Income Tax Act, 1961 (India)
Comprehensive guide on Income Tax Act 1961 (India) for students and professionals. Learn history, provisions, tax slabs, exemptions, TDS, practical examples, amendments, and career applications.
Complete Student Guide & Exam Notes
A) Introduction
What is Income Tax?
Income Tax is a direct tax levied by the government on an individual’s, company’s, or entity’s income. It helps the government generate revenue for public services and infrastructure.
Purpose of Income Tax Act, 1961:
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To consolidate and regulate the direct tax system in India.
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To provide clear rules for taxation, exemptions, deductions, and compliance.
Who enacted it and when:
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Enacted by the Parliament of India in 1961.
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Replaced earlier British-era income tax laws.
Real-life example:
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A salaried employee earning ₹10 lakh annually must calculate taxable income after deductions like 80C and HRA.
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A freelancer invoicing ₹1 lakh from a client must apply TDS provisions.
B) Historical Background
Before 1961:
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India followed colonial tax rules, fragmented across regions.
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Laws were outdated and did not support modern trade and services.
Need for IT Act 1961:
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Uniformity in tax rules across India.
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Clear definitions for income heads, exemptions, and compliance procedures.
Flowchart of Evolution:
| Year | Event |
|---|---|
| Pre-1961 | British-era Income Tax laws, inconsistent rules |
| 1961 | Income Tax Act enacted, consolidated laws |
| 1991 | Liberalization amendments, modernized tax structure |
| 2025 | Latest amendments including new slabs & digital compliance |
C) Key Provisions of Income Tax Act, 1961
1. Heads of Income
The Act classifies income into five heads:
| Head | Explanation | Example |
|---|---|---|
| Salary | Income from employment | Monthly salary, HRA, bonus |
| House Property | Rental income from property | Rent from an apartment |
| Business/Profession | Income from trade or freelance work | IT consultant income |
| Capital Gains | Profit from sale of assets | Sale of property, stocks |
| Other Sources | Lottery, gifts, interest income | Bank interest, FD interest |
2. Residential Status & Taxability
| Status | Taxable Income |
|---|---|
| Resident | Global income taxed in India |
| Non-Resident | Only India-sourced income taxed |
| Not Ordinarily Resident | Limited global income taxed |
3. Tax Slabs & Rates (FY 2025–26)
| Income Range (₹) | Tax Rate (%) |
|---|---|
| 0 – 2,50,000 | Nil |
| 2,50,001 – 5,00,000 | 5% |
| 5,00,001 – 10,00,000 | 20% |
| 10,00,001 & above | 30% |
Includes standard deductions and surcharges.
4. TDS & TCS
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TDS (Tax Deducted at Source): Tax deducted on salary, rent, professional fees.
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TCS (Tax Collected at Source): Tax collected by seller on sale of goods.
Example:
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Freelancer invoices ₹50,000. TDS @10% = ₹5,000 deducted; ₹45,000 received.
5. Exemptions & Deductions
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80C: Investments in PPF, LIC, NSC, ELSS (Max ₹1.5 lakh)
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80D: Health insurance premiums
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80G: Donations to charitable institutions
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HRA & Standard Deduction for salaried employees
6. Tax Filing & Compliance
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ITR Forms: ITR-1 to ITR-7 depending on income type
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Audit Requirement: Businesses with turnover > ₹1 crore
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Payment of Advance Tax if tax liability > ₹10,000
D) Practical Examples & Calculations
Example 1: Salary Income
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Annual Salary: ₹10,00,000
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HRA Deduction: ₹2,00,000
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80C Investment: ₹1,50,000
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Taxable Income = 10,00,000 – 2,00,000 – 1,50,000 = ₹6,50,000
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Tax Computation:
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0 – 2,50,000 → Nil
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2,50,001 – 5,00,000 → 5% of 2,50,000 = ₹12,500
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5,00,001 – 6,50,000 → 20% of 1,50,000 = ₹30,000
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Total Tax = ₹42,500
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Example 2: Capital Gains
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Sale of property: ₹20,00,000
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Purchase Price: ₹15,00,000
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Long-term capital gain = ₹5,00,000
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Tax @20% = ₹1,00,000
Example 3: Freelancer Income
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Invoice: ₹50,000
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TDS @10% → ₹5,000 deducted
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Received Amount → ₹45,000
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File ITR with TDS credit.
E) Amendments & Related Laws
Recent Amendments (up to 2025):
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New tax slabs for senior citizens
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Digital filing mandates
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Simplified TDS on freelancers
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Penalty provisions for late filing updated
Related Acts:
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Finance Act (Amendments each year)
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GST Act (Indirect Tax coordination)
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Customs Act (Import/Export tax coordination)
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Wealth Tax Act (historical)
F) Career Scope & Applications
Career Paths:
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Chartered Accountant (CA)
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Cost Accountant (CMA)
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Tax Consultant / Advisor
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IRS Officer
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Corporate Finance Officer
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Policy Analyst
Where Knowledge is Useful:
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CA/Tax consultancy firms
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Corporate finance & accounting
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Government taxation departments
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Freelance taxation advisory
G) Summary & Exam Tips
Quick Revision Table:
| Topic | Key Point |
|---|---|
| Heads of Income | Salary, House Property, Business, Capital Gains, Other Sources |
| Residential Status | Resident, Non-Resident, Not Ordinarily Resident |
| Deductions | 80C, 80D, 80G, HRA |
| TDS/TCS | Deduction/Collection at source rules |
| Filing | ITR Forms 1–7, Audit rules |
Memory Tricks:
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“SHBCO” → Salary, House, Business, Capital, Other (Heads of Income)
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“80CDH” → 80C, 80D, HRA (Common deductions)
Exam-style Q&A:
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Year of enactment of IT Act → 1961
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Tax slab for ₹6 lakh → 42,500
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TDS full form → Tax Deducted at Source
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Max 80C deduction → ₹1,50,000
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Who enforces IT Act? → CBDT
H) Conclusion
The Income Tax Act, 1961 is the backbone of India’s direct taxation system. Understanding it is crucial for exams, professional careers, and practical financial decisions.
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