Category is one of the built in taxonomy in WordPress.
so to clear things: taxonomy is a way to group things together.
we can create custom taxonomies in WordPress just like builtin ones. for example Carscould be a taxonomy with terms like
Audi Toyota Benz Mazda
there are mainly two types of taxonomies available which are hierarchical and non hierarchical
Category is best example of hierarchical taxonomy and Tag is an example of non hierarchical taxonomy
The relationship between taxonomies and terms is rather simple; think of taxonomies as the ‘parent’ and terms as the ‘children’. For example, a taxonomy called ‘Recipes’ for the ‘Food’ post type could have multiple terms such as ‘Vegetarian’ or ‘Fresh’, ‘Easy Cooking’.
Another example is where you might have a post type called Reviews and a new post called ‘Best Films of The Year’. You can help define this content by having a taxonomy called ‘Films’ and create new terms such ‘Top Picks’ or ‘Film Reviews’. All this does is help define your content into smaller chunks making it much easier to find and focus on.