Income Tax Act 1961 Explained | ITR Forms (1 to 7) & 5 Types of Income Heads in India

Income Tax Act 1961 is the backbone of India’s taxation system. This post explains ITR Forms from ITR-1 to ITR-7, and the 5 heads of income as per Indian Income Tax. Whether you're a salaried person, freelancer, or business owner — learn which form you need to file and how your income is classified.

The Income Tax Act, 1961: A Comprehensive Guide

Understanding Taxation in India

Taxation is the backbone of a nation’s economy, enabling the government to fund public services like infrastructure, healthcare, and education. In India, the **Income Tax Act, 1961**, is the primary legislation governing the taxation of income earned by individuals, businesses, and other entities. Income tax is a direct tax levied on the income of an assessee, calculated based on predefined slabs and rates. The Act ensures a systematic approach to tax collection, promoting fairness and compliance.

Taxation under this Act is based on the principle of ability to pay, where higher earners contribute a larger share. It covers various income sources, offers exemptions to encourage savings, and imposes penalties for non-compliance. For beginners, understanding the basics of how taxes work, how to file them, and the role of Tax Deducted at Source (TDS) is crucial for navigating the system effectively.

How to File Income Tax in India

Filing income tax returns (ITR) is a mandatory process for individuals and entities whose income exceeds the basic exemption limit or who meet other specified criteria. The process has been simplified with the introduction of online filing through the Income Tax Department’s e-filing portal. Here’s a step-by-step guide:

• Register on the e-Filing Portal: Visit www.incometax.gov.in and register using your Permanent Account Number (PAN). PAN is a unique 10-digit alphanumeric identifier mandatory for tax filing.
• Choose the Correct ITR Form: Select the appropriate ITR form based on your income sources and category (explained below).
• Gather Documents: Collect documents like Form 16 (for salaried individuals), bank statements, investment proofs, and TDS certificates.
• Fill and Verify Details: Log in to the portal, fill in your income details, claim deductions, and verify the pre-filled data from sources like Form 26AS (TDS summary).
• Submit and Verify: Submit the ITR and verify it using options like Aadhaar OTP, net banking, or by sending a signed ITR-V form to the Centralized Processing Centre (CPC) in Bengaluru.

Tip: File your ITR before the due date (usually July 31 for individuals) to avoid penalties and interest under Section 234F.

Types of ITR Forms

The Income Tax Department prescribes different ITR forms based on the assessee’s income sources, residential status, and entity type. Here are the main forms for individuals and businesses:

• ITR-1 (Sahaj): For individuals with income up to ₹50 lakh from salaries, one house property, and other sources (e.g., interest). Suitable for resident individuals.
• ITR-2: For individuals and HUFs with income from capital gains, multiple properties, or foreign assets, but not business income.
• ITR-3: For individuals and HUFs with income from business or profession, in addition to other sources.
• ITR-4 (Sugam): For individuals, HUFs, and firms opting for tax slabs scheme with income up to ₹50 lakh from business or profession.
• ITR-5, 6, ITR-7: For firms, companies, and other entities, respectively.

Choosing the right form is essential to ensure accurate reporting and avoid scrutiny from tax authorities.

Tax Deducted at Source (TDS)

TDS is a mechanism where a payer deducts tax at source before making certain payments, such as salaries, rent, or interest, and deposits it with the government. It ensures regular tax collection and reduces evasion. Key aspects of TDS include:

• Applicability: TDS applies to payments like salaries (above ₹2.5 lakh annually), interest on bank deposits (above ₹40,000 for individuals), rent (above ₹2.4 lakh annually), and professional fees (above ₹30,000).
• Rates: TDS rates vary, e.g., 10% for interest, 2% for rent, and 30% for lottery winnings.
• Form 26AS: This form reflects TDS details credited to your PAN, helping you reconcile tax payments during ITR filing.
• TDS Certificates: Payers issue Form 16 (salaries) or Form 16A (other payments) to confirm TDS deductions.

Taxpayers can claim TDS as a credit against their tax liability while filing ITR, ensuring no double taxation.

Introduction to the Income Tax Act, 1961

Enacted on April 1, 1961, the Income Tax Act replaced the Income Tax Act of 1922, modernizing India’s tax framework. It governs the levy, assessment, collection, and recovery of income tax, covering individuals, Hindu Undivided Families (HUFs), companies, firms, and trusts. The Act is amended regularly through Finance Acts to address economic changes and policy goals.

Basic Concepts of the Income Tax Act

Key concepts include:

• Assessee: Any person liable to pay tax or other sums under the Act.
• Assessment Year: The year following the financial year, e.g., 2025-26 for income earned in 2024-25.
• Previous Year: The financial year in which income is earned (April 1 to March 31).
• Residential Status: Determines tax scope—residents pay on global income, non-residents on India-sourced income.

Heads of Income

Income is classified under five heads:

• Salaries: Includes wages, pensions, and allowances with exemptions like HRA.
• House Property: Rental income with deductions for taxes and 30% standard deduction.
• Business or Profession: Profits from business activities, allowing expense deductions.
• Capital Gains: Gains from asset sales, taxed as short-term or long-term.
• Other Sources: Interest, dividends, and gifts above thresholds.

Exemptions and Deductions

Key provisions include:

• Section 10: Exempts agricultural income, scholarships, etc.
• Section 80C: Deductions up to ₹1.5 lakh for investments like PF and ELSS.
• Section 80D: Health insurance premium deductions.
• Section 80G: Donations to charities.

Tax Rates and Slabs

For individuals (2025-26):

• Old Regime: Slabs from 0% (up to ₹2.5 lakh) to 30% (above ₹10 lakh) with deductions.
• New Regime: Lower rates from 0% (up to ₹3 lakh) to 30% (above ₹15 lakh) with fewer deductions.

Compliance and Filing

Requirements include advance tax, ITR filing, TDS compliance, and tax audits for high-turnover businesses.

Penalties and Prosecution

Non-compliance attracts penalties (e.g., ₹5,000 for late ITR), interest, and imprisonment for evasion.

Recent Reforms

Includes faceless assessments, Vivad Se Vishwas, and equalization levy for digital transactions.

Conclusion

The Income Tax Act, 1961, is a vital framework for India’s tax system, balancing revenue needs with economic growth. Understanding its provisions, filing processes, and compliance requirements empowers taxpayers to optimize their obligations.

🔗 Also Read: ITR-1 Filing Guide: Who Can File ITR-1?