Income Tax is a direct tax imposed by the government on the taxable income earned by individuals and other taxpayers during a financial year, according to the applicable tax laws.
Unlike GST, which is generally collected on the supply of goods and services, Income Tax is based on income.
In India, income-tax rules, rates, exemptions, deductions, and tax regimes can change through legislation and annual budgets, so the applicable rules should always be checked for the relevant financial year.
A direct tax is paid directly by the taxpayer to the government.
Example: Income Tax
An indirect tax is generally collected by one person or business from another and then paid to the government.
Example: GST
Income Tax → Tax on taxable income
GST → Tax on eligible supply of goods and services
A Financial Year (FY) is the period in which income is earned and financial transactions are recorded for tax purposes.
In India, a financial year generally runs from:
1 April to 31 March
For example:
FY 2025–26 = 1 April 2025 to 31 March 2026
Income earned during a financial year is generally considered for determining the tax liability for the corresponding assessment year under the applicable tax system.
The Assessment Year (AY) is the year immediately following the relevant financial year in which the income of the previous financial year is assessed for income-tax purposes.
For example:
Financial Year: 2025–26
Assessment Year: 2026–27
Therefore:
FY → Income is earned
AY → Income is assessed/reported
Income tax may apply to different categories of taxpayers depending on their taxable income and applicable provisions.
These can include:
The applicable tax treatment depends on the type and status of the taxpayer.
Under the Income-tax Act, taxable income is generally classified under five heads of income:
These heads help in properly classifying and calculating taxable income.
Income from Salaries generally includes income received by an employee from an employer in an employer-employee relationship.
It may include:
The taxable amount depends on the applicable provisions, exemptions, and deductions.
Income from House Property generally relates to income arising from ownership of a house property.
For example, if a person owns a residential property and earns rental income from it, the income may be taxable under the head Income from House Property, subject to applicable rules.
Certain deductions may be available while calculating taxable income from house property.
Income earned from carrying on a business or profession is generally taxable under this head.
Examples include income earned by:
Business expenses that are allowable under tax law may be deducted while calculating taxable business or professional income.
Capital Gains arise when a capital asset is transferred and the transaction results in a taxable gain.
Examples of capital assets may include:
The tax treatment depends on the type of asset, holding period, date of transfer, and applicable tax provisions.
Income from Other Sources is a residual category for income that is taxable but does not fall under the other four heads.
Examples may include certain:
The exact tax treatment depends on the nature of the income and applicable provisions.
Gross Total Income (GTI) is generally the aggregate of income computed under the different heads of income, after applying the applicable provisions for set-off of losses, but before deductions under Chapter VI-A, where applicable.
In simplified form:
Income under Different Heads → Set-off as Applicable → Gross Total Income
Total Income is the amount on which income tax is generally calculated after applying eligible deductions and other applicable provisions to the Gross Total Income.
A simplified formula is:
Total Income = Gross Total Income − Eligible Deductions
The actual computation can involve several additional rules, exemptions, special rates, and adjustments.
Tax deductions are amounts allowed to be deducted from eligible income while calculating taxable income, subject to the conditions and limits prescribed by law.
Certain deductions may be available for eligible payments or investments under specified provisions.
However, the availability of deductions depends on the applicable tax regime and financial year.
Taxable Income is the income amount considered for calculating income tax after applying the relevant exemptions, deductions, adjustments, and other provisions of tax law.
Gross Total Income = ₹8,00,000
Eligible deductions = ₹1,00,000
Taxable Income:
₹8,00,000 − ₹1,00,000 = ₹7,00,000
The actual tax payable would then be calculated according to the applicable tax regime and tax rates.
TDS (Tax Deducted at Source) is a mechanism under which tax is deducted by the person making certain specified payments and deposited with the government on behalf of the recipient.
For example, an employer may deduct applicable TDS from an employee’s salary.
The recipient receives the payment after deduction, while the deducted tax is deposited with the government.
Advance Tax refers to income tax paid during the financial year in installments instead of paying the entire tax liability at the end of the year.
It generally applies when the taxpayer’s estimated tax liability meets the conditions prescribed under income-tax law.
Advance tax helps distribute the tax payment throughout the year.
Self-Assessment Tax is the tax paid by a taxpayer after calculating the final tax liability for the year and considering taxes already paid, such as TDS and advance tax.
Total Tax Liability = ₹50,000
Less: TDS = ₹30,000
Balance Tax = ₹20,000
If applicable, the taxpayer may need to pay the remaining amount as self-assessment tax before filing the return.
An Income Tax Return (ITR) is a form through which a taxpayer reports relevant income, deductions, taxes paid, and other required information to the Income Tax Department.
The appropriate ITR form depends on factors such as:
PAN (Permanent Account Number) is a unique identification number issued by the Income Tax Department.
PAN is widely used for:
PAN helps the tax authorities identify and track taxpayers and specified financial transactions.
A tax rebate is a reduction in the tax payable that may be available to eligible taxpayers under specific provisions of income-tax law.
A rebate is different from a deduction.
Reduces taxable income.
Reduces tax payable.
The availability and amount of any rebate depend on the applicable law and tax regime.
Not every receipt is necessarily taxable.
Some income may be:
Therefore, an accounting professional should not assume that every amount received by a person is automatically taxable income.
The specific nature of the receipt must be examined under the applicable tax provisions.
Suppose a taxpayer has:
Salary Income = ₹6,00,000
Interest Income = ₹50,000
Total income before applicable deductions and adjustments:
₹6,00,000 + ₹50,000 = ₹6,50,000
If eligible deductions of ₹50,000 apply:
Taxable Income = ₹6,50,000 − ₹50,000
= ₹6,00,000
The final tax liability would then be calculated according to the applicable tax regime, slab rates, rebates, cess, and other provisions for that financial year.
Income tax is an important part of accounting because businesses and individuals need to maintain accurate records of their income, expenses, investments, deductions, TDS, and tax payments.
Proper accounting helps in:
Remember:
Income & Transactions → Classification Under Five Heads → Adjustments → Gross Total Income → Eligible Deductions → Total Income → Tax Calculation → TDS/Advance Tax/Tax Paid → ITR Filing
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