How to Calculate Income Tax on Salary – Step-by-Step with Verified FY 2025-26 Slabs

• The new regime standard deduction for FY 2025-26 is Rs. 75,000, not the older Rs. 50,000 figure still shown on many outdated calculators and articles.
• Under Section 87A, income up to Rs. 12 lakh is effectively tax-free through a rebate of up to Rs. 60,000 — a significant jump from the previous Rs. 7 lakh limit and Rs. 25,000 rebate.
• Old regime slabs remain unchanged: nil up to Rs. 2.5 lakh, 5% for Rs. 2.5-5 lakh, 20% for Rs. 5-10 lakh, and 30% above Rs. 10 lakh.
• A 4% cess applies to your total tax payable after rebate and surcharge, calculated last in the seven-step process, not on your gross income directly.

Income tax is one of the primary forms of revenue generation the government uses to fund public services. Employed individuals pay tax on their earnings, calculated based on the slab they fall under. This guide provides a clear, step-by-step approach to calculating your income tax accurately using current figures, carried through a complete worked example so you can see exactly how each step affects the final number.

• Step 1 — Find your gross salary: Identify your gross salary, the total amount earned before deductions. This includes basic salary, dearness allowance, House Rent Allowance (HRA), conveyance allowance, Leave Travel Allowance (LTA), medical allowance, and Provident Fund contributions.
• Step 2 — Add other sources of income: Combine your salary with other earnings — interest, rental income, capital gains, business/professional income, or dividends — to arrive at your gross total income.
• Step 3 — Apply standard deduction and exemptions: Deduct the standard amount — Rs. 75,000 under the new regime, Rs. 50,000 under the old regime. Subtract eligible exemptions like HRA or LTA, depending on your chosen regime.
• Step 4 — Claim deductions: Reduce your taxable income further by claiming deductions under sections like 80C for investments in ELSS, PPF, NPS, or life insurance (old regime only).
• Step 5 — Calculate taxable income: Your taxable income equals gross total income minus exemptions and deductions.
• Step 6 — Apply tax rates: Use the relevant tax slabs for your chosen regime to work out the tax due.
• Step 7 — Include rebate, cess, and surcharge: Apply any applicable rebate, cess, or surcharge to determine your total tax liability.
   

The new regime is the default from FY 2023-24 onwards, but you can opt for the old regime if it offers greater savings — compare both to choose the option that genuinely suits your situation.

Seeing these steps applied to actual numbers makes the process considerably clearer than the abstract steps alone. Consider a salaried individual with a gross annual salary of Rs. 11,00,000 and no other income sources, choosing the new regime:

This example illustrates something genuinely important: at Rs. 11 lakh taxable income under the new regime for FY 2025-26, the Section 87A rebate brings the final liability to zero, even though the slab-based calculation alone (before rebate) would have shown Rs. 42,500 payable. Skipping the rebate step — which some outdated calculators do, if they haven't been updated for the current year's rebate limit — would produce a meaningfully incorrect final figure.

Old regime slabs (unchanged for several years): Nil up to Rs. 2.5 lakh, 5% for Rs. 2.5-5 lakh, 20% for Rs. 5-10 lakh, and 30% above Rs. 10 lakh.

• New tax regime (FY 2025-26): Individuals earning up to Rs. 12,00,000 annually can claim a rebate of the actual income tax payable or Rs. 60,000, whichever is lower — effectively making income up to this threshold tax-free.
• Old tax regime: Taxpayers with income up to Rs. 5,00,000 can claim a rebate of the actual tax payable or Rs. 12,500, whichever is lower.
   

Combined with the Rs. 75,000 standard deduction under the new regime, salaried individuals earning up to approximately Rs. 12.75 lakh may face zero tax liability — though this specific combined figure involves an interpretive nuance around how the standard deduction and rebate threshold interact, worth verifying against official guidance for your specific situation.

If you've compared results across different online calculators for an identical salary and gotten different final tax figures, the most common explanation isn't a calculation error — it's that the tools are working from different years' slab data. A calculator last updated for FY 2024-25 will still show the older Rs. 50,000 standard deduction and the Rs. 7 lakh/Rs. 25,000 Section 87A rebate limits, producing a genuinely different (and now outdated) result compared to one correctly updated for FY 2025-26.

Before trusting any calculator's output for actual tax planning, confirm it explicitly states which assessment year's rules it's applying — a tool that doesn't specify this, or whose figures don't match the verified slabs and rebate thresholds shown above, should be treated with caution rather than assumed current.

A cess of 4% is added to the total income tax payable, applicable to all eligible taxpayers regardless of income bracket. It's calculated on the tax amount after considering rebates and surcharges, with the collected cess allocated toward specific government initiatives like health or education.

A surcharge is an additional tax applicable to individuals with higher income levels, charged on the total income tax payable rather than income directly. The surcharge percentage varies based on income slab, with both regimes applying specific rates for higher-income categories.

These rates apply to the total income tax payable after exemptions and deductions. The notably lower surcharge rate in the new regime for incomes above Rs. 5 crore represents a genuinely significant structural difference, since the new regime caps surcharge at 25% regardless of how high income climbs beyond this threshold.

This surcharge distinction becomes particularly relevant for very high earners choosing between regimes, since the base slab rates alone don't tell the complete story at this income level — the surcharge cap difference alone can amount to a meaningfully larger gap between the two regimes' final tax liability than the slab structure suggests on its own.

When planning your tax savings, homeownership can provide significant deductions under the old regime. Home loan interest payments qualify for deductions under Section 24(b) (up to Rs. 2 lakh for self-occupied property), while principal repayments fall under Section 80C (up to Rs. 1.5 lakh). If you're considering buying a home to maximise your tax benefits, exploring home loan options becomes a genuinely worthwhile step in your broader tax planning. Bajaj Finance offers home loans from 7.25% p.a.* with amounts up to Rs. 15 Crore* and tenures up to 32 years. Check eligibility today.