Chapter 1: Basic Concepts, Tax Rates & Legal Framework
1. Tax Rates & Regime Slabs (Tax Year 2026-27 / AY 2027-28)
Under the Income-tax Act, 2025, the Default Tax Regime (Section 202 / Old 115BAC) applies automatically to all Individuals, HUFs, AOPs, BOIs, and AJPs unless an affirmative opt-out declaration is exercised.
| Total Income Slab | Default Tax Regime (Sec 202) Rate | Normal / Optional Regime Rate | Statutory Remarks |
|---|---|---|---|
| Up to ₹ 3,00,000 | Nil | Nil (₹ 2.5L / ₹ 3L sr cit / ₹ 5L super sr cit) | Universal basic exemption under Default Regime. |
| ₹ 3,00,001 to ₹ 7,00,000 | 5% | 5% (₹ 2.5L / ₹ 3L to ₹ 5L) | Tax on ₹ 7L under Default Regime = ₹ 20,000. |
| ₹ 7,00,001 to ₹ 10,00,000 | 10% | 20% (₹ 5,00,001 to ₹ 10,00,000) | Tax on ₹ 10L under Default Regime = ₹ 50,000. |
| ₹ 10,00,001 to ₹ 12,00,000 | 15% | 30% (Exceeding ₹ 10,00,000) | Tax on ₹ 12L under Default Regime = ₹ 80,000. |
| ₹ 12,00,001 to ₹ 15,00,000 | 20% | 30% | Tax on ₹ 15L under Default Regime = ₹ 1,40,000. |
| Above ₹ 15,00,000 | 30% | 30% | Standard maximum slab rate. |
Rebate u/s 156 (Old Section 87A) Fast Formula:
• Default Regime: If Total Income $\le ₹ 7,00,000$, Rebate = $100\%$ of Tax or $₹ 25,000$, whichever is lower (Tax payable = NIL).
• Marginal Relief on Rebate: If Total Income slightly exceeds $₹ 7,00,000$, Tax Payable cannot exceed $( ext{Total Income} - ₹ 7,00,000)$.
• Normal Regime: If Total Income $\le ₹ 5,00,000$, Rebate = $100\%$ of Tax or $₹ 12,500$, whichever is lower.
• Default Regime: If Total Income $\le ₹ 7,00,000$, Rebate = $100\%$ of Tax or $₹ 25,000$, whichever is lower (Tax payable = NIL).
• Marginal Relief on Rebate: If Total Income slightly exceeds $₹ 7,00,000$, Tax Payable cannot exceed $( ext{Total Income} - ₹ 7,00,000)$.
• Normal Regime: If Total Income $\le ₹ 5,00,000$, Rebate = $100\%$ of Tax or $₹ 12,500$, whichever is lower.
2. Surcharge Architecture & Marginal Relief Steps
| Total Income Range | Default Regime (Sec 202) | Normal Regime | Special Incomes (Sec 111A, 112, 112A, Dividend) |
|---|---|---|---|
| ₹ 50 Lakhs to ₹ 1 Crore | 10% | 10% | 10% maximum |
| ₹ 1 Crore to ₹ 2 Crores | 15% | 15% | 15% maximum |
| ₹ 2 Crores to ₹ 5 Crores | 25% | 25% | Capped at 15% |
| Above ₹ 5 Crores | Capped at 25% | 37% | Capped at 15% |
3-Step Marginal Relief Algorithm:
1. Calculate Tax + Surcharge on Total Income ($T_1$).
2. Calculate Tax on Threshold Limit (₹ 50L / 1 Cr / 2 Cr / 5 Cr) with lower surcharge ($T_2$).
3. Marginal Relief = $\maxig(0,\; T_1 - [T_2 + ( ext{Total Income} - ext{Threshold})]ig)$.
1. Calculate Tax + Surcharge on Total Income ($T_1$).
2. Calculate Tax on Threshold Limit (₹ 50L / 1 Cr / 2 Cr / 5 Cr) with lower surcharge ($T_2$).
3. Marginal Relief = $\maxig(0,\; T_1 - [T_2 + ( ext{Total Income} - ext{Threshold})]ig)$.
3. Unexplained Incomes & Deemed Additions (Sections 102 to 107)
| Sec (2025) | Sec (1961) | Nature of Addition | Statutory Tax Rate (Sec 115BBE) | Allowability of Expenses / Losses |
|---|---|---|---|---|
| Sec 102 | Sec 68 | Unexplained Cash Credits | 60% + 25% SC + 4% HEC = 78% | Zero deductions, no basic exemption, no loss set-off. |
| Sec 103 | Sec 69 | Unexplained Investments | 78% effective | Strict disallowance of all deductions. |
| Sec 104 | Sec 69A | Unexplained Money, Bullion, Jewellery | 78% effective | Penalty u/s 271AAC @ 10% additionally if not disclosed. |
| Sec 105 | Sec 69B | Undisclosed Investment (Excess found) | 78% effective | No set-off against current or brought-forward losses. |
| Sec 106 | Sec 69C | Unexplained Expenditure | 78% effective | Cannot be added back as cost of asset/expense. |
| Sec 107 | Sec 69D | Amount borrowed/repaid on Hundi in cash | 78% effective | Deemed income of borrower/re-payer. |
4. Statutory Cross-Reference Matrix (2025 vs 1961 Act)
| Income-tax Act, 2025 | Income-tax Act, 1961 | Subject Matter / Legal Scope |
|---|---|---|
| Section 2 | Section 2 | Statutory definitions (Person, Assessee, Capital Asset, Relative). |
| Section 4 | Section 4 | Charge of Income-tax on Total Income of previous year. |
| Section 102-107 | Sections 68-69D | Deemed unexplained incomes and unexplained credits. |
| Section 156 | Section 87A | Rebate for resident individuals. |
| Section 202 | Section 115BAC | Concessional Default Tax Regime slabs and conditions. |
5. High-Frequency Exam Traps & Pitfalls
Trap 1: Rebate u/s 87A / 156 on Special Rate Incomes!
Rebate is NOT available against tax payable u/s 112A (LTCG on equity shares) exceeding ₹ 1,25,000 as per statutory proviso. However, it is allowable against normal STCG/LTCG u/s 112 under standard provisions unless specifically restricted.
Rebate is NOT available against tax payable u/s 112A (LTCG on equity shares) exceeding ₹ 1,25,000 as per statutory proviso. However, it is allowable against normal STCG/LTCG u/s 112 under standard provisions unless specifically restricted.
Trap 2: Health & Education Cess Sequencing!
HEC @ 4% is ALWAYS computed on the total of (Tax + Surcharge - Marginal Relief). It is NEVER computed on gross tax before marginal relief.
HEC @ 4% is ALWAYS computed on the total of (Tax + Surcharge - Marginal Relief). It is NEVER computed on gross tax before marginal relief.
Trap 3: Surcharge on Firm vs Company vs Individual!
• Partnership Firm / LLP: Flat 12% surcharge if Total Income > ₹ 1 Crore.
• Domestic Company: 7% (> ₹ 1 Cr) and 12% (> ₹ 10 Cr); under Sec 115BAA/BAB: flat 10%.
• Foreign Company: 2% (> ₹ 1 Cr) and 5% (> ₹ 10 Cr).
• Partnership Firm / LLP: Flat 12% surcharge if Total Income > ₹ 1 Crore.
• Domestic Company: 7% (> ₹ 1 Cr) and 12% (> ₹ 10 Cr); under Sec 115BAA/BAB: flat 10%.
• Foreign Company: 2% (> ₹ 1 Cr) and 5% (> ₹ 10 Cr).