Charge of Income Tax Section 4 Explained | AY 2027-28 Guide

Learn How Charge Of Income Tax Section 4 Functions Under The Income Tax Act, 1961. Understand Assessment Year, Previous Year, Tax Slabs, And Who Pays Tax In AY 2027-28.

Have you ever wondered why the government takes a slice of your hard-earned money every year? Or who exactly has to pay income tax in India? If these questions have crossed your mind, you are not alone. Millions of taxpayers file returns every year without fully understanding the legal foundation behind it.

Section 4 of the Income Tax Act, 1961 is the bedrock of India’s taxation system. It is the provision that legally empowers the government to charge income tax. Without this section, there would be no tax liability at all. In this guide, we break down Section 4 in plain, conversational English that even an 8th-grader can follow. We also cover the latest tax slabs for Assessment Year (AY) 2027-28 so your knowledge stays current.

What Does Section 4(1) Actually Say?

Let us start with the exact wording of the law. Section 4(1) of the Income Tax Act, 1961 states:

“Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every person.”

In simpler words, this means four things:

1. Tax is charged annually — for every assessment year.
2. Rates come from the Finance Act — the annual Budget sets them.
3. Tax applies to total income — computed as per the Income Tax rules.
4. Every “person” is covered — individuals, companies, HUFs, and more.

Think of Section 4 as the “on-switch” for income tax in India. It tells us that tax must be paid, when it must be paid, and by whom.

Breaking Down the Four Key Elements of Section 4

1. The Assessment Year (AY) — When You Pay Tax

The assessment year is the 12-month period immediately following the previous year. It runs from April 1 to March 31.

For example:

• Income earned from April 1, 2026 to March 31, 2027 (FY 2026-27)
• Is taxed in AY 2027-28 (April 1, 2027 to March 31, 2028)

This is when you file your Income Tax Return (ITR) and settle your tax bill.

2. The Previous Year (PY) — When You Earn Income

The previous year is the financial year in which you actually earn your income. It also runs from April 1 to March 31.

Here is a simple table to make this crystal clear:

For Example:

If you receive your salary in January 2027, that income falls under FY 2026-27 and will be taxed in AY 2027-28.

3. Total Income — What Gets Taxed?

Section 4 does not tax your gross salary or business revenue. It taxes your total income — which is your income after allowed deductions and exemptions.

Your total income is computed under five heads:

• Salaries
• Income from House Property
• Profits and Gains of Business or Profession
• Capital Gains
• Income from Other Sources

4. “Every Person” — Who Pays Tax?

This is where Section 2(31) comes in. The term “person” is much broader than you might think.

Under Section 2(31), a “person” includes:

Key Point: Even if an entity was not formed to earn profit, it is still a “person” for tax purposes.

How Are Tax Rates Determined? The Role of the Finance Act

Section 4 says tax is charged at rates “prescribed in the Finance Act.” But what does that mean?

Every year, the Finance Minister presents the Union Budget (usually in February). The Finance Act that follows contains the tax rates for the upcoming assessment year.

For AY 2027-28 (FY 2026-27): The tax rates were set by the Finance Act, 2026. The government retained the new tax regime structure introduced in Budget 2025, with no major changes to slabs.

Current Income Tax Slabs for AY 2027-28 (FY 2026-27)

New Tax Regime (Default Option)

The new tax regime is now the default for individual taxpayers. Here are the current slabs:

Important Updates for AY 2027-28:

• Section 87A Rebate: Up to ₹60,000 — making income up to ₹12 lakh effectively zero tax for resident individuals.
• Standard Deduction: Salaried individuals and pensioners can claim ₹75,000, pushing the effective tax-free limit to ₹12.75 lakh.
• Senior Citizens: Deduction limit doubled from ₹50,000 to ₹1 lakh.

Old Tax Regime (Optional)

You can still opt for the old regime if you have many deductions (like 80C, HRA, home loan interest).

Note: Senior citizens (60-80 years) get a higher basic exemption of ₹3 lakh. Super senior citizens (80+ years) get ₹5 lakh.

Real-World Example: How Section 4 Works in Practice

For Example: Let us look at a practical scenario.

Scenario: Mr. Ravi, a 35-year-old software engineer, earns ₹15 lakh in FY 2026-27 (AY 2027-28). His income includes:

• Salary: ₹13,50,000
• Rental income: ₹1,50,000

Step 1: Apply standard deduction (new regime)

• ₹15,00,000 – ₹75,000 = ₹14,25,000 (taxable income)

Step 2: Calculate tax as per new regime slabs

Step 3: Add Health & Education Cess @ 4%

• ₹93,750 × 4% = ₹3,750
• Final Tax Payable = ₹97,500

Since his income exceeds ₹12 lakh, he does not qualify for the Section 87A rebate. However, if his taxable income were ₹12 lakh or less, his tax would be zero thanks to the rebate.

Who Is Liable to Pay Tax Under Section 4?

Section 4 applies broadly. You are liable if:

1. You are a resident Indian with total income exceeding the basic exemption limit.
2. You are a non-resident with income that accrues or arises in India.
3. You are a company, firm, HUF, or any other “person” under Section 2(31) with taxable income.

However, some income is exempt:

• Agricultural income (Section 10(1))
• Income covered under specific exemptions (Section 10)
• Deductions under Chapter VI-A (like 80C, 80D) in the old regime

Special Provisions Under Section 4

Section 4(2) — TDS and Advance Tax

Section 4(2) states that income tax must be deducted at source (TDS) or paid in advance wherever the Act requires it. This means:

• Your employer deducts TDS from your salary every month.
• Banks deduct TDS on interest above certain limits.
• You may need to pay advance tax if your tax liability exceeds ₹10,000 in a year.

Income Deemed to Accrue in India

Even if you earn money outside India, it may still be taxable if:

• You are a resident of India.
• The income is deemed to accrue or arise in India (Section 9).
• It is received or deemed received in India.

This is why Section 4 supports India’s worldwide income taxation for residents.

Comparison Table: New Regime vs. Old Regime for AY 2027-28

Frequently Asked Questions (FAQ)

Q.1.  : What is the charge of income tax under Section 4?

Section 4 is the foundational provision that legally mandates the levy of income tax in India. It states that tax shall be charged for every assessment year on the total income of the previous year of every person, at rates set by the Finance Act.

Q.2. : What is the difference between Assessment Year and Previous Year?

The previous year is when you earn income (e.g., FY 2026-27). The assessment year is when you pay tax on that income (e.g., AY 2027-28). They are consecutive 12-month periods running from April 1 to March 31.

Q.3.  : Who is considered a “person” under the Income Tax Act?

Under Section 2(31), a “person” includes individuals, HUFs, companies, firms, AOPs, BOIs, local authorities, and artificial juridical persons. It is a broad definition designed to cover every possible taxable entity.

Q.4.  : What are the current income tax slabs for AY 2027-28?

Under the new tax regime (default), income up to ₹4 lakh is tax-free. Rates range from 5% to 30% across seven slabs. With the Section 87A rebate, income up to ₹12 lakh is effectively tax-free for resident individuals. Salaried persons enjoy a standard deduction of ₹75,000.

Q.5. : Is agricultural income taxable under Section 4?

No. Agricultural income is exempt under Section 10(1) of the Income Tax Act. However, it may be considered for rate purposes if you have other taxable income.

Key Takeaways

• Section 4(1) is the legal foundation for income tax in India.
• Tax is charged annually on the total income of the previous year.
• Rates are set by the Finance Act (Budget) each year.
• Every “person” under Section 2(31) is covered — not just individuals.
• The new tax regime is now default, with seven slabs and significant rebates.

For AY 2027-28, income up to ₹12.75 lakh can be effectively tax-free for salaried individuals.