Income Tax

Who pays, and on what

Liability begins with residential status, because status decides the scope of what is taxed, not the rate at which it is taxed. The tests are counted in days spent in India and are applied afresh every year, so a person can be resident one year and non-resident the next without anything about them having changed except their travel.

An individual is resident for a year on being in India for 182 days or more in that year, or for 60 days or more in that year together with 365 days or more across the four preceding years. The 60-day limb is relaxed to 182 days for an Indian citizen leaving India for employment or as a member of a ship's crew, and for an Indian citizen or person of Indian origin visiting India — though for a visitor whose Indian-source income exceeds ₹15 lakh the relaxation is only to 120 days. A resident is further classified as ordinarily resident or not ordinarily resident, the latter broadly where the person has been non-resident in nine of the ten preceding years or present for 729 days or less across the seven preceding years.

Scope follows from that classification under section 5. A resident and ordinarily resident is taxed on worldwide income. A resident but not ordinarily resident is taxed on Indian income, and on foreign income only where it comes from a business controlled from India or a profession set up in India. A non-resident is taxed only on income received in India or accruing or arising in India. The distinction matters most to returning migrants and to families with assets abroad, for whom the difference between the three statuses is the difference between declaring a foreign account and not having to.

• There is also a deeming rule: an Indian citizen with Indian-source income above ₹15 lakh who is not liable to tax in any other country by reason of domicile or residence is treated as resident, and as not ordinarily resident.
• Residential status for a company, firm or other entity is decided by different tests — for a company, incorporation in India or place of effective management in India.
• Status is a question of fact for each year and cannot be elected. A tax residency certificate from another country does not by itself displace the Indian day-count test, though a treaty may relieve the resulting double taxation.

Previous year and assessment year

Income is earned in one year and assessed in the next. The year of earning is the previous year, always the financial year from 1 April to 31 March. The year in which that income is assessed and the return filed is the assessment year, which is the financial year immediately following. Income earned between 1 April 2025 and 31 March 2026 is the previous year 2025-26, assessed in the assessment year 2026-27.

The confusion is entirely practical. A challan, a return form and a TDS certificate each ask for a year, and they do not all mean the same one. Advance tax and TDS are paid during the previous year; the return, the self-assessment tax and any refund belong to the assessment year. Paying a self-assessment challan against the wrong assessment year is one of the commonest ways of ending up with a demand and a matching unclaimed credit sitting side by side.

The Income-tax Act, 2025 abolishes the pair and uses a single 'tax year' — the financial year in which the income is earned — for both the earning and the assessment. Material written under the older law will continue to speak of previous years and assessment years for some time yet, and both vocabularies will be in circulation while the transition works through.

A financial year is not an accounting year of your choosing. The previous year for tax is 1 April to 31 March for every taxpayer, whatever period the books are drawn up for, and a business whose first year is shorter than twelve months still has a previous year ending 31 March.

The five heads of income

Every item of income is classified under one of five heads. The classification is not a formality: each head has its own rules for what may be deducted, its own timing rules, and its own treatment of losses. The same rupee taxed under a different head can produce a materially different result, which is why the characterisation of an income is argued about far more often than its amount.

• Salaries — remuneration from an employer-employee relationship, including allowances, perquisites, pension and the taxable part of retirement benefits. What is deductible here is tightly limited by statute; there is no general 'expenses of earning salary'. A director's fee paid to a non-employee director is not salary, and falls under other sources.
• Income from house property — the annual value of a building and the land appurtenant to it, whether let out or held as self-occupied, reduced by municipal taxes paid, a standard deduction of 30% of the net annual value and interest on borrowed capital. It is charged on the owner and on the property's letting capacity, so a let property is taxed on the higher of the actual and expected rent. Property held as stock-in-trade by a builder is an exception with its own rule.
• Profits and gains of business or profession — the residual home of trading and professional income, computed from the books after allowing revenue expenditure laid out wholly and exclusively for the business, depreciation on blocks of assets, and the specific allowances and disallowances the Act attaches. This is the head with the most machinery: presumptive schemes, disallowances for cash payments and for TDS not deducted, and the tax audit requirement all live here.
• Capital gains — profit on the transfer of a capital asset, charged in the year of transfer. Character depends on whether the asset was held long enough, and the rate depends on the asset class. Stock-in-trade is excluded, which is why the line between an investor and a trader in shares is fought over so persistently.
• Income from other sources — the residual head, catching interest, dividends, winnings, family pension, gifts caught by the deeming provisions, and anything not naturally belonging elsewhere. Being residual, it is where an income lands by default when no other head fits, not where a taxpayer may choose to put it.

Losses are not freely interchangeable across heads. Business loss cannot be set off against salary at all; speculation loss can only be set off against speculation profit; capital loss can only be set off against capital gains, with long-term loss confined to long-term gains; and loss under house property may be set off against other heads only up to ₹2 lakh in a year, the balance being carried forward.

The two regimes

Since the assessment year 2024-25 the concessional regime under section 115BAC is the default. It offers wider slabs and lower rates, and in exchange withdraws almost every deduction and exemption. The older regime, with its narrower slabs and its full apparatus of Chapter VI-A deductions, house rent allowance, leave travel concession and interest on a self-occupied house, remains available but must now be positively opted for.

Neither is better as a proposition. Which one produces less tax depends entirely on the deductions a particular taxpayer actually claims, not on those theoretically available. The break-even is the level of total deductions and exemptions at which the tax saved by the old regime's deductions exactly offsets the tax saved by the new regime's lower rates. Below that level of deductions the new regime wins; above it the old one does. For most salaried taxpayers the deductions that move the calculation are the large recurring ones — house rent allowance where rent is genuinely paid, interest on a housing loan, and employer contributions — rather than the small ones, and the arithmetic should be done on the actual figures each year rather than settled once and forgotten.

The rebate under section 87A complicates the comparison at the lower end. Under the new regime a resident individual with total income up to ₹12 lakh pays no tax at all, the rebate extending to ₹60,000; with the ₹75,000 standard deduction on salary, a salaried person is effectively untaxed up to about ₹12.75 lakh of salary. The old regime's rebate is far smaller, ₹12,500 for total income up to ₹5 lakh. Below the new regime's rebate ceiling the old regime is therefore very difficult to justify however large the deductions.

• The new regime's slabs are the same for every individual regardless of age. There is no higher basic exemption for a senior citizen under it.
• Surcharge under the new regime is capped at 25%; the old regime's 37% band does not apply to it.
• The slabs above are for the financial year 2025-26 and were not altered for 2026-27. Confirm against the Finance Act for the year you are computing.

The old regime slabs

Retained for those who opt out of the default. The basic exemption limit rises with age here, which it does not under the new regime — one of the few remaining reasons an older taxpayer with modest income might still look at it.

These slabs have not moved for several years, which makes it easy to state them from memory and easy to be caught out the year they do move. Verify them against the current Finance Act rather than against last year's working papers.

Switching between the regimes

The mechanics differ sharply depending on whether the taxpayer has business or professional income, and this is where advisers most often give the wrong answer by generalising from the salaried case.

A person with no income under the head profits and gains of business or profession — a salaried employee, a pensioner, someone living on investments — may choose afresh every single year, in the return itself. There is no form to file separately and no lock-in. The choice must, however, be made in a return filed on or before the due date under section 139(1); a belated return can only be filed under the default regime.

A person with business or professional income must exercise the option to leave the default regime in Form 10-IEA, filed on or before the due date under section 139(1) for that year. Having opted out into the old regime, that person may return to the new regime once — and having so returned, may never opt out again for any subsequent year, for as long as the business income continues. The choice is therefore effectively made twice in a lifetime rather than annually, and is worth modelling over several years rather than one.

Missing the section 139(1) due date costs more than late-filing interest for someone whose deductions favour the old regime. The option cannot be exercised in a belated return, so the year is assessed under the default regime and the deductions are simply lost.

Rates for firms, LLPs and companies

Persons other than individuals are taxed at flat rates rather than slabs, with surcharge and cess on top. The concessional company regimes under sections 115BAA and 115BAB work on the same principle as the individual new regime — a lower rate in exchange for surrendering specified incentive deductions and additional depreciation — and, once opted into, cannot be withdrawn.

• Individuals bear surcharge at 10% above ₹50 lakh, 15% above ₹1 crore, 25% above ₹2 crore and 37% above ₹5 crore, the last band applying under the old regime only.
• Surcharge on capital gains taxed under sections 111A and 112A, and on dividends, is capped at 15% however high the total income.
• Marginal relief applies at every surcharge threshold, so that the extra tax cannot exceed the extra income that crossed the threshold. It is computed automatically by the return utility, but should be checked when income sits just above a threshold.
• Minimum alternate tax under section 115JB applies to companies at 15% of book profit, and does not apply to a company that has opted into section 115BAA or 115BAB. The parallel alternate minimum tax under section 115JC applies to certain non-corporate persons claiming specified deductions.
• The 25% company rate depends on gross turnover in a specified earlier year not exceeding the prescribed limit. Both the base year and the limit have been revised more than once — confirm which year and which figure apply before relying on the lower rate.
• Section 115BAB is confined to companies incorporated on or after 1 October 2019 that commence manufacture within a statutory window. That window has a sunset date which has been extended before; check whether it is still open for the company in question.

Capital gains

A capital gain arises on the transfer of a capital asset and is charged in the year of transfer, whether or not the money has been received. Whether it is short-term or long-term depends on how long the asset was held before transfer, and that single fact usually matters more to the tax than anything else about the transaction.

This area was restructured with effect from 23 July 2024. Before that date there were three holding periods and a rate structure that varied widely by asset, with indexation available on most long-term assets. Since then there are two holding periods and a single long-term rate, and indexation has been withdrawn for transfers on or after that date. Anything written about capital gains before mid-2024 describes the earlier scheme, which still governs transfers made up to 22 July 2024 — so older material is not wrong, merely out of date for current transactions.

• Indexation adjusted the cost of acquisition for inflation using the cost inflation index, so that only the real gain was taxed. It has been withdrawn for transfers on or after 23 July 2024, and the lower flat rate of 12.5% is the compensation for its removal. Where the asset was held for many years through a period of high inflation, the withdrawal can leave the taxpayer worse off despite the lower rate.
• For land or a building acquired before 23 July 2024 and transferred by a resident individual or Hindu undivided family, there is a grandfathering option: tax at 12.5% without indexation, or at 20% with indexation, whichever is lower. It does not extend to companies, firms or non-residents.
• The cost inflation index remains relevant for transfers made up to 22 July 2024 and for computing the grandfathered alternative.
• For listed equity acquired before 31 January 2018, the cost is stepped up to the fair market value on that date under the section 112A grandfathering rule, so that gains accrued before the reintroduction of the levy are not taxed.
• The basic exemption limit may be used to absorb capital gains only by a resident, and only against gains remaining after all other income has used up the limit.
• Exemptions on reinvestment survive — section 54 for a residential house reinvested in a residential house, section 54F for any long-term asset where the whole net consideration goes into a house, and section 54EC for investment in specified bonds within six months. Each has its own ceiling and its own lock-in; verify both before relying on one.

The date of transfer, not the date of payment or of registration, fixes the year and now also fixes which rate structure applies. A sale agreed in one year and registered in the next needs the transfer date established on the facts, because 23 July 2024 sits between two quite different regimes.

Deductions worth knowing

The deductions below are the ones that appear in most individual returns. Almost all of them are available under the old regime only; the new regime withdrew them as the price of its lower rates, retaining just a short list.

• What survives under the new regime is a short list: the standard deduction on salary, the standard deduction on family pension, the employer's National Pension System contribution under 80CCD(2), the deduction for new employment under 80JJAA, and interest on a let-out property. Everything else in the table above is old-regime only.
• Interest on a self-occupied house under section 24(b), up to ₹2 lakh, is an old-regime deduction. It is not available under the new regime, and it is often the single largest item deciding which regime is better for a salaried taxpayer with a housing loan.
• House rent allowance and leave travel concession are exemptions from salary rather than Chapter VI-A deductions, but they too are withdrawn under the new regime and belong in the same comparison.
• 80C is a ceiling on the aggregate, not on each item. Provident fund deducted from salary already consumes part of it before any voluntary investment is made, and the amount left over is frequently smaller than people assume.

Advance tax

Tax is meant to be paid as income is earned rather than after the year has closed. Where the tax payable for a year, after credit for tax deducted and collected at source, comes to ₹10,000 or more, it must be paid in four instalments during the previous year itself.

The instalments are cumulative rather than equal: each date carries a percentage of the whole year's liability that must have been paid by then, counting everything paid earlier. A liability that only becomes apparent in February therefore has to be caught up in a single payment by 15 March, with interest for the earlier instalments already run.

• A resident individual aged 60 or above with no income under the head profits and gains of business or profession is not liable to pay advance tax at all, and may settle the whole liability as self-assessment tax.
• A taxpayer computing income under the presumptive schemes in sections 44AD or 44ADA pays in one instalment: the whole amount by 15 March.
• Tax paid on or before 31 March still counts as advance tax for the year, even though the instalment dates have passed. Paying on 30 March reduces interest under section 234B, though not the interest already accrued under 234C.
• Advance tax is estimated, and an honest estimate revised at each date is the intended behaviour, not an admission of error.

Two different interest charges follow from getting this wrong, and they run together rather than in the alternative. Section 234B charges 1% a month where advance tax paid falls short of 90% of the assessed tax, running from 1 April of the assessment year until the tax is paid. Section 234C charges 1% a month for the shortfall at each of the four instalment dates — for three months at each of the first three dates and for one month at the last. A shortfall in June that is never made good therefore attracts 234C four times over and 234B on top.

The filing calendar

The due date for a return depends on what compliance the taxpayer is subject to, not on the amount of income. An audit pushes the date back by three months; a transfer pricing report pushes it back by one further month.

The dates below are the statutory ones. The Board extends them by order more often than not, sometimes late in the season, so a date near the line is worth confirming — but a return planned around a hoped-for extension is a return planned badly.

• A belated return is a return filed after the due date but within the section 139(4) window. It is a valid return, but it costs a late fee under section 234F, interest under section 234A, the ability to opt out of the default regime, and — most expensively — the right to carry forward most losses.
• A revised return corrects a return already filed, whether the original was on time or belated, and replaces it entirely. There is no limit on the number of revisions within the window.
• An updated return is a different animal. It may be filed long after the ordinary windows have closed, but only to declare additional income and pay more tax. It cannot be used to claim a refund, to increase a refund already claimed, to reduce a declared liability, or to declare or increase a loss. It carries additional tax on top of the tax and interest otherwise due, on a scale that rises the longer the delay — reported as 25% within twelve months of the end of the assessment year, 50% within twenty-four, 60% within thirty-six and 70% within forty-eight. Confirm the current scale before computing one.
• Tax audit under section 44AB is required where business turnover exceeds ₹1 crore, or ₹10 crore where cash receipts and cash payments each stay within 5% of the total, and where professional gross receipts exceed ₹50 lakh. Verify the current thresholds; they have been revised more than once.

Which ITR form applies

The form follows from the status of the taxpayer and the composition of the income. Filing on the wrong form produces a defective return under section 139(9), which is curable but only within the time allowed by the notice — and a return left defective is treated as never having been filed.

The eligibility conditions for ITR-1 and ITR-4 are narrowed and widened almost every year, and the utility enforces them. A taxpayer who filed ITR-1 last year may not be eligible this year on identical income, so read the current year's conditions rather than repeating the previous year's form.

Presumptive taxation

The presumptive schemes let a small business or professional declare a fixed percentage of turnover as income, without maintaining detailed books under section 44AA or submitting to audit under section 44AB. No further deduction for expenses or depreciation is allowed against the presumed profit — depreciation is deemed to have been allowed, and the written-down value of the assets falls accordingly.

Declaring more than the deemed percentage is always permitted. The scheme sets a floor, not a fixed figure.

• Section 44AD is not open to a business earning income from commission or brokerage, to an agency business, to a profession covered by section 44AA(1), or to a person already covered by section 44AE.
• Advance tax under both 44AD and 44ADA is due in a single instalment by 15 March.
• A taxpayer using a presumptive scheme still has to declare income under the other heads in the ordinary way, and may still claim Chapter VI-A deductions where the chosen regime allows them.

Opting out of section 44AD has a five-year consequence that catches people badly. Where a taxpayer has declared profit under 44AD and then, in any of the five assessment years that follow, declares a lower profit than the section deems, 44AD is closed to them for the five assessment years after that. For those years they must maintain books under section 44AA and, where total income exceeds the basic exemption limit, obtain a tax audit under section 44AB. A single year of declaring the real, lower profit therefore commits the business to five years of audited accounts. Section 44ADA carries no equivalent lock-in.

What goes wrong most often

In roughly the order a practitioner meets them, and none of them is exotic.

• A mismatch with Form 26AS or the annual information statement. The department's view of the taxpayer's income is assembled from third-party reporting, and any figure in the return that falls short of it generates an adjustment under section 143(1) or a compliance query. Reconcile both statements before filing, not after the notice — and remember that the AIS can itself be wrong, in which case feedback should be filed against the entry rather than the return silently altered to match it.
• Income omitted because no tax was deducted on it. Savings and fixed deposit interest below the deduction threshold, interest on an income tax refund, rent from a small tenant, capital gains on mutual fund units, dividends — none of these arrives with a TDS certificate to prompt the memory, and all of them are taxable. The absence of a deduction is not an exemption.
• Advance tax missed by a business in its first profitable year. There is no employer withholding, the previous year showed a loss, and the liability is discovered when the accounts are drawn up in the following June. By then all four instalment dates have gone and interest under both sections 234B and 234C is already running.
• A belated return, and the losses it costs. Business loss, capital loss and speculation loss can only be carried forward if the return declaring them was filed by the section 139(1) due date. Filing a month late converts a carried-forward loss into a loss that is simply gone, which is generally far more expensive than the late fee that drew attention to the delay. Unabsorbed depreciation and house property loss are the exceptions and survive a late return.
• Foreign assets left undeclared in the schedule for them by a resident and ordinarily resident. The schedule is required whether or not there is any income from the asset, and the consequences of omitting it sit under the black money legislation rather than under the ordinary penalty provisions.
• A self-assessment challan paid against the wrong assessment year or the wrong minor head, leaving a demand outstanding and an unmatched credit sitting elsewhere in the same account.