A transaction groups multiple database operations into a single logical unit. When multiple users or applications access data at the same time, it becomes important to define how transactions interact with each other. This is where isolation levels are used.

An isolation level determines how much a transaction can see changes made by other transactions. SQL Server supports levels such as Read Uncommitted, Read Committed, Repeatable Read, Serializable and Snapshot.

Read Uncommitted is the lowest level and allows dirty reads. This means a transaction may read data that has not yet been committed. Read Committed prevents reading uncommitted data but may still allow non-repeatable reads.

Higher isolation levels improve consistency but may increase locking and performance costs. Serializable is one of the strictest levels and prevents phantom reads, but it should be used carefully in high-traffic systems.

The correct isolation level depends on the application needs. Financial operations may require stricter consistency, while reporting screens may accept more flexible approaches.