Income tax is a direct tax levied by the Central Government on the total income of every person — including individuals, Hindu Undivided Families, companies, firms, and other entities — computed in accordance with the provisions of the Income Tax Act. Under Indian law, the charge of income tax is established by Section 4 of the Income Tax Act, 1961, which provides that income tax shall be charged for any assessment year at the rates laid down by the relevant Finance Act on the total income of the previous year.
Legal definition
The Income Tax Act, 1961 establishes the charge and defines key concepts:
Section 4(1) — Charge of income tax: "Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every person."
Section 2(45) — "Total income": "Total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act.
Section 2(24) — "Income": Provides an inclusive (not exhaustive) definition covering profits and gains, dividends, voluntary contributions received by trusts, the value of perquisites or profits in lieu of salary, capital gains, and any other receipt of a similar nature.
Section 14 classifies income into five heads for the purpose of computation: (1) Salaries, (2) Income from house property, (3) Profits and gains of business or profession, (4) Capital gains, and (5) Income from other sources. The total income is the aggregate of income computed under each of these heads, after allowing deductions under Chapter VI-A.
The constitutional authority for levying income tax derives from Entry 82 of the Union List (List I) of the Seventh Schedule, which vests the power to tax income (other than agricultural income) exclusively in Parliament.
How courts have interpreted this term
Commissioner of Income Tax v. Vatika Township Pvt. Ltd. [(2015) 1 SCC 1]
In this full bench decision, the Supreme Court established important principles regarding the retrospective application of tax legislation. The Court held that a taxing statute cannot be applied retrospectively to create a new charge or impose a higher burden unless the legislature clearly and unambiguously expresses such intent. The bench observed that "a legislation which is found to be prospective cannot be rendered retrospective merely by the intention of the legislature to make it so." This judgment is foundational for understanding the limits of Parliament's power to amend the Income Tax Act retroactively.
Vodafone International Holdings BV v. Union of India [(2012) 6 SCC 613]
The Supreme Court held that the transfer of shares in a foreign company, which indirectly held assets in India, was not taxable under Section 9 of the Income Tax Act as it then stood. The Court adopted a "look at" approach (examining the legal form of the transaction) rather than a "look through" approach (examining economic substance), ruling that Indian tax law did not extend to indirect transfers of capital assets situated in India. This landmark judgment prompted the retrospective amendment of Section 9 by the Finance Act, 2012, and the subsequent Vivad se Vishwas initiative to resolve tax disputes.
CIT v. Podar Cement Pvt. Ltd. [(1997) 5 SCC 482]
The Supreme Court held that for purposes of taxation of income from house property under Section 22, the term "owner" need not be interpreted in its strictest legal sense. The Court ruled that the person who receives or is entitled to receive the income from the property in their own right is treated as the deemed owner for income tax purposes. This interpretation broadened the tax base and prevented the avoidance of tax on property income through nominal ownership structures.
Why this matters
Income tax is the single largest source of direct tax revenue for the Indian government, contributing approximately 55% of all direct tax collections. Every person whose total income exceeds the basic exemption limit is required to file an income tax return and pay tax at the applicable rate. Understanding the charging provision, computation mechanism, and applicable deductions is essential for every taxpayer, employer, and financial advisor in India.
For individual taxpayers, the most significant recent development is the shift to the new tax regime under Section 115BAC, which became the default regime from FY 2023-24 onwards. For FY 2025-26, the new regime offers a basic exemption of Rs 4 lakh, with progressive slab rates of 5% to 30% across seven brackets, and an enhanced rebate under Section 87A that makes income up to Rs 12 lakh effectively tax-free (Rs 12.75 lakh for salaried employees after the Rs 75,000 standard deduction). Taxpayers may opt for the old regime, which retains the Rs 2.5 lakh exemption limit but allows deductions under Sections 80C, 80D, and other provisions.
For businesses and practitioners, income tax compliance involves quarterly advance tax payments (under Section 208, required when estimated tax liability exceeds Rs 10,000), timely filing of returns (July 31 for individuals, October 31 for audit cases), and responding to assessments and notices from the Income Tax Department. The increasing digitisation of the tax administration — through faceless assessments, faceless appeals, and the e-Verification scheme — has fundamentally changed the compliance landscape. Practitioners must be familiar with both the substantive provisions of the Act and the evolving procedural framework on the e-filing portal.
Related terms
Broader concepts:
Specific components:
Related procedures:
Frequently asked questions
What is the basic exemption limit for income tax in India for FY 2025-26?
Under the new tax regime (Section 115BAC), which is the default regime, the basic exemption limit is Rs 4 lakh for FY 2025-26. Under the old tax regime, the limit remains Rs 2.5 lakh for individuals below 60 years, Rs 3 lakh for senior citizens (60-80 years), and Rs 5 lakh for super senior citizens (above 80 years). Additionally, an enhanced rebate under Section 87A makes total income up to Rs 12 lakh effectively tax-free under the new regime.
What is the difference between the old and new income tax regimes?
The new tax regime (Section 115BAC) offers lower slab rates (5% to 30% across seven brackets) but disallows most deductions and exemptions, including Sections 80C, 80D, HRA, and LTA. The old regime retains higher slab rates (5%, 20%, 30%) but allows these deductions, potentially reducing taxable income significantly. Taxpayers must evaluate which regime results in a lower tax liability based on their specific deduction profile.
Is agricultural income taxable under the Income Tax Act?
Agricultural income is exempt from income tax under Section 10(1) of the Income Tax Act, 1961. This exemption derives from Entry 46 of the State List, which reserves the taxation of agricultural income to state governments. However, agricultural income exceeding Rs 5,000 is considered for rate purposes — it is added to total income to compute the effective tax rate, and tax is then calculated only on non-agricultural income at this higher rate (the "partial integration" method).
What happens if income tax returns are not filed on time?
Failure to file an income tax return by the due date under Section 139(1) triggers a late filing fee of Rs 5,000 under Section 234F (reduced to Rs 1,000 if total income does not exceed Rs 5 lakh). Additionally, the taxpayer loses the ability to carry forward certain losses (capital losses, business losses under Section 72-74), forfeits certain deductions, and may attract interest under Section 234A at 1% per month on the outstanding tax liability. Persistent non-filing may attract prosecution under Section 276CC.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.