What Is Income Tax?
Income tax is a tax the government levies on the income you earn in a financial year — from salary, business, investments and other sources. In India it is charged at progressive slab rates, reduced by deductions and exemptions, and collected through TDS, advance tax and self-assessment when you file a return.
Why income tax matters
Income tax is likely one of your largest annual expenses, so understanding it directly affects your take-home pay. Knowing how slabs, the two regimes, and deductions like Section 80C work can legally save you a significant amount.
It also shapes your investing and planning: choosing the right regime and tax-saving instruments turns tax planning into a part of building wealth, not just a compliance chore.
How income tax works
Your total income for the year is computed across sources, reduced by eligible deductions and exemptions (under the old regime), and taxed at the applicable slab rates, plus cess. Tax is collected as you earn — through TDS on salary and interest, and advance tax for other income — and reconciled when you file your annual return, paying any balance or claiming a refund. You choose between the old regime (higher rates, many deductions) and the new regime (lower rates, few deductions), whichever leaves you paying less.
A real Indian example of income tax
Under the old regime, Kavya earns ₹12,00,000. She claims the standard deduction, ₹1.5 lakh under Section 80C, ₹25,000 under Section 80D, and HRA — bringing her taxable income well below ₹12 lakh. The remaining amount is taxed slab by slab. She compares this with the new regime’s lower rates and larger rebate, then picks whichever yields the smaller tax. TDS from her salary covers most of it through the year.
Benefits
Common mistakes
Best practices
Frequently asked questions about income tax
How does income tax work in India?
Your yearly income is taxed at progressive slab rates after eligible deductions. It is collected through TDS and advance tax as you earn, and reconciled when you file your annual return — paying any balance or claiming a refund.
What are the two tax regimes?
The old regime has higher rates but many deductions (80C, 80D, HRA); the new regime has lower rates but almost none. You choose whichever results in lower tax. See old vs new tax regime.
How can I reduce my income tax?
Under the old regime, use deductions like Section 80C (PPF, ELSS, EPF, insurance), Section 80D, HRA and home-loan benefits. Under the new regime, the lower rates and rebate do the work instead. Compare both to minimise tax.
Who has to pay income tax in India?
Anyone whose taxable income exceeds the exemption limit for their regime and age must pay and usually file a return. Even below that, filing can be worthwhile to claim refunds of TDS already deducted.
Related terms
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How BudgetAnalyzer uses this
BudgetAnalyzer helps you keep sight of tax-relevant spending and investments — insurance premiums, 80C investments, rent — through the year, so planning and choosing a regime is based on your real numbers.
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