cess on the income tax computed.

Quick Comparison Table

Section 87A — The Rebate That Makes Income Up to ₹12L Tax-Free

Even where income exceeds the basic exemption limit, a rebate completely wipes out tax for lower-income taxpayers:

How the ₹12L threshold works under the new regime:

Tax on ₹12,00,000 under new regime:

• ₹0 – ₹4L: Nil
• ₹4L – ₹8L: ₹4,00,000 × 5% = ₹20,000
• ₹8L – ₹12L: ₹4,00,000 × 10% = ₹40,000
• Total income tax = ₹60,000

Section 87A rebate = ₹60,000 (equal to tax computed). Tax after rebate = ₹0.

For a salaried person with ₹75,000 standard deduction, gross salary up to ₹12,75,000 results in net taxable income of ₹12,00,000 — still zero tax.

Cess Is Always on Tax — Never on Rebate

A common mistake: students add cess to gross income or to the pre-rebate tax amount.

Correct sequence:

1. Compute income tax on taxable income using the slab table
2. Apply Section 87A rebate — reduces tax to nil if eligible
3. Add 4% cess on the tax remaining after rebate
4. Result = total tax payable

Tax Residency — Resident, NOR, Non-Resident

An individual's tax liability depends on residency status, not citizenship. The Act classifies individuals under Section 6:

Resident (R)

An individual is a Resident if they satisfy either of these in the relevant FY:

1. Present in India for 182 days or more in the FY, OR
2. Present in India for 60 days or more in the FY AND 365 days or more in the preceding 4 FYs

Special rule for Indian citizens visiting India (and persons of Indian origin visiting India): The 60-day threshold increases to 182 days.

Not Ordinarily Resident (NOR)

A resident who has been a non-resident in 9 of the preceding 10 FYs, or has been in India for 729 days or fewer in the preceding 7 FYs, is classified as Not Ordinarily Resident.

Non-Resident (NR)

Anyone who does not satisfy the Resident conditions is a Non-Resident.

Why Residency Matters

Kiran Sharma is a Resident Indian — he has lived in Hyderabad throughout FY 2025-26 and is fully taxable on all global income.

PAN — Permanent Account Number

PAN is a 10-character alphanumeric identifier issued by the Income Tax Department. It is mandatory for all taxpayers, TDS deductors, and anyone entering specified financial transactions.

Structure of a PAN

A B C D E 1 2 3 4 F
─────── ─ ─── ─── ─
  |     |  |    |  └── Last character: alphabetic (check digit)
  |     |  |    └───── 4-digit sequence number
  |     |  └────────── First character of surname/entity name
  |     └──────────── Type code (see table)
  └──────────────────── First 3: AAA–ZZZ (assessing officer jurisdiction)

PAN Type Codes (5th character)

Sunrise Retail Pvt Ltd has GSTIN 36AACCS1234A1ZP. The embedded PAN is AACCS1234A — the 5th character C confirms it is a company.

Kiran Sharma's PAN would look like ABCKP1234D — the 5th character P indicates an individual.

The Default Rule — New Regime

Since AY 2024-25, the new regime is the default. If you do nothing, the new regime applies. To use the old regime, you must explicitly elect it when filing. For individuals with business income, the election is made by filing Form 10-IEA.

For Kiran Sharma: he has both salary and business income. His default is the new regime unless he actively files Form 10-IEA to switch to the old regime.

ITR Filing Obligation

Who must file an ITR?

1. Any company or firm — mandatory regardless of income or profit/loss
2. Individuals/HUF — if total income exceeds the basic exemption limit before deductions
3. Individuals with specified financial transactions — even if income is below the threshold (e.g. foreign travel spend >₹2L, electricity bill >₹1L, TDS/TCS ≥₹25,000)
4. Anyone claiming a refund — TDS was deducted but income is below the taxable threshold

Sunrise Retail Pvt Ltd: must file ITR-6 (companies other than those claiming Section 11 exemption) for every FY without exception.

Kiran Sharma: has salary income from Sunrise Retail plus business income from his proprietorship. He files ITR-3 (for individuals with income from business or profession).

Case Study Application

Sunrise Retail Pvt Ltd — Tax Profile

Kiran Sharma — Tax Profile

Practice Exercises

Key Terms

Next up: Module 2 — The Five Heads of Income — Learn how income tax law classifies every receipt into one of five heads, and map Kiran Sharma's complete income picture for FY 2025-26.