Income Tax Calculation on Salary – How to Calculate and Save Tax in 2026

For most salaried employees, income tax is deducted by the employer automatically through TDS — but understanding how that figure is calculated helps you verify it, plan deductions in advance, and avoid a surprise demand at year end.

This page covers:

• What income tax on salary is and how it works
• Step-by-step calculation method
• 10 salary components and their tax treatment
• How to use an income tax calculator
• Ways to save income tax as a salaried individual
• How income tax compliance connects to home loan eligibility

Income tax on salary is the tax the government levies on employment income. India uses a progressive slab system — the more you earn, the higher the applicable rate on the incremental income in each bracket. Employers deduct this tax at source (TDS) based on your projected annual income each year, and you reconcile the final position through your ITR.

The key choice for salaried employees since FY 2023-24 is which regime to use: the new default regime (with standard deduction but limited additional deductions) or the old regime (with the full set of exemptions and deductions under Sections 80C, 80D, 24(b), and others).

1. Determine gross salary: Add basic pay, HRA, special allowances, bonuses, perquisites, and any other compensation components.
2. Deduct exemptions: Subtract applicable exemptions — HRA (subject to conditions), LTA (for actual travel), standard deduction (Rs. 75,000 under new regime, Rs. 50,000 under old regime), and transport/medical allowances where applicable.
3. Calculate taxable income: Gross salary minus all exemptions = taxable income.
4. Apply deductions (old regime only): Subtract Section 80C investments (up to Rs. 1.5 lakh), Section 80D health insurance premium, home loan interest under Section 24(b), and other applicable deductions.
5. Apply tax slab: Apply the applicable tax rates to the remaining taxable income.
6. Add cess: Add 4% Health and Education Cess on the computed tax liability.
7. Subtract TDS already deducted: The net figure is the balance tax payable (or refundable) when filing ITR.

New tax regime (default)

Income up to Rs. 12 lakh is effectively tax-free under the new regime due to the Section 87A rebate and Rs. 75,000 standard deduction.

Old tax regime

Old regime deductions:

• Section 80C — invest up to Rs. 1.5 lakh in PPF, ELSS, EPF, NSC, home loan principal repayment, tuition fees
• Section 80D — health insurance premium up to Rs. 25,000 (Rs. 50,000 for senior citizens)
• Section 24(b) — home loan interest up to Rs. 2 lakh for self-occupied property
• Section 80E — education loan interest (no cap, for 8 years from loan start)
• NPS contribution — additional Rs. 50,000 under Section 80CCD(1B) beyond the 80C limit
• HRA exemption — claim if you live in rented accommodation

New regime considerations:

• The new regime offers lower slab rates and a higher Rs. 75,000 standard deduction
• Most deductions are not available — so the tradeoff depends on your total deduction quantum
• If your total old-regime deductions exceed Rs. 1.5-2 lakh, the old regime may give a lower net tax

Use the Income Tax Department's online tax calculator to compare both regimes before your company's investment declaration deadline.

Lenders assess income stability through ITR filings alongside salary slips. Two to three years of consistent ITR filing that matches your salary income strengthens a home loan application significantly. For home loans specifically, Section 24(b) allows you to deduct up to Rs. 2 lakh in interest on a self-occupied property — which directly reduces your taxable income and makes the effective cost of borrowing lower than the headline interest rate suggests.

Bajaj Housing Finance offers home loans from 7.25% p.a.* p.a.* with amounts up to Rs. Rs. 15 Crore* and tenures up to 32 years years. Check your eligibility today.

Understanding the computation of salary income and the process of income tax calculation on salary helps salaried individuals plan taxes effectively and avoid compliance issues. Knowing the TDS full form, understanding TDS in income tax, and learning the difference between TDS and income tax can help taxpayers accurately assess their tax liability and claim eligible deductions.

Understanding your income tax calculation helps you make better decisions about which regime to choose, which deductions to claim, and how a home loan can improve your tax efficiency. Bajaj Housing Finance offers home loans from 7.25% p.a.* p.a.* with amounts up to Rs. Rs. 15 Crore* and tenures up to 32 years years. Check your eligibility today.