In this guide
Income tax can look complicated because earning money, calculating taxable income, paying tax and filing an ITR are four different stages. The transcript covers this complete journey—from heads of income and deductions to marginal relief, TDS, TCS, advance tax and return filing.
For 2026, taxpayers must also understand an important transition: AY 2026-27, relating to FY 2025-26, continues under the Income-tax Act, 1961, while income earned from 1 April 2026 falls under the Income-tax Act, 2025 as Tax Year 2026-27.
The Five Heads of Income
Taxable income is broadly classified under five heads:
- Salary
- Income from House Property
- Profits and Gains from Business or Profession
- Capital Gains
- Income from Other Sources
Salary, rental income, business profits, investment gains, interest and similar receipts must therefore first be classified correctly before tax is calculated.
Not every amount received in a bank account is taxable income. For example, genuine gifts from specified relatives may be exempt, while agricultural income is generally exempt from Central income tax, although it can affect the tax rate in specified cases.
New Tax Regime Slabs for AY 2026-27
The new tax regime is the default regime. For AY 2026-27, the applicable slabs are:
| Taxable Income | Tax Rate |
|---|---|
| Up to ₹4 lakh | Nil |
| ₹4 lakh–₹8 lakh | 5% |
| ₹8 lakh–₹12 lakh | 10% |
| ₹12 lakh–₹16 lakh | 15% |
| ₹16 lakh–₹20 lakh | 20% |
| ₹20 lakh–₹24 lakh | 25% |
| Above ₹24 lakh | 30% |
A salaried taxpayer under the new regime can claim the ₹75,000 standard deduction. A resident individual with total income up to ₹12 lakh can receive Section 87A rebate of up to ₹60,000. Consequently, a salaried individual having only normal slab-rate income can potentially have nil income tax at gross salary of ₹12.75 lakh.
For individual tax planning:
Old Regime vs New Regime
The old regime continues as an option for eligible taxpayers.
The old regime has higher slab rates but permits many traditional exemptions and deductions, subject to conditions. The new regime offers lower slab rates while restricting many deductions such as Sections 80C and 80D.
Therefore, selecting a regime solely by looking at slab rates can produce the wrong result.
Taxpayers without business or professional income generally have greater flexibility to choose the suitable regime each year. Business/professional taxpayers are subject to additional opting-out and switching rules.
Special-Rate Income Can Change the Tax Calculation
A common mistake is assuming that every ₹12 lakh income results in zero tax under the new regime.
It does not.
Certain incomes are taxed separately at special rates. For example:
- Qualifying long-term listed equity gains under Section 112A are generally taxed at 12.5% above the ₹1.25 lakh threshold;
- Qualifying Section 111A short-term equity gains are taxed at 20%;
- Income from transfer of Virtual Digital Assets such as cryptocurrency is taxed at 30%; and
- Lottery, gambling and specified game winnings are generally taxable at 30%.
From AY 2026-27, Section 87A rebate cannot be used to eliminate tax payable on specified special-rate income such as Section 112A long-term capital gains.
That is why two people having the same total income can still have very different tax liabilities.
What Is Marginal Relief?
Marginal relief prevents an unusually steep tax increase immediately after crossing certain thresholds.
For the new-regime Section 87A rebate, where total income exceeds ₹12 lakh slightly and the calculated income tax exceeds the amount by which income exceeds ₹12 lakh, marginal relief restricts that tax burden according to the statutory formula. The Income-tax Act, 2025 continues the same concept for Tax Year 2026-27.
Marginal relief also operates separately in relation to surcharge thresholds.
TDS, TCS and Advance Tax
Income tax is not necessarily paid only when the ITR is filed.
TDS allows tax to be deducted when specified income is paid or credited—for example salary, interest or professional payments.
TCS is collected on specified transactions and is also credited against the taxpayer’s PAN.
Both TDS and TCS are generally tax credits, not necessarily the taxpayer’s final tax liability.
Where estimated tax payable after available credits is ₹10,000 or more, advance-tax provisions may apply. Normal instalments fall in June, September, December and March. For Tax Year 2026-27, these advance-tax payments are governed by the Income-tax Act, 2025.
For TDS/TCS compliance:
Check AIS and Form 26AS Before Filing ITR
Before filing, taxpayers should reconcile their records with:
- Form 26AS;
- Annual Information Statement (AIS);
- TDS/TCS details;
- Advance and self-assessment tax;
- Bank interest;
- Securities transactions; and
- Other reported financial information.
AIS contains a broader information set, including TDS/TCS, SFT information, taxes, refunds/demands and other reported data.
For professional ITR preparation:
Residential Status Is Not Simply a 182-Day Rule
The statement “less than 182 days in India means NRI” is an oversimplification.
The general tests include 182 days in the relevant year or 60 days in that year plus 365 days during the preceding four years, with special modifications for certain Indian citizens and Persons of Indian Origin.
Residential status should therefore be calculated before deciding whether foreign income is taxable in India.
Who Must File an ITR?
Zero tax does not automatically mean that no return is required.
Return filing is generally mandatory when income exceeds the applicable basic exemption threshold before specified deductions, and filing can also become compulsory under additional high-value transaction conditions even where income is below that threshold.
For AY 2026-27, taxpayers may use ITR-1, ITR-2, ITR-3 or ITR-4 depending on the nature of income and eligibility conditions.
Frequently Asked Questions
Is income up to ₹12 lakh completely tax-free in 2026?
For a resident individual under the new regime, Section 87A can reduce normal slab-rate tax to nil where total income does not exceed ₹12 lakh. Special-rate income requires separate examination.
Can salary of ₹12.75 lakh have zero tax?
Yes, where the ₹75,000 standard deduction reduces eligible salary income to ₹12 lakh and the conditions for Section 87A rebate are satisfied.
Is crypto income covered by normal tax slabs?
No. Income from transfer of Virtual Digital Assets is generally taxed at 30%, plus applicable surcharge and cess.
Is staying outside India for 183 days enough to become NRI?
Not always. Residential status depends on multiple statutory tests and special rules.
Do I need to file ITR even when my final tax is zero?
Possibly yes. Filing obligation and tax liability are separate questions, and specified transaction-based filing requirements can also apply.
