How income tax works under the 2025 Act

Farhan is paid ₹15,00,000 in Tax Year 2026-27 and owes ₹98,750 of income tax on it. Every step between those two numbers is set by the Income-tax Act, 2025, the law that took over from the Income-tax Act, 1961 with that tax year, and many of the steps have new section numbers.

Below you will see which law and which year apply to which income, sort a year’s receipts into the five heads of income, build total income and the tax on it with the rounding the Act requires, and map the sections and forms you may know to their new numbers. It is education only. Divya and Farhan are invented, every rule comes from the law and the rules cited at the end, and no product, provider or way of filing is recommended.

One tax year replaces the previous year and the assessment year

The Income-tax Act, 1961 gave every year of income two names. Income earned in the financial year 2025-26 is the income of the previous year 2025-26, and it is assessed, that is, its tax is worked out and settled, in assessment year 2026-27. The 2025 Act uses one name. Its section 3(1) defines the tax yeartax year: The year of income under the Income-tax Act, 2025: the twelve months of the financial year from the first day of April. It replaces the previous year and the assessment year of the 1961 Act. as the twelve months of the financial year that begins on the first day of April, so the income and its tax belong to the same year.

The new Act came into force on the first day of Tax Year 2026-27 (section 1(3)) and repealed the old one (section 536(1)). It still keeps the 1961 Act working for every tax year that began before it: the returns, assessments and notices of those years follow the old Act and its procedure (section 536(2)(c)). So for a while two laws run side by side, each for its own years. Walk through them:

The return for FY 2025-26, filed in 2026, is therefore a 1961 Act return: its forms are the ITR forms of assessment year 2026-27, and they still speak of section 80C and section 87A. The return for Tax Year 2026-27, filed in 2027, is the first under the new Act. The rates did not move with the change of law: the memorandum to the Finance Bill, 2026 says that no change was proposed in the tax rates.

Five heads sort every rupee you earn

Before any tax is worked out, every receipt has to be put in its place. Section 13 lists five heads of incomehead of income: One of the five groups into which section 13 of the Income-tax Act, 2025 sorts all income: salaries, house property, business or profession, capital gains and other sources. Each is worked out by its own rules.: salaries; income from house property; profits and gains of business or profession; capital gains; and income from other sources. Each head has its own rules for what counts and what may be taken off, so the same ₹10,000 can be taxed differently depending on where it belongs. Step through six common receipts:

The heads follow the source of the money, not what you do with it. Pay from an employer is salary even when it is spent on rent; rent from a flat you own is house property income even when it pays a home loan; and a gain on selling mutual fund units is a capital gain even when it is reinvested the same day. Income from other sources is the head of last resort: interest, dividends and anything else that fits none of the first four heads.

Divya, a teacher in Chennai, has three heads in her year: her salary of ₹9,20,000, ₹12,000 a month from a one-room flat she lets out in Coimbatore, and ₹25,444.60 of interest from a deposit and her savings account. Each head is worked out separately, and only then added up, as the next section shows.

Total income: gross total income less deductions, rounded

Once each head is worked out, three steps give the figure the tax is charged on. Added together, the heads make gross total incomegross total income: The income under all five heads added together, each worked out by its own rules, before the deductions of Chapter VIII come off.. From it come the deductions of Chapter VIII, such as the ₹1,50,000 for provident fund and similar payments in the old regime; they can never exceed gross total income (section 122(2)). What is left is total incometotal income: Gross total income less the Chapter VIII deductions the regime allows, rounded to the nearest ₹10. It is the figure the slab rates apply to., and section 516 rounds it: ignore the paise, then round to the nearest multiple of ₹10, with a last digit of 5 or more rounding up.

The program works through Divya’s year in the new regime, the default, and then Farhan’s:

"""From income to tax for two invented people in Tax Year 2026-27, new (default) regime.

Rules (Income-tax Act, 2025, with the rates of the Finance Act, 2026): the five heads of section 13; the standard
deduction of Rs 75,000 from salary (section 19(1), Table Sl. No. 2); a let-out house's annual value, the higher of the
rent it could fetch and its actual rent (here the actual rent), less the municipal tax the owner paid in the year
(section 21), less 30 % of it (section 22(1)(a)); no Chapter VIII deduction in this regime other than an employer's
NPS contribution (section 202(2)); total income and tax rounded to the nearest Rs 10 after dropping the paise (section
516); the slabs of section 202(1); the rebate of section 156(2); and the 4 % Health and Education Cess (Finance Act,
2026, section 3). Divya and Farhan are invented.
"""

from decimal import ROUND_HALF_UP, Decimal

D = Decimal
SLABS = [(400000, "0"), (800000, "0.05"), (1200000, "0.10"), (1600000, "0.15"), (2000000, "0.20"), (2400000, "0.25"), (None, "0.30")]


def inr(amount):
    """Rupees with Indian digit grouping and paise when there are any: 1433000 -> "₹14,33,000"."""
    value = D(amount).quantize(D("0.01"), rounding=ROUND_HALF_UP)
    whole, _, paise = str(value).partition(".")
    head, tail = whole[:-3], whole[-3:]
    groups = []
    while len(head) > 2:
        groups.insert(0, head[-2:])
        head = head[:-2]
    if head:
        groups.insert(0, head)
    text = ",".join(groups + [tail]) if groups else tail
    return "₹" + text + ("" if paise == "00" else "." + paise)


def round_516(amount):
    """Section 516: drop the paise, then round to the nearest ₹10 (a last digit of 5 or more rounds up)."""
    rupees = int(amount)
    return D(rupees - rupees % 10 + (10 if rupees % 10 >= 5 else 0))


def slab_tax(income):
    tax, lower = D(0), D(0)
    for upper, rate in SLABS:
        top = income if upper is None else min(income, D(upper))
        if top > lower:
            tax += (top - lower) * D(rate)
        if upper is None or income <= upper:
            break
        lower = D(upper)
    return tax


def show(name, heads):
    print(name)
    for head, amount in heads.items():
        print(f"  {head:<28}{inr(amount):>14}")
    gross_total = sum(heads.values(), D(0))
    total = round_516(gross_total)
    print(f"  {'Gross total income':<28}{inr(gross_total):>14}")
    print(f"  {'Total income, rounded':<28}{inr(total):>14}")
    tax = slab_tax(total)
    print(f"  {'Tax at the slab rates':<28}{inr(tax):>14}")
    if total <= 1200000:
        rebate = min(tax, D(60000))
    else:
        rebate = max(D(0), tax - (total - 1200000))  # marginal relief just above ₹12 lakh
    print(f"  {'Rebate, section 156':<28}{inr(rebate):>14}")
    after = tax - rebate
    cess = after * D("0.04")
    print(f"  {'Cess at 4 %':<28}{inr(cess):>14}")
    print(f"  {'Tax for the year, rounded':<28}{inr(round_516(after + cess)):>14}")
    print()


rent, municipal_tax = D(12000) * 12, D(2000)
annual_value = rent - municipal_tax
show("Divya", {
    "Salaries, less ₹75,000": D(920000) - 75000,
    "House property, less 30 %": annual_value - annual_value * D("0.30"),
    "Other sources": D("21504.60") + D(3940),
})
show("Farhan", {
    "Salaries, less ₹75,000": D(1500000) - 75000,
    "Other sources": D(8000),
})

Divya
  Salaries, less ₹75,000           ₹8,45,000
  House property, less 30 %          ₹99,400
  Other sources                   ₹25,444.60
  Gross total income            ₹9,69,844.60
  Total income, rounded            ₹9,69,840
  Tax at the slab rates              ₹36,984
  Rebate, section 156                ₹36,984
  Cess at 4 %                             ₹0
  Tax for the year, rounded               ₹0

Farhan
  Salaries, less ₹75,000          ₹14,25,000
  Other sources                       ₹8,000
  Gross total income              ₹14,33,000
  Total income, rounded           ₹14,33,000
  Tax at the slab rates              ₹94,950
  Rebate, section 156                     ₹0
  Cess at 4 %                         ₹3,798
  Tax for the year, rounded          ₹98,750

Read Divya’s lines from the top. Her salary loses the standard deductionstandard deduction: A flat amount taken off salary income with no proof needed: ₹75,000 in the new regime and ₹50,000 in the old one, or the salary if it is less (section 19 of the Income-tax Act, 2025). of ₹75,000 (section 19(1)). Her flat’s annual value is the higher of the rent it could fetch and the rent she gets, here her ₹1,44,000 of rent, less the ₹2,000 of municipal tax she paid (section 21), and a flat 30 % of that comes off (section 22(1)(a)), leaving ₹99,400. Her interest counts in full. Gross total income is ₹9,69,844.60, and because the new regime allows her no Chapter VIII deduction, that is also her total income before rounding. Section 516 drops the 60 paise, leaving ₹9,69,844, and a last digit of 4 rounds down: ₹9,69,840.

Tax follows from total income: slabs, rebate, cess

Total income goes through four more steps on its way to the tax for the year. The slabs come first: in the new regime, section 202(1) charges nothing on the first ₹4,00,000, then 5 %, 10 %, 15 %, 20 % and 25 % on each band of ₹4,00,000 above it, and 30 % above ₹24,00,000. Then the rebaterebate (section 156): An amount taken off the tax itself for a resident individual with a low total income: up to ₹60,000 at ₹12 lakh or less in the new regime, and up to ₹12,500 at ₹5 lakh or less in the old one. of section 156 takes off up to ₹60,000 when total income is ₹12,00,000 or less, with a smaller relief just above that line. Then the 4 % Health and Education Cess of the Finance Act, 2026 is added. Last, section 516 rounds the tax payable to the nearest ₹10, the same way as income.

Divya’s slab tax is ₹36,984, and because her total income is under ₹12 lakh the rebate takes all of it: she owes nothing. Farhan’s year shows every step with a number in it. Follow it stage by stage:

The last stage matters as much as the others. The ₹98,750 is the tax for the year, not what Farhan still has to pay: the TDS his employer deducted from his salary counts against it, and so would any advance tax. If his employer deducted ₹92,500, he pays the ₹6,250 that is left before he files his return; if it deducted more than ₹98,750, the return claims the excess back as a refund.

Familiar sections have new numbers

The ideas mostly carried over from the 1961 Act, but their addresses did not. Articles, payslips and the forms for FY 2025-26 use the old numbers; everything for Tax Year 2026-27 uses the new ones. The table lists those this track uses most:

The forms changed too, under the Income-tax Rules, 2026. An employer’s TDS certificate for salary is now Form 130Form 130: The certificate an employer gives after the tax year for the income tax it deducted from salary under the Income-tax Act, 2025, with the salary, the deductions allowed and the tax worked out. More in “Reading your payslip line by line” (rule 215), where it was Form 16; you give payroll details of other income on Form 122 (rule 204) and the evidence of your claims on Form 124 (rule 205); a bank accepts Form 121 instead of deducting TDS when your year’s tax will be nil (rule 211); and the Annual Information Statement is Form 168 (rule 245).

Practise: from income to tax

Fifteen questions on the tax year, the heads, total income, the steps to the tax and the new numbers. Each session opens on the idea your earlier answers show to be the weakest:

Interview questions

Warm-up (fresher): What is a tax year under the Income-tax Act, 2025, and how is it different from an assessment year?

A tax year is the twelve months of the financial year that begins on the first day of April (section 3(1)). The Income-tax Act, 1961 used two names for one year of income: the previous year in which it was earned, and the assessment year after it in which its tax was assessed, so FY 2025-26 income belonged to assessment year 2026-27. The 2025 Act uses one: income of Tax Year 2026-27 is taxed as income of Tax Year 2026-27. The new Act applies from that tax year, while every earlier year, including the return for FY 2025-26 filed in 2026, stays under the 1961 Act (section 536(2)(c)).

Warm-up (fresher): How is total income different from gross total income?

Gross total income is the income under the five heads added together, each worked out by its own rules, such as the standard deduction from salary or 30 % off a let-out flat’s annual value. Total income is gross total income less the deductions of Chapter VIII, such as section 123’s ₹1,50,000 in the old regime, which can never exceed gross total income; section 516 then rounds it to the nearest ₹10. The slabs apply to total income. In the new regime most of those deductions are not allowed, so for many salaried people the two figures differ only by the rounding: Divya’s ₹9,69,844.60 becomes ₹9,69,840.

Key takeaways

• A tax year is the financial year from the first day of April; Tax Year 2026-27 is the first under the Income-tax Act, 2025, while FY 2025-26 and its return stay under the 1961 Act.
• Every receipt belongs to one of five heads, salaries, house property, business or profession, capital gains and other sources, and each head is worked out by its own rules.
• The heads add up to gross total income; Chapter VIII deductions bring it down to total income, which is rounded to the nearest ₹10.
• Tax comes from total income through the slabs, the rebate of section 156 and the 4 % cess, is rounded to the nearest ₹10, and TDS and advance tax already paid count against it.
• Familiar sections and forms have new numbers: 80C is section 123, 87A is section 156, 115BAC is section 202, and Form 16 is Form 130.