Income Tax Guide India (FY 2026-27 / AY 2027-28)

1. The tax system in India

India levies income tax under the Income-tax Act, 1961. It is a Union levy — administered by the Central Board of Direct Taxes (CBDT), with assessment carried out by the Income Tax Department. The financial year (FY) runs April to March; the corresponding assessment year (AY) is the next FY when income is assessed and returns are filed.

We are currently in FY 2026-27. Returns filed during this year are for income earned in FY 2025-26 (AY 2026-27). The slabs and rules discussed in this guide apply to FY 2026-27 income (returns due 31 July 2027 for non-audit cases).

Who pays

Five categories of taxpayer:

• Individuals (resident and non-resident)
• Hindu Undivided Family (HUF)
• Firms (including LLPs)
• Companies (domestic and foreign)
• AOPs, BOIs, trusts, co-operatives, local authorities

2. New regime vs old regime — which should I pick?

Two parallel slab structures coexist. The new regime (Section 115BAC) is now the default for individuals and HUFs. The old regime remains available by explicit opt-in.

What you give up in the new regime

• Section 80C investments (PPF, ELSS, life insurance, home loan principal)
• Section 80D health insurance
• HRA exemption (Section 10(13A))
• LTA exemption
• Home loan interest on self-occupied property (Section 24(b))
• Most Chapter VI-A deductions

What survives in the new regime

• ₹75,000 standard deduction (salaried) — the old regime allows ₹50,000
• Section 87A rebate up to ₹60,000 (taxpayers with income up to ₹12 lakh)
• Employer NPS contribution (80CCD(2))
• Family pension deduction (1/3rd of pension or ₹25,000, whichever lower)
• Home loan interest on let-out property
• Agniveer Corpus Fund contribution (80CCH)
• Surcharge capped at 25% (vs 37% in old regime)

How to choose

Rule of thumb: if your old-regime deductions exceed roughly ₹3.75–4 lakh (80C + 80D + home loan interest + HRA + employer NPS combined), old regime usually wins. Below that, new regime is better. Run both computations on your actual numbers — most tax calculators show side-by-side.

Salaried taxpayers can switch each year via the ITR. Business / professional income taxpayers must opt out via Form 10-IEA before the ITR due date — and can switch back to old regime only once in a lifetime.

3. Slabs for FY 2026-27 — what are the income tax rates?

New regime (default)

With Section 87A rebate up to ₹60,000 and the ₹75,000 standard deduction for salaried, a salary income of ₹12.75 lakh attracts nil effective tax under the new regime.

Just above ₹12 lakh, marginal relief under Section 87A caps the tax so that the extra tax never exceeds the income earned over ₹12 lakh — so a small overshoot does not push the whole income into tax. The relief tapers off by roughly ₹12.7 lakh of total income.

Old regime

Section 87A rebate up to ₹12,500 makes income up to ₹5 lakh effectively tax-free under the old regime.

Surcharge and cess

• Income above ₹50 lakh: 10% surcharge on tax
• Above ₹1 crore: 15%
• Above ₹2 crore: 25%
• Above ₹5 crore: 37% (capped at 25% under new regime)
• Health and Education Cess: 4% on tax + surcharge

Companies and firms

• Domestic company (turnover ≤ ₹400 cr in prior FY): 25%
• Other domestic companies: 30%
• Section 115BAA (no incentives): 22%
• Section 115BAB (new manufacturing): 15%
• Partnership firms and LLPs: 30%

4. The five heads of income

Total income is computed across five heads. Each has its own rules for income recognition and allowable deductions.

1. Income from salary — basic, allowances, perquisites, retirement benefits
2. Income from house property — rent or notional rent on owned property
3. Profits and gains of business or profession (PGBP) — net business income
4. Capital gains — sale of capital assets (property, shares, mutual funds, gold)
5. Income from other sources — interest, dividends, lottery, gifts above ₹50,000

Gross total income is the sum across heads. Chapter VI-A deductions are then applied (old regime) to arrive at total taxable income.

5. Capital gains — how are they taxed (post-Budget 2024 rules)?

Budget 2024 rationalised capital gains. Two holding-period thresholds and two rate buckets now apply.

Holding period to qualify as long-term

• Listed equity shares / equity mutual funds: 12 months
• Unlisted shares: 24 months
• Immovable property: 24 months
• Debt mutual funds (acquired post 1 April 2023): always short-term

Capital gains tax rates (post 23 July 2024)

Surcharge cap on equity gains. Surcharge on tax on STCG under Section 111A and LTCG under Section 112A is capped at 15% even where total income would otherwise attract 25% or 37%. The cap applies under both the new and the old regime. (Under the new regime the overall surcharge ceiling is 25% in any case.)

Exemption sections

• Section 54 — LTCG on residential house, reinvest in another residential house
• Section 54F — LTCG on any asset other than house, reinvest in residential house
• Section 54EC — LTCG on land/building, invest in NHAI/REC bonds up to ₹50 lakh
• Section 54B — Agricultural land, reinvest in agricultural land

6. House property income

Income from owned property is computed under a notional rent (Annual Value) framework.

Annual value

• Self-occupied: Nil (up to 2 self-occupied houses)
• Let-out: Actual rent or fair rent, whichever is higher
• Deemed let-out: If you own 3+ houses, additional houses are deemed let-out and notional rent is taxed

Deductions from house property income

• Standard deduction: 30% of net annual value (after municipal tax)
• Interest on borrowed capital (Section 24(b)): Self-occupied — up to ₹2 lakh (old regime only). Let-out — full interest (loss capped at ₹2 lakh against other heads in the year; balance carried forward 8 years).

Pre-construction interest (paid before the FY in which construction completed) is deductible in 5 equal annual instalments starting the year of completion.

7. Salary income

Salary covers basic pay, allowances, perquisites, retirement benefits, and employer contributions to PF/NPS/superannuation.

Allowances commonly received

• HRA — exempt to the extent of least of: actual HRA, 50% of basic (40% in non-metro), rent paid minus 10% of basic. Old regime only.
• LTA — actual travel cost (economy airfare / first AC rail), two journeys in a block of four years. Old regime only.
• Children education allowance — ₹100 per child per month (max 2 children). Old regime only.
• Transport allowance — only for differently-abled employees, ₹3,200/month.

Perquisites

Rent-free accommodation, company car, ESOPs, employee loans below market rate, club memberships, gifts above ₹5,000 — all valued under Rule 3 and taxed as salary. ESOPs are taxed twice: at exercise (salary) and at sale (capital gains).

Form 16

Employer issues Form 16 by 15 June following the FY. It is your TDS certificate and salary summary — Part A (TDS challans, employer details), Part B (salary computation, deductions claimed, tax computed).

8. Business and profession (PGBP)

Business income is net of all expenses incurred wholly and exclusively for the business — subject to specific disallowances under Sections 30 to 43.

Common disallowances

• Section 40(a)(ia): 30% of expense disallowed if TDS not deducted / not deposited
• Section 40A(3): Cash payments above ₹10,000 (₹35,000 for transporters) per day per person — fully disallowed
• Section 40(b): Partner remuneration / interest beyond prescribed limits
• Section 14A: Expenses related to exempt income
• Section 43B: Statutory dues (GST, ESI, PF, bonus) — allowed only on actual payment basis. See our GST guide for the indirect-tax side.

Depreciation (Section 32)

Block of assets concept — assets grouped by class and rate. Common rates: Plant and machinery — 15%; Computers and software — 40%; Furniture — 10%; Buildings (residential) — 5%; Buildings (commercial) — 10%. Additional depreciation of 20% on new plant for manufacturing (Section 32(1)(iia)).

9. Presumptive taxation — who is eligible for 44AD / 44ADA / 44AE?

For eligible small taxpayers, presumptive schemes replace the burden of maintaining detailed books with a deemed profit percentage.

Section 44AD — small business

• Eligible: resident individual / HUF / partnership (not LLP)
• Turnover threshold: ₹2 crore (₹3 crore if cash receipts ≤ 5% of total)
• Deemed profit: 8% of turnover (6% for digital receipts)
• No books required (but recommended); no further deductions allowed
• Lock-in: once opted, must continue for 5 consecutive FYs. Opting out earlier triggers Section 44AD(4) — but books (44AA) and audit (44AB) become mandatory only if total income also exceeds the basic exemption limit in that year

Section 44ADA — specified professionals

• Eligible: resident professional in specified list (CA, lawyer, doctor, architect, engineer, interior designer, technical consultant, film artist, accountant, company secretary)
• Receipt threshold: ₹50 lakh (₹75 lakh if cash receipts ≤ 5%)
• Deemed profit: 50% of gross receipts

Section 44AE — transport operators

• Eligible: persons owning up to 10 goods carriages
• Deemed profit: ₹1,000 per ton of gross vehicle weight per month for heavy vehicles, ₹7,500 per month per vehicle for other

10. Tax audit — when is Section 44AB applicable?

Tax audit is a statutory audit by a Chartered Accountant certifying that the books reflect the income computed. Different from a financial-statement audit under the Companies Act.

Audit thresholds

• Business: Turnover above ₹1 crore (₹10 crore if 95%+ receipts and 95%+ payments via banking channels)
• Profession: Gross receipts above ₹50 lakh
• Opting out of presumptive: If 44AD/44ADA was applicable and you declare lower than the presumed profit while income exceeds basic exemption — audit applies

Forms

• Form 3CA — if accounts are also audited under another law (e.g., Companies Act)
• Form 3CB — if no other audit (the CA gives the opinion)
• Form 3CD — annexure with 44 clauses of detailed disclosures

Due dates

Tax audit report to be filed by 30 September of the AY. ITR by 31 October. Penalty for non-audit (Section 271B): 0.5% of turnover, max ₹1.5 lakh.

11. Advance tax — who pays it and when?

If your estimated tax liability for the year exceeds ₹10,000, you must pay advance tax in four instalments. Senior citizens (60+) without business income are exempt.

44AD / 44ADA assessees pay 100% by 15 March in a single instalment. Shortfall attracts interest under Section 234C at 1% per month.

12. ITR forms — which ITR should I file?

13. Due dates calendar

14. Deductions under Chapter VI-A — how to save tax (old regime)?

The key deductions are available only in the old regime. All are subject to limits and conditions.

15. Set-off and carry-forward of losses

Intra-head set-off

Loss under one source within a head can be set off against income of another source within the same head — with some exceptions (e.g., loss from speculation can only be set off against speculation gain; LTCL only against LTCG).

Inter-head set-off

• House property loss — set off against any head, but capped at ₹2 lakh per year against other heads (old regime)
• Business loss — set off against any head except salary
• Capital loss — cannot be set off against any other head
• Speculation loss — only against speculation gain

Carry-forward periods

• Business loss: 8 years (only against business income)
• Unabsorbed depreciation: indefinite
• Speculation loss: 4 years
• Capital loss (short-term): 8 years (against any capital gain)
• Capital loss (long-term): 8 years (only against LTCG)
• House property loss: 8 years

Critical: ITR must be filed by the original due date to carry losses forward. Late returns forfeit carry-forward (except house property loss and unabsorbed depreciation).

16. MAT and AMT

Minimum Alternate Tax (Section 115JB) — companies

Companies whose tax under normal provisions is lower than 15% of book profit must pay MAT at 15% of book profit (plus surcharge and cess). Book profit is computed under the Companies Act with prescribed adjustments. Companies opting for Section 115BAA / 115BAB (concessional rates) are exempt from MAT.

Alternate Minimum Tax (Section 115JC) — non-corporates

Applies to LLPs, individuals and HUFs claiming Section 10AA (SEZ) or Chapter VI-A deductions (other than 80P). AMT rate: 18.5% of adjusted total income. For LLPs in IFSC: 9%.

MAT / AMT credit

Tax paid in excess of normal tax (under MAT or AMT) is available as credit for set-off against future normal tax liability. Credit can be carried forward for 15 years.

17. Faceless assessment and e-proceedings

Since 2020, income tax assessments are conducted faceless. No physical visit to the assessing officer is required. All communication happens via the e-filing portal under the National Faceless Assessment Centre (NaFAC).

How it works

1. Case is randomly allocated to an assessing unit anywhere in India
2. Notice issued under Section 143(2) or 148 via portal
3. You file response and supporting documents on portal within stipulated time
4. Verification unit raises further queries if needed
5. Draft assessment order issued; you respond with objections
6. Review unit examines; final order issued

Faceless appeals (CIT-A level) operate on the same model. Personal hearing is available via video conferencing on request.

18. Penalties, interest, late fees

Interest provisions

• Section 234A — interest at 1% per month on tax unpaid as on ITR due date (for late filing)
• Section 234B — interest at 1% per month if advance tax paid is less than 90% of assessed tax
• Section 234C — interest at 1% per month for shortfall in each instalment of advance tax

Late fee for ITR (Section 234F)

• ₹5,000 — if ITR filed after due date but before 31 December
• ₹1,000 — if total income does not exceed ₹5 lakh
• Belated return not allowed after 31 December of AY

Common penalties

• Section 270A — under-reporting (50%) / misreporting (200%) of income
• Section 271B — failure to get accounts audited: 0.5% of turnover, max ₹1.5 lakh
• Section 271H — failure to file TDS/TCS return: ₹10,000–₹1 lakh
• Section 271AAB — undisclosed income found in search: 30%–60% (depending on admission/disclosure)
• Section 271FA — failure to furnish SFT (Statement of Financial Transactions): ₹500 per day
• Section 271DA — receiving ₹2 lakh+ in cash: 100% of amount

19. What changed in FY 2026-27

1. New regime slabs revised by Budget 2025 — the new regime now offers nil tax up to ₹12.75 lakh (salary) via expanded 87A rebate to ₹60,000.
2. TDS on partner remuneration (Section 194T) — effective 1 April 2025; firms must deduct 10% TDS on remuneration / commission / interest paid to partners above ₹20,000 per partner per year.
3. Capital gains rationalisation continues — Budget 2024 changes (12.5% LTCG, 20% STCG on equity) remain in force. Listed equity ₹1.25 lakh exemption.
4. Buyback tax shifted to shareholder — company buybacks are now taxed in the hands of the shareholder as deemed dividend (income from other sources) instead of buyback distribution tax in the company.
5. Vivad se Vishwas 2.0 — dispute resolution scheme operated through FY 2024-25; check if pending disputes were eligible.
6. TDS rate cuts — several rates reduced (194H, 194-IB) w.e.f. 1 Oct 2024. See our TDS Guide for the full table.

20. Mistakes that get noticed

• Mismatch between 26AS / AIS and ITR. The AIS now captures securities, dividends, mutual funds, foreign remittance. Discrepancies trigger automated intimations under Section 143(1).
• Missing high-value transactions. Property purchase above ₹30 lakh, cash deposits above ₹10 lakh in savings, ₹50 lakh in current — all auto-flow into AIS.
• Not disclosing foreign assets / income. Resident ROR taxpayers must fill Schedule FA even for ₹1 of foreign holding. Non-disclosure attracts Black Money Act penalties.
• Choosing wrong ITR form. ITR-1 with capital gains is invalid — defective return notice under Section 139(9).
• Wrong regime opted by business taxpayers. Form 10-IEA missed; you lose the option to go back to old regime.
• Claiming HRA without supporting documents. Rent receipts + landlord's PAN (if rent >₹1L/year) are mandatory.
• Capital loss not carried forward. Late return forfeits carry-forward — file by due date even if no tax payable.
• Cash payments above ₹10,000 for business. Section 40A(3) — fully disallowed. Track UPI or bank transfers.

21. Frequently asked questions

22. Income tax glossary

AY

Assessment Year — the year in which income of the previous FY is assessed and ITR filed.

FY / PY

Financial Year / Previous Year — the year in which income is earned (April–March).

ROR / RNOR / NR

Resident & Ordinarily Resident / Resident but Not Ordinarily Resident / Non-Resident — three residency statuses with different tax scope.

AIS

Annual Information Statement — comprehensive statement of financial transactions reported to ITD.

TIS

Taxpayer Information Summary — simplified summary of AIS items.

26AS

Tax Credit Statement — TDS, advance tax, self-assessment tax paid for you.

TDS

Tax Deducted at Source — see /tds-guide for the full picture.

TCS

Tax Collected at Source — collected by sellers / e-commerce operators.

MAT

Minimum Alternate Tax — applies to companies under Section 115JB.

AMT

Alternate Minimum Tax — non-corporate equivalent of MAT under Section 115JC.

PGBP

Profits and Gains of Business or Profession — one of the five heads of income.

LTCG / STCG

Long-Term / Short-Term Capital Gain — based on holding period.

STT

Securities Transaction Tax — levied on transactions in listed equity shares, equity-oriented mutual fund units (including redemptions) and exchange-traded derivatives (futures and options).

Indexation

Adjusting cost of acquisition for inflation (CII) — now applicable in narrower cases post Budget 2024.

87A

Rebate that wipes out tax liability up to a threshold income.

NaFAC

National Faceless Assessment Centre — operates the faceless regime.

ITR-V

Acknowledgment of an ITR after e-verification or signed copy mailing.

SFT

Statement of Financial Transactions — high-value transactions reported by banks, MFs, registrars.

44AB

Section requiring tax audit by a CA.

44AD / 44ADA

Presumptive income for small business / specified professionals.

Form 10-IEA

Election form to opt out of new regime (business / professional income).