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Income tax calculation is one of the most important financial tasks for salaried individuals. Understanding how tax is computed helps employees estimate their take-home salary, plan investments, and avoid last-minute tax surprises. For Financial Year (FY) 2025-26 (Assessment Year 2026-27), taxpayers can calculate their tax liability based on the applicable income tax slabs and deductions available under their chosen tax regime.
This guide explains how to calculate income tax on salary for FY 2025-26 with detailed examples and formulas.
You can refer to the complete section mapping of Income Tax Act 1961 vs Income Tax Act 2025 here.
Salary income refers to the earnings received by an employee from an employer during a financial year. It includes basic salary, allowances, bonuses, commissions, and other benefits.
The taxable salary is calculated after deducting eligible exemptions and deductions from the gross salary.
Salary income may include:
Calculating income tax on salary in India involves several steps. Here's a simplified overview of the process of computation of taxable income:
To calculate income tax on salary:
Taxable Income = Gross Salary – Eligible Deductions
Once you calculate your taxable income, apply the applicable income tax slabs and add 4% Health & Education Cess.
Example
Tax payable under the New Tax Regime:
Total Tax Liability = ₹66,300
Gross salary is the total salary earned before deductions.
Example
| Particulars | Amount (₹) |
|---|---|
| Basic Salary | 8,00,000 |
| HRA | 2,40,000 |
| Special Allowance | 1,60,000 |
| Bonus | 1,00,000 |
| Gross Salary | 13,00,000 |
In this case, the employee's gross annual salary is ₹13,00,000.
Under the New Tax Regime, most deductions available under the old regime are not allowed. However, salaried employees can claim:
Calculation
| Particulars | Amount (₹) |
|---|---|
| Gross Salary | 13,00,000 |
| Less: Standard Deduction | 75,000 |
| Taxable Income | 12,25,000 |
The taxable income becomes ₹12,25,000.
The New Tax Regime slab rates for FY 2025-26 are as follows:
| Annual Taxable Income | Tax Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 to ₹8,00,000 | 5% |
| ₹8,00,001 to ₹12,00,000 | 10% |
| ₹12,00,001 to ₹16,00,000 | 15% |
| ₹16,00,001 to ₹20,00,000 | 20% |
| ₹20,00,001 to ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Income tax is calculated progressively, meaning each slab is taxed at its respective rate.
For a taxable income of ₹12,25,000:
Tax Calculation
| Income Slab | Tax Amount (₹) |
|---|---|
| Up to ₹4,00,000 | Nil |
| Next ₹4,00,000 at 5% | 20,000 |
| Next ₹4,00,000 at 10% | 40,000 |
| Remaining ₹25,000 at 15% | 3,750 |
| Total Tax | 63,750 |
Thus, the total income tax before cess is ₹63,750.
A Health and Education Cess of 4% is levied on the income tax amount.
Calculation
Final Tax Liability
| Particulars | Amount (₹) |
|---|---|
| Income Tax | 63,750 |
| Health & Education Cess | 2,550 |
| Total Tax Payable | 66,300 |
Therefore, the final tax payable is ₹66,300
Here are the key components of a typical salary package:
It serves as the base amount upon which other components, such as provident fund, gratuity, and pension, are calculated. Typically fixed in nature, the basic salary forms a critical part of the overall pay structure.
HRA helps employees manage housing or living expenses. It also offers tax benefits, as a portion or the entirety of this allowance may be tax-exempt, subject to certain conditions based on the employee's salary and place of residence.
DA offsets the impact of inflation by covering the increased cost of living. It is commonly provided to public sector employees and is periodically revised in line with inflation rates.
This allowance reimburses employees for travel expenses incurred while commuting between their home and workplace. It is tax-exempt up to a specific limit under the Income Tax Act.
Employees receive this allowance to cover medical expenses. It is tax-exempt if claimed with supporting medical bills; otherwise, it is taxable.
LTA reimburses travel expenses incurred during holidays taken within India. It is eligible for tax exemption under specific conditions outlined in the Income Tax Act.
A bonus is typically performance-based pay aimed at boosting employee motivation and productivity. It may be a fixed amount or linked to individual, team, or company performance.
PF involves contributions from both the employer and employee, calculated as a fixed percentage of the basic salary. It accumulates as a retirement fund, which employees can access upon retirement or under specific circumstances.
This allowance includes miscellaneous components that do not fall into other defined categories. It is fully taxable.
Performance incentives reward employees for exceptional work and are tied to individual, team, or organizational goals. The amount may vary across pay periods depending on performance metrics.
| Category | Amount | Total |
|---|---|---|
| Salary income (after standard deduction of Rs. 75000) | Rs.24.22 lakh | - |
| Income derived from other sources | Rs.20,000 | - |
| Total gross income | - | Rs.24.42 lakh |
| Total Tax to be paid | - | Rs 3,25,104 |
| This is how income tax will be calculated under New Regime | ||
| Up to Rs.4 lakh | Exempted from tax | Rs.0 |
| More than Rs.4 lakh and up to Rs.8 lakh | 5% | Rs.20,000 |
| More than Rs.8 lakh and up to Rs.12 lakh | 10% | Rs.40,000 |
| More than Rs.12 lakh and up to Rs.16 lakh | 15% | Rs.60,000 |
| More than Rs.16 lakh and up to Rs.20 lakh | 20% | Rs.80,000 |
| More than Rs.20 lakh and up to Rs. 24 lakh | 25% | Rs.1,00,000 |
| More than Rs. 24 lakh | 30% | Rs. 12,600 |
| Cess | 4% of total tax | Rs 12,504 |
| Total tax to be paid | Rs.3,25,104 | |
| Category | Amount | Total |
|---|---|---|
| Salary income | Rs.16.5 lakh | - |
| Income derived from other sources | Rs.20,000 | - |
| Total gross income | - | Rs.16.7 lakh |
| Deductions under Section 80C | Rs.1.5 lakh | - |
| Deductions under Section 80TTA | Rs.8,000 | Rs.1.7 lakh |
| Deductions under Section 80D | Rs.12,000 | - |
| Gross Taxable Income | - | Rs.15 lakh |
| Total tax to be paid | - | Rs.2.73 lakh |
With Finance Minister Nirmala Sitharaman's tax announcements in Budget 2025, individual taxpayers, especially those earning up to ₹12 lakh, get significant relief under the new tax regime. The Section 87A rebate has been increased to ₹60,000, making income up to ₹12.75 lakh (including standard deduction 75,000) tax-free under the new regime.
Let’s compare tax calculations for different income levels under both Old & New Tax Regimes to determine which one is more beneficial for FY 2025-26.
Gross Income: ₹15,00,000
Deductions:
Tax Slabs (Old Regime):
Gross Income: ₹15,00,000
Deductions: Standard Deduction: ₹75,000
Taxable Income: ₹14,25,000
Tax Slabs (New Regime):
Savings in New Regime: ₹19,500
Gross Income: ₹20,00,000
Deductions: ₹5,00,000
Taxable Income: ₹15,00,000
Tax Calculation (Old Regime):
Gross Income: ₹20,00,000
Deductions: ₹75,000
Taxable Income: ₹19,25,000
Tax Calculation (New Regime):
Savings in New Regime: ₹80,600
Gross Income: ₹24,00,000
Deductions: ₹5,00,000
Taxable Income: ₹19,00,000
Tax Calculation (Old Regime):
Gross Income: ₹24,00,000 Deductions: ₹75,000 Taxable Income: ₹23,25,000
Tax Calculation (New Regime):
Savings in New Regime: ₹1,05,300
Employers calculate your annual taxable income, estimate your total tax liability, and deduct tax every month as Tax Deducted at Source (TDS).
Monthly TDS = Estimated Annual Tax Liability ÷ Number of Remaining Months
The deducted tax is deposited with the Income Tax Department on your behalf and reflected in Form 16.
Avoiding these mistakes can help you accurately calculate your tax liability and avoid notices or penalties.
The following table shows how the sections mentioned in this guide correspond to the Income Tax Act 2025.
| Income Tax Act 1961 | Income Tax Act 2025 |
|---|---|
| Section 80C | Section 123 |
| Section 80U | Section 154 |
| Section 80D | Section 126 |
| Section 24B | Section 22 |
| Section 80TTA | Section 153 |
| 80CCC | Section 123 |
| 80CCD | Section 124 |
| 80TTB | Section 153 |
| 80EE | Section 130 |
| Section 80DD | Section 127 |
| Section 80DDB | Section 128 |
| Section 80G | Section 133 |
| Section 80GGB | Section 136 |
| Section 80GGC | Section 137 |
Income tax on salary is calculated based on the income earned and the applicable tax rates. The tax rates are determined by the government and are based on income slabs. The income tax calculation is done based on the following formula: Taxable Income = Gross Salary - Deductions; Income Tax = (Taxable Income x Applicable Tax Rate) - Tax Rebate.
Anyone with taxable income can use the Tax2Win Income Tax Calculator, whether they are salaried employees, self-employed professionals, or individuals with income from other sources.
This tool is especially helpful for those looking to plan their taxes efficiently and maximize their savings by making informed investment decisions.
Gross salary is the total salary earned by an individual before any deductions or taxes are applied. It includes basic salary, allowances, bonuses, and other benefits.
Deductions from salary are amounts that are subtracted from an individual's gross salary before income tax is calculated. These include contributions to provident fund, health insurance, and other deductions as per the applicable laws.
If your gross total income exceeds the exemption limit, then you are liable to pay the income tax.
Additionally, if you have the following you must file an ITR:
To boost your in-hand salary, you can use India’s first tax planning optimizer tool that plans your investments and saves more money using recommendations provided by the tool. For instance, if you are still determining the most suitable tax regime, it will suggest the most tax-effective tax regime based on your income and investments. This tool will also analyze the additional deductions you can further avail to obtain tax relief and get a higher in-hand salary.
The new tax regime doesn’t include all the deductions and exemptions that the old regime contained. However, with the new tax regime, the tax rates are further reduced, So it totally depends on your choice which regime will suit you the best.
Each month, your employer withholds a segment of your salary and forwards it to the income tax department in your stead. Your employer calculates the TDS deduction from your salary monthly, factoring in your annual salary and investments in tax-saving products.
Gross Salary constitutes the taxable amount, whereas CTC includes non-taxable elements like provident fund and gratuity. While Gross Salary is pivotal in income tax calculations, CTC does not factor into any tax assessments.
The section 80C is covered under section 123 of the Income Tax Act 2025. While the number of the section has changed, the provisions and rules covered under it will remain the same.
