The Basics of Income Tax

2.1 – A Quick Overview

India's income-tax system applies tax to income earned by individuals and other taxable persons.

For an investor or trader, this becomes relevant whenever money is earned through activities such as:

• Salary
• Business or profession
• Interest
• Rent
• Dividends
• Capital gains
• Trading activities
• Other taxable sources

However, not every type of income is taxed in exactly the same way.

This distinction will become increasingly important as we move through this module.

For example:

Salary income

may be taxed according to the applicable slab rates.

Whereas certain:

Capital gains

may be subject to specific tax rates.

Similarly, income from:

Business or trading

is generally included in the business-income computation and taxed according to the applicable framework.

So before calculating tax, the first step is always to understand what type of income you have earned.

Why Do We Pay Income Tax?

It is natural to ask:

Why should I pay tax on the money I earn?

The government collects taxes to fund public expenditure and provide services and infrastructure.

Tax revenues contribute towards areas such as:

• Healthcare
• Education
• Defence
• Roads and infrastructure
• Public administration
• Social and economic programmes

In simple terms:

Individuals and businesses contribute tax

↓

Government collects these revenues

↓

Funds are used for public expenditure

Who Is Considered a "Person" for Income Tax?

The word "person" under income-tax law has a broader meaning than simply an individual human being.

It can cover different categories of taxpayers, including:

• Individuals
• Hindu Undivided Families (HUFs)
• Companies
• Firms
• Associations of Persons (AOPs)
• Bodies of Individuals (BOIs)
• Local authorities
• Certain other juridical persons

For this module, our primary focus is on individual investors and traders.

When Does an Individual Have to Pay Income Tax?

Whether tax is ultimately payable depends on factors such as:

• Total taxable income
• Tax regime selected, where applicable
• Nature of income
• Applicable deductions
• Applicable rebates
• Special tax rates
• Age and residential status in relevant cases
• Other provisions of the tax law

Therefore, it is not enough to simply look at your gross income and ask:

"Am I above the basic exemption limit?"

The complete tax computation needs to be considered.

2.2 – What Exactly Is Income Tax?

Income tax is a tax imposed by the government on taxable income.

For an individual, income can come from several sources.

For example:

Salary

You earn:

₹8 lakh

from your employment.

Interest

You receive:

₹40,000

from bank deposits.

Capital Gains

You make:

₹1 lakh

from selling an investment.

Trading Income

You earn:

₹2 lakh

from an eligible trading activity treated as business income.

These income streams may not all receive identical tax treatment.

That is why taxation becomes more important once you start combining investing and trading with your regular income.

Income Tax and the Stock Market

Suppose you earn:

₹10 lakh salary

and additionally make:

₹2 lakh from F&O trading

Your employer may have already deducted TDS from your salary.

But the employer does not automatically settle the tax implications of your F&O activity.

The additional income therefore needs to be considered while preparing your tax computation and return.

Similarly, if you earn capital gains from investments, those gains need to be reported according to the applicable capital-gains provisions.

This is why:

Your salary tax calculation is not necessarily your complete tax calculation.

Taxable Income Is Not Always the Same as Total Money Received

Another important distinction is between:

Money received

and

Taxable income

For example, suppose you sell shares for:

₹5 lakh

That does not mean you earned ₹5 lakh as profit.

If the shares originally cost:

₹4 lakh

then the gain is:

₹5 lakh − ₹4 lakh = ₹1 lakh

The relevant tax calculation is based on the applicable rules for that ₹1 lakh gain, not simply the entire ₹5 lakh sale value.

Tax Rates Can Differ Depending on the Income

One of the biggest mistakes a new investor can make is assuming:

"All my income is taxed at the same percentage."

That is not necessarily true.

Broadly, income may be subject to:

Normal slab rates

For example, many forms of salary, business income and other income.

Special tax rates

Certain capital gains and other specified income can have separate rates.

Exempt income

Certain income may be exempt subject to the relevant provisions.

Therefore, the final tax calculation can involve several different components.

2.3 – Income-Tax Slabs in India

For current learning, we should use the AY 2026–27 framework for income earned during FY 2025–26.

The new tax regime is now the default regime for individuals, subject to the applicable rules.

For an individual below 60 years of age, the current new-regime slabs are:

These are the current slab rates notified for AY 2026–27 under the new tax regime.

Example of Slab-Based Taxation

Suppose your taxable income under the normal slab-rate framework is:

₹10 lakh

The entire ₹10 lakh is not taxed at 10%.

Instead, the slab system works progressively:

• First ₹4 lakh → Nil
• Next ₹4 lakh → 5%
• Remaining ₹2 lakh → 10%

So the basic slab calculation is:

₹4 lakh × 0% = ₹0

₹4 lakh × 5% = ₹20,000

₹2 lakh × 10% = ₹20,000

Basic tax = ₹40,000

This is before considering applicable rebate, surcharge, cess and other provisions.

The ₹12 Lakh Rebate

The current tax framework has another important feature.

For eligible resident individuals under the new tax regime, Section 87A provides a rebate of up to ₹60,000 where total income does not exceed ₹12 lakh, subject to the applicable conditions.

This means an eligible resident individual with total income up to ₹12 lakh can effectively have nil tax liability under the new regime, subject to the statutory rules.

Marginal Relief Around ₹12 Lakh

There is also a provision for marginal relief in specified cases around the ₹12 lakh threshold.

The purpose is to prevent a small increase in income beyond the rebate threshold from creating a disproportionately large increase in tax liability.

Therefore, when calculating tax around this level, simply applying the headline slab rates may not give the complete answer.

Important: Capital Gains May Follow Different Rates

The slab table above should not be interpreted as meaning that every rupee of income is automatically taxed according to these rates.

Certain capital gains are subject to special rates.

For example, qualifying listed-equity transactions covered under the relevant provisions can have:

• 20% STCG rate under Section 111A for applicable transfers
• 12.5% LTCG rate under Section 112A for applicable transfers

The LTCG exemption threshold under Section 112A is ₹1.25 lakh per financial year, subject to the applicable conditions.

We will study these rules in detail in the Taxation for Investors chapter.

Business and Trading Income

Trading income is also different from capital gains.

If your market activity is treated as business income, the business profit is generally included in your overall income computation and taxed according to the applicable provisions.

For example:

Salary = ₹8 lakh

F&O business profit = ₹2 lakh

The F&O profit does not automatically receive a special flat "trading tax rate."

Instead, business income forms part of the overall tax computation under the applicable regime, while special-rate income such as certain capital gains is handled separately.

This distinction will become very important in the later chapters.

Old Tax Regime Still Exists

The new tax regime is the default regime, but the old tax regime continues to exist subject to the applicable conditions.

For individuals below 60, the old-regime slabs for AY 2026–27 are broadly:

The old regime may allow deductions and exemptions that are restricted or unavailable under the new regime.

Therefore, tax planning cannot be based only on comparing the headline slab rates.

The taxpayer's complete income and eligible deductions need to be considered.

Why the New Regime Is Important for Investors and Traders

The tax regime can affect your final tax liability.

Suppose two taxpayers have the same income:

₹15 lakh

Their final tax liability may differ depending on:

• Which regime applies
• Whether they are eligible to choose another regime
• Available deductions
• Nature of income
• Special-rate income
• Applicable rebate
• Other tax provisions

For taxpayers with business or professional income, there are also specific rules regarding exercising or changing the regime choice.

So the correct approach is:

Calculate your tax under the applicable options rather than assuming one regime is always better.

A Simple Illustration

Suppose an individual has:

• Salary: ₹7 lakh
• Bank interest: ₹50,000
• F&O business profit: ₹1.5 lakh

Ignoring deductions and other adjustments for simplicity:

₹7 lakh + ₹50,000 + ₹1.5 lakh

= ₹9 lakh

This income would then be considered under the applicable tax framework.

But if the person also has:

₹2 lakh eligible LTCG

that ₹2 lakh should not simply be treated in exactly the same way as the ₹9 lakh normal-rate income.

The applicable special capital-gains provisions must also be considered.

Don't Confuse the Tax Slab With the Tax Rate on Every Income

This is one of the most important lessons from this chapter.

Suppose someone says:

"I fall in the 20% slab, so all my income is taxed at 20%."

That statement is too simplistic.

Your tax calculation can contain:

Normal-rate income

• Special-rate income− Eligible rebate/deductions
• Applicable surcharge
• Health and Education Cess

Therefore, the final tax liability requires a complete calculation

Surcharge and Cess

For higher-income taxpayers, surcharge can apply depending on total income and the applicable provisions.

For individuals under the current framework, surcharge rates can vary with income levels.

In addition, Health and Education Cess at 4% is generally charged on income tax plus applicable surcharge.

Therefore, the tax shown by simply applying the slab rates is not necessarily the final amount payable.

A Major 2026 Terminology Change

There is one more update that is important for this module.

From 1 April 2026, the Income Tax Act, 2025 applies to income for Tax Year 2026–27 onwards.

The new framework uses:

Tax Year

instead of the earlier concept of:

Previous Year + Assessment Year

So:

1 April 2026 – 31 March 2027

is: 

Tax Year 2026–27

However, income earned during:

1 April 2025 – 31 March 2026

is still dealt with as:

FY 2025–26 → AY 2026–27

under the earlier framework.

This distinction is important because the tax year must always be identified before applying the relevant provisions.

The Practical Lesson

Do not memorise a tax slab permanently.

Instead, develop this habit:

Step 1: Identify the relevant tax year.

Step 2: Identify the nature of your income.

Step 3: Determine the applicable tax regime.

Step 4: Apply the relevant slab or special rate.

Step 5: Consider deductions, rebates and losses where applicable.

Step 6: Add surcharge and cess where applicable.

Step 7: Reduce eligible tax already paid, such as TDS and advance tax.

This approach remains useful even when tax rates change.

Why This Matters for Market Participants

For a person who only earns salary, taxation can be relatively straightforward.

But consider someone with:

• Salary
• Equity investments
• Mutual funds
• F&O trading
• Intraday trading
• Dividends
• Bank interest

Now there may be several different tax treatments operating together.

This is exactly why the remainder of this module focuses on classifying market activity first, and then separately explaining investor and trader taxation.

Key Takeaways

1. Income tax is a tax on taxable income earned by a person.
2. The term "person" under income-tax law covers more than just individuals.
3. Income can come from salary, business, investments, interest, dividends, rent and other sources.
4. Different types of income can have different tax treatments.
5. Taxable income is not always the same as the amount of money received.
6. For AY 2026–27, the new-regime slab structure for individuals below 60 starts with nil tax up to ₹4 lakh and reaches 30% above ₹24 lakh.
7. The new tax regime is the default regime, while the old regime continues subject to the applicable conditions.
8. Eligible resident individuals can receive a Section 87A rebate of up to ₹60,000 where total income does not exceed ₹12 lakh, subject to the applicable rules.
9. The slab rate does not necessarily apply to every type of income.
10. Certain capital gains are taxed at special rates rather than ordinary slab rates.
11. Business and trading income is generally included in the applicable normal-rate tax computation, subject to the nature and classification of the income.
12. Surcharge may apply to higher-income taxpayers.
13. Health and Education Cess is generally 4% of income tax plus applicable surcharge.
14. Tax calculation should consider the nature of income, applicable regime, rebates, deductions, losses and special rates.
15. From 1 April 2026, the Income Tax Act, 2025 applies to income for Tax Year 2026–27 onwards.
16. Income earned during FY 2025–26 continues to be dealt with under the AY 2026–27 framework.
17. The most important habit is: identify the relevant tax year first, then apply the rules applicable to that year.