Understanding Income Tax Eligibility in India

Income tax is a contribution made by citizens to the government to fund essential public services, infrastructure, and the nation’s development. While it is an obligation for some, not everyone in India is required to pay income tax. The eligibility criteria depend on factors like age, income level, and residential status.

This guide breaks down everything that you need to know about income tax eligibility in India, exemptions, deductions, and tips to optimise your taxes.

What is income tax?

Income tax is a direct tax levied on an individual or entity's income. It is charged annually and helps fund government initiatives like healthcare, education, and infrastructure projects.

Every earning individual or organisation with income above a specified threshold must contribute. The Income Tax Act of 1961 governs all rules and regulations related to taxation in India.

Who needs to pay income tax? – Categories of taxpayers

Under the Income Tax Act, anyone earning taxable income in India—whether a resident or non-resident—is required to file Income Tax Returns. Currently, as per the new tax regime, income tax is applicable if an individual's total income exceeds Rs. 3 lakh in a financial year.

The Income Tax Act divides taxpayers into distinct categories, with varying tax rules applicable to each.

• Individuals
• Hindu Undivided Families (HUFs)
• Firms
• Companies
• Association of Persons (AOP)
• Body of Individuals (BOI)
• Local authorities
• Artificial juridical persons

Classification of individuals and HUFs

For tax purposes, individuals and HUFs are further categorised as residents and non-residents:

• Residents: Resident individuals are taxed on their global income, including income earned both in India and abroad.
• Non-Residents: Non-resident individuals are only taxed on income earned or accrued within India.

Determining residential status: The residential status of an individual must be assessed separately for each financial year. It is based on the duration of their stay in India during the year.

Sub-categories of resident individuals

For taxation purposes, resident individuals are further classified into the following age-based categories:

• Individuals below 60 years of age
• Senior citizens (60–80 years)
• Super senior citizens (above 80 years)

Each category enjoys distinct exemption limits, ensuring age-appropriate relief in income tax obligations.

What are the 5 heads of income?

Every individual earning income in India, whether a resident or non-resident, is subject to income tax. To simplify taxation, the Income Tax Department classifies income into five distinct categories, known as the 5 heads of income:

• Income from other sources: This includes income earned from sources such as interest on savings accounts, fixed deposits, or winnings from lotteries.
• Income from house property: Any income earned by renting out a house property falls under this category.
• Income from capital gains: Income generated from the sale of capital assets such as shares, mutual funds, or house property is taxable under this head.
• Income from business and profession: This head covers profits earned by businesses, self-employed individuals, freelancers, or contractors. It also includes income from professional practices such as those of doctors, lawyers, chartered accountants, life insurance agents, and private tutors.
• Income from salary: Earnings from salaries and pensions are taxed under this category.

Tax slabs in India

In India, different types of taxpayers are taxed according to distinct rules under the income tax laws. For firms and Indian companies, a fixed tax rate is applied to their taxable income. However, individuals, Hindu undivided families (HUFs), associations of persons (AOPs), and bodies of individuals (BOIs) are taxed based on income slabs.

Income is divided into specific ranges, commonly referred to as tax brackets or tax slabs. Each slab is associated with a different tax rate. As the taxable income increases, the applicable tax rate also rises, following a progressive tax system.

Old income tax regime

The old tax regime offers three tax slabs: 5%, 20%, and 30%, applied to different income brackets. Individuals have the option to stick with this regime, which allows them to claim various deductions, such as:

• Allowances like leave travel concession (LTC), house rent allowance (HRA), and other specific allowances.
• Deductions for tax-saving investments under Section 80C (including LIC, PPF, NPS, etc.) and Section 80U.
• A standard deduction of Rs. 50,000.
• Deduction for home loan interest payments.

For individuals under 60 years of age, the tax slab rates under the old tax regime are as follows:

Income range	Tax rate
Up to Rs. 2,50,000	0%
Rs. 2,50,000 – Rs. 5,00,000	5%
Rs. 5,00,000 – Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

New tax regime

In the 2020 budget, the government introduced a new tax regime with reduced tax rates but fewer deductions and exemptions for individuals and HUFs. This led many taxpayers to stick with the existing regime. However, to promote wider acceptance, the 2023 Budget made the new tax regime the default option. Furthermore, the income tax slabs under this regime for FY 2024-25 (AY 2025-26) have been updated in the 2024 Budget as follows:

Income range	Tax rate
Income up to Rs. 3 lakh	0%
Rs. 3 lakh to Rs 7. lakh	5%
Rs. 7 lakh to Rs. 10 lakh	10%
Rs. 10 lakh to Rs. 12 lakh	15%
Rs. 12 lakh to Rs. 15 lakh	20%
Income above Rs. 15 lakh	30%

List of income tax forms

The seven types of ITR forms are as follows:

• ITR-1: For resident individuals earning income from salary, one house property, other sources, agricultural income below Rs 5,000, with a total income of up to Rs 50 lakh.
• ITR-2: For individuals/HUFs without any business or profession, owning more than one house property.
• ITR-3: For individuals/HUFs with income from a proprietary business or profession, or income as a partner in a firm.
• ITR-4: For individuals/HUFs with presumptive income from business or profession, and owning one house property.
• ITR-5: For partnership firms or LLPs.
• ITR-6: For companies.
• ITR-7: For trusts.

Income tax saving instruments

Taxpayers can lower their income tax liability by making strategic investments in tax-saving instruments. These investments, covered under Sections 80C to 80U of the Income Tax Act, offer deductions for specific expenses and investments, applicable when taxes are filed under the old tax regime. Below are some of the most popular investment options under Section 80C:

• ELSS (Equity-Linked Savings Scheme): This equity-based investment option qualifies for Section 80C deductions and offers a 3-year lock-in period. There is no maximum investment limit, though tax benefits under Section 80C are available up to Rs. 1.5 lakh per year.
• PPF (Public Provident Fund): A fixed income investment with a 15 year lock-in period, PPF allows for a maximum investment of Rs. 1.5 lakh annually under Section 80C.
• NSC (National Savings Certificate): This fixed income investment option also offers a 5-year lock-in period, with no maximum investment limit. However, the tax benefit under Section 80C is restricted to Rs. 1.5 lakh per financial year.
• 5-year tax-saving FD (Fixed Deposit): This fixed income option allows for a 5-year lock-in and offers tax deductions up to Rs. 1.5 lakh under Section 80C.
• SCSS (Senior Citizens Savings Scheme): Available to senior citizens, this fixed income investment offers tax deductions up to Rs. 15 lakh and has a 5-year lock-in period under Section 80C.

Note: While ELSS and NSC do not have a maximum investment limit, the tax benefit under Section 80C is available up to Rs. 1.5 lakh per financial year.

Deduction for interest income

Taxpayers can also claim a deduction for interest earned on deposits with banks under Section 80TTA of the Income Tax Act. A deduction of up to Rs. 10,000 is available under this section.

Education loan deduction

Under Section 80E, taxpayers can claim a deduction for the interest paid on loans taken for higher education. There is no upper limit on the amount of interest that can be claimed as a deduction in the Income Tax Return.

Medical expense and health insurance deduction

In addition to the Section 80C deduction, taxpayers can avail of tax benefits under Section 80D for premiums paid on health insurance and medical expenses incurred for themselves, their family, and their parents.

• For individuals below 60 years of age, the maximum deduction is Rs. 25,000 for self, spouse, and children, and Rs. 25,000 for parents.
• For individuals 60 years or older, the maximum deduction increases to Rs. 50,000 for self, spouse, and children, and Rs. 50,000 for parents.
• An additional deduction of Rs. 5,000 is available for preventive health checkups, which is included within the overall deduction limit.
• The total maximum deduction (including preventive checkups) is Rs. 50,000 for those under 60, and Rs. 1,00,000 for senior citizens.

Home loan deduction

Under Section 24, taxpayers can claim a deduction for the interest paid on a housing loan during the financial year. The amount of the deduction depends on whether the property is self-occupied or rented out. Additionally, the principal repayment of the loan qualifies for a deduction under Section 80C, up to a limit of Rs. 1.5 lakh.

For self-occupied property: The maximum deduction for stamp duty, registration charges, and principal repayment is Rs. 1.5 lakh (within the overall Section 80C limit). The interest paid on the home loan is eligible for a deduction of up to Rs. 2 lakh.

For rented property: The deduction for principal repayment remains the same at Rs. 1.5 lakh (within the Section 80C limit). However, there is no cap on the interest deduction, although rental income must be declared in the Income Tax Return. The maximum loss that can be claimed from a house property is capped at Rs. 2 lakh.

First-time homebuyers: Under Section 80EE, taxpayers can claim a deduction of up to Rs. 50,000 on interest paid for a home loan, subject to certain conditions.

Explore Bajaj Housing Finance Home Loan

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