Step-by-step guide on how to calculate income tax on salary in India for FY 2025–26 with practical examples, slab comparison, deductions, and latest updates from Budget 2025. Understand both old and new regimes easily.
Why This Guide Matters
As a salaried individual in India, understanding how to calculate income tax on salary with example is no longer optional—it’s essential. The financial year 2025–26 has introduced notable updates, including an increased standard deduction of ₹75,000 under the new regime and extended rebates for income up to ₹12 lakh.
These changes not only influence how much tax you pay but also how you plan your finances throughout the year.
This guide will help you decode the tax calculation process with crystal clarity—whether you’re a fresher earning ₹6 lakh per year or a senior executive with ₹25 lakh CTC.
Understanding the Basics: Salary Structure and Taxable Income
Before diving into tax slabs and deductions, it's vital to break down what your salary consists of and how it translates into taxable income.
Gross Salary vs Net Salary vs Taxable Income
| Component | Description |
|---|---|
| Cost to Company (CTC) | Your total salary package including all benefits, contributions, and bonuses. |
| Gross Salary | CTC minus employer's contributions (e.g., EPF, gratuity). |
| Net Salary (Take-home) | Gross salary minus income tax, employee EPF, and other deductions. |
| Taxable Income | Gross salary minus exemptions and deductions allowed under the Income Tax Act. |
Key Salary Components Affecting Tax:
- Basic Salary – Fully taxable
- House Rent Allowance (HRA) – Partially exempt under Section 10(13A)
- Leave Travel Allowance (LTA) – Exempt when claimed with proof
- Special Allowances – Fully taxable
- Bonus/Incentives – Fully taxable
Each of these plays a role in determining how much of your income is ultimately taxable.
Choosing Between Old and New Tax Regime (FY 2025–26)
Since the introduction of the optional new tax regime under Section 115BAC, salaried employees have two methods of calculating their income tax:
Comparison of Tax Regimes (FY 2025–26)
| Annual Income | Old Regime (with deductions) | New Regime (no major deductions) |
|---|---|---|
| Up to ₹2.5 lakh | Nil | Nil |
| ₹2.5 – ₹5 lakh | 5% | 5% |
| ₹5 – ₹7.5 lakh | 20% | 10% |
| ₹7.5 – ₹10 lakh | 20% | 15% |
| ₹10 – ₹12 lakh | 30% | 15% (rebate eligible) |
| ₹12 – ₹15 lakh | 30% | 20% |
| ₹15 lakh+ | 30% | 30% |
Under the new tax regime, a rebate of up to ₹25,000 is now available for income up to ₹12 lakh (as per Budget 2025), making it an attractive option for many salaried individuals with fewer deductions.
You can review the latest tax slab updates directly from the Income Tax Department to ensure complete accuracy.
Step-by-Step Guide to Calculate Income Tax on Salary
Let’s now walk through the complete process to calculate income tax on salary using a structured and clear approach.
Step 1: Compute Gross Salary
Begin with your CTC and identify components contributing to your gross income. Exclude employer-side EPF contributions and gratuity.
Example:
CTC = ₹12,00,000
Employer EPF = ₹21,600
Gratuity = ₹18,000
Gross Salary = ₹12,00,000 – ₹21,600 – ₹18,000 = ₹11,60,400
Step 2: Deduct Allowable Exemptions
These are amounts you are allowed to deduct from your gross salary before arriving at taxable income:
- HRA exemption (as per actual rent, basic salary, and city category)
- LTA exemption (subject to conditions and actual travel proof)
- Standard Deduction of ₹75,000 (FY 2025–26, applicable in both regimes)
- Professional Tax (if applicable)
For example, if you live in Delhi, pay ₹20,000 rent, and your basic is ₹40,000/month, your eligible HRA exemption may be around ₹1.5–1.8 lakh annually.
The ET Wealth HRA Calculator is helpful in estimating this figure.
Step 3: Claim Deductions Under Chapter VI-A
Once you’ve calculated your net taxable salary after allowable exemptions, the next step is to claim deductions available under Chapter VI-A of the Income Tax Act. These deductions are applicable only under the old tax regime.
Here are some of the most commonly used sections by salaried employees:
Common Deductions for Salaried Individuals
| Section | Deduction Head | Maximum Limit |
|---|---|---|
| 80C | Investments in EPF, PPF, ELSS, LIC, etc. | ₹1,50,000 |
| 80D | Health insurance premium | ₹25,000 (₹50,000 for senior citizens) |
| 80CCD(1B) | NPS (additional contribution) | ₹50,000 |
| 80E | Interest on education loan | No Limit (for 8 years) |
| 80TTA | Savings bank interest (non-senior) | ₹10,000 |
For most salaried individuals, Section 80C is the most widely used, especially due to contributions to EPF and life insurance premiums. You can refer to the official income tax list of deductions to explore all eligible investments and payments.
Let’s say:
- You contributed ₹90,000 to EPF
- Paid ₹30,000 for LIC
- Invested ₹30,000 in ELSS
This brings your total 80C deduction to ₹1,50,000 (maximum allowed). If you also paid ₹20,000 in health insurance, that goes under Section 80D.
Total deduction claimed = ₹1,50,000 (80C) + ₹20,000 (80D) = ₹1,70,000
Step 4: Determine Taxable Income
To find your final taxable income, subtract the total deductions from your net salary (after exemptions):
Taxable Income = Gross Salary – Exemptions – Deductions
Continuing the earlier example:
- Gross Salary: ₹11,60,400
- HRA exemption: ₹1,60,000
- Standard deduction: ₹75,000
- 80C + 80D deductions: ₹1,70,000
Taxable Income = ₹11,60,400 – ₹1,60,000 – ₹75,000 – ₹1,70,000 = ₹7,55,400
This is the income on which you’ll now apply the applicable slab rates to calculate your income tax.
Step 5: Apply Income Tax Slab Rates
Depending on the regime you choose, the income tax slab rates differ significantly. If you opt for the old regime, you can apply all the deductions above. If you opt for the new regime, most exemptions and deductions are not applicable—but the slab rates are lower.
Income Tax Calculation: Old vs New Regime (on ₹7,55,400)
| Income Range | Old Regime Tax | New Regime Tax |
|---|---|---|
| Up to ₹2.5 lakh | Nil | Nil |
| ₹2.5L – ₹5L | 5% = ₹12,500 | 5% = ₹12,500 |
| ₹5L – ₹7.5L | 20% = ₹50,000 | 10% = ₹25,000 |
| ₹7.5L – ₹7.55L | 20% = ₹1,080 | 15% = ₹750 |
| Total Tax | ₹63,580 | ₹38,250 |
| Rebate (Sec 87A)* | Nil (tax > ₹5L) | ₹0 (income > ₹7L) |
*Note: Rebate under Section 87A is available only if taxable income is up to ₹5 lakh under the old regime and ₹7 lakh under the new regime (₹12 lakh in Budget 2025 with conditions).
Then add 4% Health and Education Cess on the total tax payable:
- Old Regime: ₹63,580 × 4% = ₹2,543 | Total: ₹66,123
- New Regime: ₹38,250 × 4% = ₹1,530 | Total: ₹39,780
In this case, the new tax regime is clearly beneficial unless the individual has many additional deductions.
Step 6: Consider Rebate, Surcharge, and Cess
Some additional rules that apply after slab calculation:
- Section 87A rebate for individuals earning up to ₹7 lakh (under the new regime).
- Rebate increased to ₹25,000 for income up to ₹12 lakh (from Budget 2025).
- Surcharge applies if income exceeds ₹50 lakh (10% to 37% based on slab).
- Health & Education Cess at 4% is mandatory on total tax.
For higher-income individuals, surcharge can dramatically increase their tax liability, especially under the old regime. So careful planning is needed.
For details on surcharge thresholds and cess, refer to the updated Government of India tax surcharge slabs.
Real-World Examples: Income Tax Calculation for Salaried Individuals
Understanding the process theoretically is important, but real examples offer better clarity. Below are practical income tax calculations for different salary levels under both old and new regimes for FY 2025–26.
Example 1: Salary of ₹6,00,000 per annum
Scenario:
- Location: Non-metro (e.g., Jaipur)
- Basic Salary: ₹3,00,000
- HRA: ₹1,50,000
- Other Allowances: ₹1,50,000
- Annual Rent Paid: ₹1,44,000 (₹12,000/month)
Old Regime Calculation:
- Gross Salary = ₹6,00,000
- Less: HRA Exemption ≈ ₹80,000 (based on rent, salary, and city)
- Less: Standard Deduction = ₹75,000
- Less: 80C Deductions (e.g., EPF, LIC) = ₹1,50,000
- Taxable Income = ₹6,00,000 – ₹80,000 – ₹75,000 – ₹1,50,000 = ₹3,95,000
- Tax Payable = ₹0 (eligible for Section 87A rebate)
New Regime Calculation:
- No deductions allowed except standard deduction (₹75,000)
- Taxable Income = ₹6,00,000 – ₹75,000 = ₹5,25,000
- Tax = 5% of ₹2,75,000 = ₹13,750
- Less: Rebate under 87A = ₹13,750
- Final Tax = ₹0
Verdict: Either regime works, but the new regime is simpler with less documentation.
Example 2: Salary of ₹12,00,000 per annum
Scenario:
- Location: Metro city (e.g., Mumbai)
- Basic Salary: ₹5,00,000
- HRA: ₹2,40,000
- Special Allowances: ₹2,00,000
- Bonus: ₹2,60,000
- Rent Paid: ₹2,40,000 (₹20,000/month)
Old Regime Calculation:
- Gross Salary = ₹12,00,000
- HRA Exemption ≈ ₹1,80,000
- Standard Deduction = ₹75,000
- 80C Deductions = ₹1,50,000
- 80D (Health Insurance) = ₹25,000
- Taxable Income = ₹12,00,000 – ₹1,80,000 – ₹75,000 – ₹1,50,000 – ₹25,000 = ₹7,70,000
Tax Calculation (Old Regime):
- 5% on ₹2.5L–5L = ₹12,500
- 20% on ₹5L–7.7L = ₹54,000
- Total = ₹66,500 + 4% cess = ₹69,160
New Regime Calculation:
- Only standard deduction allowed = ₹75,000
- Taxable Income = ₹11,25,000
- As per new Budget, up to ₹12L gets ₹25,000 rebate
- Tax before rebate:
- 5% on ₹2.5L–5L = ₹12,500
- 10% on ₹5L–7.5L = ₹25,000
- 15% on ₹7.5L–10L = ₹37,500
- 20% on ₹10L–11.25L = ₹25,000
- Total = ₹100,000
- Less: ₹25,000 rebate
- Total tax = ₹75,000 + 4% cess = ₹78,000
Verdict: The old regime saves ~₹9,000 due to full deductions. It’s better if you invest wisely under 80C and 80D. Otherwise, the new regime is less cumbersome.
For official slab charts and downloadable forms, you can visit the Taxpayer Information Portal maintained by NSDL, which is integrated with the Income Tax e-filing system.
Example 3: Salary of ₹18,00,000 per annum
Scenario:
- Senior executive in Bengaluru
- CTC includes higher allowances, bonus, and LTA
Let’s break it down:
- Basic Salary: ₹6,00,000
- HRA: ₹3,00,000
- Bonus: ₹3,00,000
- Special Allowance: ₹3,00,000
- Other Benefits: ₹3,00,000
Old Regime Taxable Income:
- HRA Exemption: ₹2,00,000
- Standard Deduction: ₹75,000
- 80C: ₹1,50,000
- 80D: ₹25,000
- Total Deductions = ₹4,50,000
- Taxable Income = ₹13,50,000
Tax:
- ₹12,500 (5% on 2.5L–5L)
- ₹50,000 (20% on 5L–7.5L)
- ₹75,000 (20% on 7.5L–10L)
- ₹1,05,000 (30% on 10L–13.5L)
- Total Tax = ₹2,42,500 + Cess = ₹2,52,200
New Regime:
- Standard deduction only = ₹75,000
- Taxable = ₹17,25,000
- Apply slab rates accordingly; total tax = ₹2,62,500 + cess = ₹2,72,000
Verdict: The old regime provides savings of nearly ₹20,000, making it more beneficial for high-income earners with eligible investments and expenses.
These examples provide clear insight into how to calculate income tax on salary with example and evaluate the best tax regime for your needs. The choice largely depends on how well you utilize deductions. Those who do not wish to invest in 80C options may find the new regime easier and cleaner.
Old vs New Tax Regime: Side-by-Side Comparison
Choosing between the old and new income tax regime depends on various factors—your salary structure, eligible deductions, exemptions, and future financial goals. Below is a side-by-side comparison to help you assess which regime may benefit you the most based on FY 2025–26 norms.
Comparison Table: Old vs New Tax Regime (FY 2025–26)
| Criteria | Old Regime | New Regime |
|---|---|---|
| Applicable Deductions | Yes (80C, 80D, HRA, LTA, etc.) | Mostly No (only standard deduction, NPS employer contribution) |
| Standard Deduction | ₹75,000 | ₹75,000 |
| HRA Exemption | Allowed | Not Allowed |
| 80C, 80D, 80G | Allowed | Not Allowed |
| Slab Rates | Higher (with deduction benefits) | Lower rates, fewer exemptions |
| Tax Rebate (87A) | Up to ₹5 lakh income | Up to ₹7 lakh income (now extended to ₹12 lakh with rebate) |
| Ease of Filing | Requires documentation and proofs | Simpler; no documentation needed |
| Who Should Opt | Those claiming deductions worth over ₹3 lakh | Those without many tax-saving investments |
This comparison is essential when you calculate income tax on salary with example, especially when your taxable income falls near the rebate thresholds.
For the most up-to-date list of deduction limits, you can refer to the Central Board of Direct Taxes (CBDT) portal.
Budget 2025 Highlights Impacting Salaried Taxpayers
The Union Budget 2025 introduced some impactful changes for salaried individuals, making tax planning even more relevant. Here's what you need to know:
Key Changes Introduced:
- Standard Deduction Raised:
Increased from ₹50,000 to ₹75,000 for all salaried individuals under both regimes. - Enhanced 87A Rebate:
Salaried taxpayers with income up to ₹12,00,000 under the new regime are now eligible for a rebate up to ₹25,000, effectively making their tax liability zero. - Interest Rebate on Home Loans:
First-time homebuyers may get extended interest deduction benefits under Section 80EEA (as announced), although subject to future clarification. - Simplified Form 16 Format:
The government proposes a unified format for Form 16, making it easier to compute tax and file returns without confusion. - TDS Threshold Updates:
Threshold for TDS on salary remains unchanged, but updates on professional and contractor payments have been revised.
For complete highlights and government press releases, refer to the official Budget 2025 coverage by PIB.
Tax-Saving Strategies You Can Still Use (Old Regime)
If you prefer the old regime, it’s still possible to significantly reduce your taxable income using smart, legal tax-saving instruments. These include:
Top Options for Deductions:
- Section 80C:
- EPF (automatically deducted)
- PPF
- ELSS mutual funds
- Sukanya Samriddhi Yojana
- Life Insurance premiums
- Section 80D:
- Mediclaim policy for self, spouse, children, and parents
- Section 80E:
- Interest paid on education loans
- NPS (National Pension Scheme):
- ₹50,000 additional deduction under 80CCD(1B)
- Home Loan Interest:
- Under Section 24(b), up to ₹2,00,000 for self-occupied property
Investing in these instruments can lower your taxable income significantly. For example, someone with ₹12 lakh income could reduce it to under ₹8 lakh with the right combination of deductions.
Many of these options are featured and explained on platforms like NSDL NPS Portal and the LIC India site.
These strategies are particularly effective when you're calculating income tax on salary with example using the old regime framework. They not only reduce your tax burden but also contribute to your long-term savings and protection.
Tools to Simplify Income Tax Calculation on Salary
While manual computation is useful for understanding, most salaried individuals prefer using automated calculators for accuracy and convenience. These tools help you compute taxes based on your salary, deductions, exemptions, and chosen regime—instantly.
Recommended Tax Calculation Tools:
- Income Tax India Calculator (Govt Portal):
The official e-filing website offers a comprehensive salary tax calculator where you can input your salary components and get accurate tax figures.
Access here: https://incometaxindia.gov.in/pages/tools/income-tax-calculator.aspx - EPFO Salary Breakup Tool:
If you're contributing to EPF, the Employees' Provident Fund Organisation calculator helps estimate both tax and retirement savings.
These calculators typically require:
- Annual CTC
- HRA, Basic, LTA, Bonus
- Rent paid, investments made
- Medical insurance premium
- Home loan interest, if any
Once filled, the tool will automatically display:
- Total deductions and exemptions
- Taxable income
- Slab-wise tax breakup
- Final tax liability with cess
These tools can also guide salaried professionals on whether the old or new regime offers better savings.
To address common concerns, here are the most frequently asked questions around how to calculate income tax on salary with example:
1. Can I switch between old and new regime every year?
Yes. Salaried individuals can opt between the two regimes every financial year while filing their ITR.
2. Is standard deduction available in both regimes?
Yes. From FY 2025–26, the standard deduction of ₹75,000 is available under both old and new regimes.
3. Are HRA and LTA allowed under the new tax regime?
No. These exemptions are only available under the old regime.
4. Who is eligible for Section 87A rebate in FY 2025–26?
In the new regime, individuals earning up to ₹12 lakh are eligible for a rebate of up to ₹25,000. Under the old regime, the rebate applies to income up to ₹5 lakh.
5. Do I need to submit proofs for deductions when filing ITR?
No. You don’t need to submit proofs while filing online. However, you should retain them in case the Income Tax Department requests verification later.
6. Is bonus considered taxable?
Yes. Any performance or annual bonus is treated as part of your gross salary and is fully taxable.
7. What happens if I miss claiming deductions?
You’ll end up with a higher taxable income and pay more tax. Always declare your investments and expenses before the end of the financial year.
8. How is TDS calculated on salary?
Your employer estimates annual taxable income, applies slab rates, deducts TDS monthly, and reports it in Form 16. You can verify your TDS through the TRACES portal.
Key Takeaways Before You File
Here’s a brief checklist to keep in mind when preparing to file your income tax return:
- Choose your preferred regime (based on deductions vs simplified slabs)
- Collect all investment proofs and rent receipts (if opting old regime)
- Reconcile TDS from Form 16 and 26AS
- Use reliable calculators to verify tax liability
- File ITR before due date to avoid penalties
It’s important to review your salary breakup and deductions carefully before selecting a regime. If you expect a promotion, bonus, or any major salary restructuring, reassess your regime choice accordingly.
What to Do After Calculating Your Income Tax
Now that you know how to calculate income tax on salary with example, it’s time to act. Whether you file your own tax return or rely on a CA, following a structured post-calculation plan ensures compliance, accuracy, and potential savings.
1. Download and Review Your Form 16
Your employer issues Form 16 annually, which summarizes:
- Total income paid
- Deductions claimed
- TDS deducted and deposited
- Taxable income and final tax liability
Before filing, match details in Form 16 with your salary slips and investment proofs. If you’ve switched jobs, ensure you have Form 16 from both employers. The Income Tax Department cross-verifies this with your Form 26AS, which you can check here.
2. Choose the Right ITR Form
For salaried individuals:
| Situation | ITR Form Applicable |
|---|---|
| Only salary income | ITR-1 (Sahaj) |
| Salary + capital gains (e.g., mutual funds) | ITR-2 |
| Salary + business income (freelancing) | ITR-3 |
Filing the wrong ITR form can lead to return rejection. You can verify applicable forms on the official income tax filing portal.
3. Recheck Tax Slab Selection
Even after completing your tax calculation, revisit your chosen regime. If you used the old regime but missed out on claiming 80C or HRA, your tax liability may increase unnecessarily. Similarly, if you have no investments to declare, the new tax regime will likely be better suited.
For employees, you can declare your preferred regime to the employer at the beginning of the financial year for proper TDS deductions. This avoids surprises at year-end.
4. File Your Income Tax Return Before Deadline
For FY 2025–26 (AY 2026–27), the deadline for ITR filing without audit is 31st July 2026. Filing after this date may attract a penalty under Section 234F, which could be up to ₹5,000 depending on your income.
You can file your ITR through:
- Official e-Filing Portal: https://www.incometax.gov.in
- Registered tax filing platforms
- Through an authorized Chartered Accountant
Also ensure to verify your ITR within 30 days—either via Aadhaar OTP, bank account, or physical signed copy.
This concludes your comprehensive walkthrough of how to calculate income tax on salary with example for FY 2025–26. By now, you should feel confident in breaking down your salary structure, applying relevant exemptions, selecting the right tax regime, and filing your returns on time with clarity.
FAQ
How do I calculate income tax on my salary in India?
You can calculate income tax by computing your gross salary, subtracting exemptions and deductions, and applying the correct slab rates.
What is the standard deduction for salaried employees in FY 2025–26?
The standard deduction for salaried individuals is ₹75,000 for FY 2025–26 under both old and new tax regimes.
Which is better: old or new tax regime?
The old regime is better if you claim deductions like 80C, HRA, etc. The new regime is simpler and beneficial if you don’t use many deductions.
Can I switch between old and new tax regimes every year?
Yes, salaried individuals can switch between regimes every financial year while filing their income tax return.
Is HRA exemption available in the new regime?
No, HRA and other common exemptions like LTA and 80C are not available under the new regime, except the standard deduction.
What is the latest rebate under Section 87A for FY 2025–26?
Under the new regime, individuals with income up to ₹12 lakh can now claim a rebate of up to ₹25,000 as per Budget 2025.
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