How to Calculate Taxable Income in India: A Step-by-Step Guide

Understand how your income is taxed in India under both old and new regimes. Learn to claim deductions smartly and discover tax-saving strategies like investing in Fixed Deposits.
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4 min
09-May-2025

Whether you are a salaried professional or a freelancer, knowing your taxable income helps you plan better, claim deductions smartly, and avoid any year-end tax surprises.

Taxable income is the portion of your earnings on which you are legally required to pay income tax. It is calculated after subtracting all eligible deductions and exemptions from your gross total income—which includes salary, capital gains, rental income, business profits, and other earnings.

Let us break down how it works, the steps involved, and how you can optimise your tax outgo while growing your wealth.

What is Taxable Income?

Taxable income is what’s left of your total income after subtracting exemptions and deductions allowed under the Income Tax Act. This final figure determines how much tax you owe under the old or new tax regime.

For instance, if you earn Rs. 12 lakh annually and claim deductions under Section 80C and 80D worth Rs. 2 lakh, your taxable income comes down to Rs. 10 lakh.

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How to calculate taxable income – Step by Step

Here is a simplified process to calculate your taxable income:

1. Add all sources of income

Include income from all five heads:

  • Salary
  • House property (e.g., rental income)
  • Business or profession
  • Capital gains (from shares, mutual funds, property, etc.)
  • Other sources (e.g., interest from FDs, dividends)

2. Subtract exempt income

Exclude any income that is fully exempt, like:

  • Agricultural income
  • Tax-free allowances (if eligible)
  •  Certain life insurance proceeds

3. Claim deductions under various sections

These help reduce your tax burden significantly:

  • Section 80C: Invest in PPF, ELSS, life insurance, or tax saving FDs (up to Rs. 1.5 lakh)
  • Section 80D: Premiums for health insurance (limit: Rs. 25,000/Rs. 50,000)
  • Section 24(b): Home loan interest (up to Rs. 2 lakh)

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4. Add standard deduction

Salaried individuals can claim a flat Rs. 50,000 deduction and pensioners can claim a flat Rs. 1,00,000 —no documentation needed.

5. Deduct professional tax

If your employer deducts professional tax, it’s allowed as a deduction too.

6. Factor in HRA and LTA

You can claim House Rent Allowance (HRA) and Leave Travel Allowance (LTA) if they’re part of your salary and you meet the eligibility criteria.

7. Subtract all applicable deductions

After reducing all these eligible deductions from your gross income, the remaining amount is your net taxable income.

Once you know this amount, apply the applicable tax rates based on your chosen regime.

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Income Tax Slabs for FY 2024–25

For Individuals Below 60 Years – Old Regime

Annual Income (Rs. )

Tax Rate

Up to Rs. 2.5 lakh

Nil

Rs. 2.5 lakh – Rs. 5 lakh

5%

Rs. 5 lakh – Rs. 10 lakh

20%

Above Rs. 10 lakh

30%


Note: Additional 4% Health & Education cess applies.
This regime works best if you have eligible deductions and tax-saving investments in place.

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For Individuals – New Regime (FY 2024–25)

Annual Income (Rs. )

Tax Rate

Up to Rs. 3 lakh

Nil

Rs. 3 lakh – Rs. 6 lakh

5%

Rs. 6 lakh – Rs. 9 lakh

10%

Rs. 9 lakh – Rs. 12 lakh

15%

Rs. 12 lakh – Rs. 15 lakh

20%

Above Rs. 15 lakh

30%


Under the new regime, only a standard deduction of Rs. 50,000 is available. Most other exemptions like 80C, HRA, and 80D are not allowed.

If your taxable income is below Rs. 7 lakh, you're eligible for Section 87A rebate, which means you pay zero tax.

Popular Tax Deductions You Can Claim (Old Regime)

Here’s a quick rundown of deductions that can help you lower your tax burden:

Section

What It Covers

Limit

80C

PPF, ELSS, life insurance, tax-saving FD

Rs. 1.5 lakh

80CCD(1B)

Additional NPS investment

Rs. 50,000

80D

Health insurance

Rs. 25,000/Rs. 50,000

24(b)

Interest on home loan

Rs. 2 lakh

80G

Donations to charities

Varies

80E

Education loan interest

No limit

80EE/80EEA

Home loan interest for first-time buyers

Rs. 50,000/Rs. 1.5 lakh

80TTA/80TTB

Interest from savings/FDs (for seniors)

Rs. 10,000/Rs. 50,000


Many of these are only valid under the old regime. Choose your regime based on what fits your profile.

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Conclusion: Plan Smart, Save More

Understanding how taxable income works helps you take charge of your finances. Whether you prefer the flexibility of the old regime or the simplicity of the new one, the key is to choose the option that saves you the most money based on your lifestyle and investments.

Also, don’t forget—investing wisely not only helps reduce tax but builds long-term stability. If you're looking for a reliable starting point, Fixed Deposits are among the safest ways to lock in returns and grow your savings.

Open an FD today an earn inflation beating returns.

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Frequently asked questions

How do you calculate total taxable income?
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