Chapter 1 of 8
How Income Tax Works in India
Tax slabs, income types, and deductions foundation.
Suvash opened his first payslip on the 1st of the month, hands shaking slightly with excitement. ₹75,000 CTC. He'd told his mother the number three times. She'd lit an agarbatti.
Then he looked at the actual credit. ₹61,400.
"Where did ₹13,600 go?"
He called his college senior, who laughed. "Bhai, that's TDS. Tax Deducted at Source. Welcome to salaried life."
Suvash stared at his phone for a long time. Nobody had ever explained this, not his engineering college, not the HR lady who spoke very fast during onboarding, not even his father who worked on a farm and had never paid income tax in his life.
This article is for every Suvash. Let's fix this knowledge gap, one concept at a time.
What Is Income Tax, Actually?
A tax charged by the Government of India on the income you earn in a financial year. The more you earn, the higher the percentage you pay, this is called a progressive tax system.
Think of it like this: the government builds roads, schools, hospitals, and the ISRO rockets we all feel proud about. That money has to come from somewhere. A chunk of it comes from people like Suvash, who earn a salary.
The tricky part isn't that you pay tax, it's how much, when, and whether you're overpaying.
Financial Year vs Assessment Year: Don't Mix These Up
This trips up almost everyone.
- Financial Year (FY): The year in which you earn the income. Runs from April 1 to March 31. FY 2025-26 = April 2025 to March 2026.
- Assessment Year (AY): The year in which you file tax for that income. Always one year after the FY. Income earned in FY 2025-26 is assessed in AY 2026-27.
FY is when you earn. AY is when you answer for it. Think of FY as the crime year and AY as the court year. (Okay, "crime" is a stretch, but you get it.)
When Suvash files his ITR in July 2026, he's filing for AY 2026-27, which covers income earned from April 2025 to March 2026.
The 5 Heads of Income
The Income Tax Act doesn't just look at your salary. It looks at all your income under 5 heads:
- Salaries: Your CTC, bonuses, allowances. Suvash's main source.
- House Property: Rental income, or notional income if you own multiple properties.
- Business or Profession: Income from freelancing, running a business, professional practice. Mathi's territory.
- Capital Gains: Profit from selling shares, mutual funds, property.
- Other Sources: FD interest, savings account interest, gifts above ₹50,000, YouTube income (yes, Ganesh: this means you).
Most salaried people deal with Salaries + maybe Capital Gains. But knowing all five helps you understand why your CA sometimes asks weird questions.
What Is TDS and Why Is Suvash's Salary Short?
A mechanism where the payer (your employer) deducts tax from your income before paying you, and deposits it directly with the government on your behalf.
Your employer knows your approximate annual salary. Based on which tax regime you've chosen and what deductions you've declared, they calculate estimated tax for the year, divide by 12, and deduct that amount every month.
So Suvash's monthly TDS isn't a fine or a punishment. It's his estimated tax being collected in advance by his employer. The government gets the money early; Suvash files his ITR later to confirm the final number.
Gross salary: ₹75,000/month = ₹9,00,000/year
Under the new tax regime (FY 2025-26):
- Standard deduction: ₹75,000
- Taxable income: ₹8,25,000
Tax calculation on ₹8,25,000:
- ₹0 to ₹3L → Nil
- ₹3L to ₹7L → 5% = ₹20,000
- ₹7L to ₹8.25L → 10% = ₹12,500
- Total tax: ₹32,500
- Add 4% health & education cess: ₹1,300
- Annual tax: ₹33,800
- Monthly TDS: ₹33,800 ÷ 12 ≈ ₹2,817/month
Why did Suvash say ₹13,600 was missing? Because if he submitted no investment declaration to HR, they calculate TDS without any deductions. If HR assumes old regime with no declarations, the number shoots up. Always submit your investment declaration form to HR in April!
How Slab Rates Work
India uses a progressive tax system, you don't pay the same rate on your entire income. Each chunk of income gets taxed at its own rate.
| Income Slab | New Regime (FY 2025-26) | Old Regime |
|---|---|---|
| Up to ₹2.5L | Nil | Nil |
| ₹2.5L – ₹3L | Nil | 5% |
| ₹3L – ₹5L | 5% | 5% |
| ₹5L – ₹7L | 5% | 20% |
| ₹7L – ₹10L | 10% | 20% |
| ₹10L – ₹12L | 15% | 30% |
| ₹12L – ₹15L | 20% | 30% |
| Above ₹15L | 30% | 30% |
If your total income is ₹12L or below, you pay zero tax under the new regime, thanks to the Section 87A rebate. This rebate wipes out your entire tax liability up to ₹12L. Cross ₹12L by even ₹1 and the rebate disappears entirely. Then you pay full tax from the first slab.
ITR Filing: The Annual Reckoning
Every year, you have to file an Income Tax Return (ITR) by July 31. This is your report to the government: "Here's everything I earned, here's how much tax I owe, here's what was already deducted."
Three outcomes are possible:
- Refund: You paid more TDS than required. Government sends money back. (Most salaried people with old regime deductions experience this.)
- Zero balance: TDS exactly matched your tax. Nothing to pay or receive.
- Tax due: You earned extra income (FD interest, rental, stocks) that wasn't captured in TDS. You pay the difference.
Even if you owe zero tax, file your ITR. It's required for visa applications, loan approvals, and as proof of income. Miss July 31 and you can still file a belated return by December 31, but with a ₹5,000 penalty.
Form 16 and AIS: Your Tax Evidence
Suvash's employer will give him a Form 16 every year around May-June. It shows:
- His gross salary breakdown
- All deductions allowed
- Tax already deducted (TDS)
He should also download his AIS (Annual Information Statement) from the income tax portal. It shows all income sources the government already knows about, banks report FD interest, brokers report stock sales. The government knows more than you think. Cross-check AIS with your own records before filing.
Common Mistakes That Cost Real Money
- Not submitting investment declaration to HR: Results in excess TDS all year. You get a refund eventually, but it's your money locked with the government, interest-free.
- Confusing FY and AY: Filing for the wrong year is a genuine mistake people make.
- Ignoring FD interest: FD interest is taxable as "Other Sources." Your bank deducts 10% TDS, but if you're in the 20% or 30% slab, you owe the remaining amount yourself.
- Not filing ITR at all: Even if tax is zero, non-filing creates complications for loans, visas, and future filings.
The April Decision That Changes Everything
Every April, when the new financial year starts, Suvash needs to do three things:
- Tell HR which tax regime he wants for the new year
- Submit investment declarations (rent receipts, insurance premiums, 80C proofs)
- Plan any additional tax-saving investments before year-end
Get this right in April and he avoids the March panic. Get it wrong and HR deducts maximum TDS all year, and he only gets the refund 12+ months later.
Key Takeaways
- Income tax is progressive: you pay higher rates only on income above each slab threshold, not on the entire amount
- FY is when you earn; AY is when you file the return for that income (always one year later)
- TDS is your employer pre-paying your estimated tax every month: it's an advance payment, not a fine
- File ITR by July 31 every year: even if tax owed is zero
- India has 5 heads of income: Salary, House Property, Business/Profession, Capital Gains, Other Sources
- Always submit your investment declaration to HR in April to avoid excess TDS all year
Ready to figure out which tax regime actually saves Suvash more money? Read the Old vs New Regime guide or run your own numbers on the Income Tax Calculator.
Suvash earned income in FY 2025-26. In which Assessment Year will he file his Income Tax Return?