Income tax in India was first introduced in February 1860 by James Wilson, British India's first finance member, to cover the deficit left by the 1857 revolt. The law then evolved through the Acts of 1918, 1922 and 1961. Since 1 April 2026, India runs on an entirely new law, the Income-tax Act, 2025.
That single paragraph holds 166 years of history. The longer story is worth knowing, because India's tax ideas are far older than the British, and because the law changed in a big way this very year. Here is the full timeline, dated and verified, plus what it means for you if you run a small business today.
What is income tax and who has to pay it in India?
Income tax is a direct tax: you earn income, and you pay a share of it straight to the central government. Contrast that with an indirect tax like GST, where the shopkeeper collects the tax from you on a sale and passes it on. With income tax, the person who earns is the person who pays.
Liability covers individuals, Hindu Undivided Families (HUFs), partnership firms, LLPs and companies. It is threshold-based, so small earners stay out entirely. Under the default new regime for FY 2025-26, there is no tax on income up to ₹4 lakh, and the Section 87A rebate makes income up to ₹12 lakh effectively tax-free (about ₹12.75 lakh for salaried people after the ₹75,000 standard deduction), as per ClearTax's slab guide for 2026. Cross the threshold, and slab rates rise in steps to 30% above ₹24 lakh.
How was tax collected in ancient India?
Indian rulers were taxing income more than two thousand years before the British arrived. The Income Tax Department's own history of direct taxation cites the Manusmriti: traders and artisans paid one-fifth of their profits in silver and gold, while agriculturists gave up one-sixth, one-eighth or one-tenth of their produce depending on their circumstances. Manu's advice reads surprisingly modern. Tax should relate to income, and a king should neither skip taxation nor make it exorbitant.
Kautilya's Arthashastra, written around 300 BC, turned this into detailed administration. Land revenue was normally one-sixth of produce. Tolls, octroi, customs and ferry fees were codified. Imports attracted a levy called vartanam, foreign goods a further dvarodaya, and salt was taxed at the point of extraction. Performers and professionals with fluctuating earnings paid income tax in proportion to what they earned that period. Proportional, note, not progressive; the tax-by-capacity idea belongs to Manu, while Kautilya's rates were fixed shares.
Who introduced income tax in India and why?
James Wilson introduced income tax in India in February 1860, through the Income Tax Act, 1860. Wilson served as British India's first finance member from December 1859 and presented India's first budget. His problem was blunt: the British government's military spending during and after the 1857 revolt had blown a severe hole in its finances, and a new revenue source was needed fast.
The 1860 Act was a serious piece of law for its time. It ran to 259 sections and taxed income under four schedules: landed property; professions and trade; securities, annuities and dividends; and salaries and pensions. Notably, it taxed agricultural income too, something independent India's central law never did.
How did income tax law evolve from 1860 to 1961?
Between 1860 and 1961, income tax law was consolidated three times, and the 1922 version built the department that still collects your tax. The Income Tax Act, 1918 was replaced by the Income-tax Act, 1922, which for the first time gave specific nomenclature to income-tax authorities and shifted administration to the central government. The Income Tax Department dates its modern structure to that 1922 law.
The 1922 Act had a long innings. It governed assessments right up to assessment year 1961-62, when Parliament replaced it with the Income-tax Act, 1961, effective 1 April 1962 across India. For 64 years after that, the 1961 Act was the law, amended every single year through the Finance Act that accompanies the Union Budget. That annual-amendment habit is also why the Act swelled past 700 sections and became notoriously hard to read.
The complete timeline:
| Period | Law or source | What it did |
|---|---|---|
| Ancient India | Manusmriti | Traders and artisans taxed one-fifth of profits; agriculturists one-sixth to one-tenth of produce |
| c. 300 BC | Arthashastra | Land revenue at one-sixth; codified tolls, customs, import levies and a salt tax |
| 1860 | Income Tax Act, 1860 | First income tax in India, by James Wilson; 259 sections, four income schedules |
| 1918 | Income Tax Act, 1918 | Interim consolidation, replaced within four years |
| 1922 | Income-tax Act, 1922 | Named the tax authorities, centralised administration; ran until AY 1961-62 |
| 1961 | Income-tax Act, 1961 | Effective 1 April 1962; five heads of income; amended annually by Finance Acts |
| 2025 | Income-tax Act, 2025 | In force 1 April 2026; 536 sections, single "tax year", digital-first administration |
What does India's income tax law look like today?
As of 2026, the Income-tax Act, 1961 is no longer the law. It was repealed and replaced by the Income-tax Act, 2025, which came into force on 1 April 2026. Per PRS Legislative Research, the Income-tax (No. 2) Bill passed the Lok Sabha on 11 August 2025 and the Rajya Sabha the next day, receiving presidential assent on 21 August 2025. (A first version tabled in February 2025 was withdrawn on 8 August and re-introduced.) FY 2026-27 is the first year assessed under the new Act.
What actually changed? Mostly structure, not substance. The new Act compresses 700-plus sections into 536 sections across 23 chapters, replaces the confusing "previous year" and "assessment year" pair with a single "tax year", and is built for faceless, digital-first administration. Tax rates themselves are unchanged and continue to be set each year by the Finance Act.
The five heads of income also survive in substance: salary; income from house property; profits and gains of business or profession; capital gains; and income from other sources. Only the section numbers change from tax year 2026-27, per ClearTax.
On personal tax, the new regime has been the default since FY 2023-24, with the ₹12 lakh effective zero-tax line described earlier. The old regime, with its 80C deductions (think PPF contributions) and HRA exemptions, remains optional for those whose deductions justify it.
Capital gains got their own overhaul in Budget 2024, and every pre-2024 figure you may remember is obsolete. Since 23 July 2024: an asset is long-term after 12 months for listed securities and 24 months for everything else (property, gold, unlisted shares); long-term gains are taxed at a flat 12.5% without indexation; short-term gains on listed equity at 20%; and equity enjoys a ₹1.25 lakh annual LTCG exemption, as of 2026.
Where does all this money come from? Collections are heavily concentrated in a handful of states; see which states pay the most tax in India.
How does income tax apply to small business owners?
For most small traders, the presumptive taxation scheme is the practical answer: as of 2026, if your turnover is up to ₹2 crore (₹3 crore where cash receipts are at most 5% of turnover), you can declare 8% of turnover as profit, or 6% for amounts received digitally or through banking channels, and skip detailed books and audit. The scheme is open to resident individuals, HUFs and partnership firms, but not LLPs. Note the direction of the limit: ₹2 crore is a ceiling, not a floor. The 6% digital rate is a real nudge to move collections to UPI and bank transfer.
Companies pay corporate income tax instead of slab rates. As of 2026, domestic companies pay 25% where turnover is up to ₹400 crore and 30% above it, with two optional flat regimes: 22% under Section 115BAA and 15% for new manufacturing companies under Section 115BAB, plus a 4% health and education cess in each case. Separately, the Companies Act, 2013 calls you a "small company" if paid-up capital is up to ₹4 crore and turnover up to ₹40 crore (thresholds raised in September 2022), which lightens compliance, not the tax rate.
Your structure decides your paperwork. A sole proprietorship files through the owner's own return; a partnership firm registers under the Indian Partnership Act, 1932; an LLP registers with the MCA and files its income tax return by 31 July, or 31 October when audit applies (subject to CBDT extensions announced in some years, as in AY 2026-27).
Income tax is also only one line in a business's tax life. In 2026 the working list is: GST once aggregate turnover crosses ₹40 lakh for goods or ₹20 lakh for services in normal-category states (half that in special-category states, with some state variations); TDS obligations, including on payroll; state professional tax; and customs duty if you import. Two old ghosts you can forget: fringe benefits tax was abolished in the 2009 Budget, and excise now survives only on petroleum and alcohol-type goods. Skipping GST registration when you are over the line gets expensive; here is what happens when you don't pay GST.
If you maintain regular books instead of going presumptive, genuine business expenses reduce your taxable profit: rent for business premises or a home office portion, vehicle running costs for business use, staff salaries and reimbursements. Rules on proportionate claims are fussy, so confirm specifics with a CA before filing. And before you pay a rupee more than you must, check the government schemes for small businesses you may qualify for.
FAQs
Who introduced income tax in India?
James Wilson, British India's first finance member, introduced income tax in February 1860 through the Income Tax Act, 1860, to cover the fiscal deficit after the 1857 revolt.
Is the Income-tax Act, 1961 still in force?
No. The 1961 Act was repealed and replaced by the Income-tax Act, 2025, which came into force on 1 April 2026. It has 536 sections and uses a single "tax year" instead of previous year and assessment year.
How much income is tax-free in India in FY 2025-26?
Under the default new regime, income up to ₹4 lakh attracts no tax, and the Section 87A rebate makes income up to ₹12 lakh effectively tax-free (about ₹12.75 lakh for salaried taxpayers with the standard deduction).
What is the turnover limit for presumptive taxation in 2026?
Up to ₹2 crore turnover, or ₹3 crore if cash receipts are at most 5% of turnover. Profit is deemed at 8% of turnover (6% for digital receipts). Resident individuals, HUFs and partnership firms qualify; LLPs do not.
What are the five heads of income?
Salary; income from house property; profits and gains of business or profession; capital gains; and income from other sources. All five continue in substance under the Income-tax Act, 2025.
