Income tax is a significant component of a country’s revenue, and understanding how it applies to your salary can help you plan for your finances more effectively. In this blog post, we’ll guide you through how to calculate income tax on your salary, incorporating the revised income tax slabs for FY 2025-26. We will also discuss the deductions available under both the old and the new tax regimes, providing a clear, practical example to help you better understand the process. Let us breakdown on how to calculate income tax on salary with example.
New Income Tax Slabs Budget FY 2025-26
How to Calculate Income Tax on Salary?
Step 1: Know Your Gross Income
The first step in calculating your income tax is to determine your gross income. This includes your salary, bonuses, incentives, and any other income you receive before any deductions are made.
For example, if your monthly salary is ₹50,000 and you receive an additional ₹20,000 as a bonus during the year, your gross income for the year would be:
Gross Income=Monthly Salary×12+Bonus=50,000×12+20,000=₹620,000
Step 2: Apply Deductions and Exemptions
India offers various exemptions and deductions that can reduce your taxable income. However, the availability of deductions depends on which tax regime you choose—the old tax regime or the new tax regime.
Old Tax Regime Deductions:
Under the old tax regime, taxpayers can claim several deductions to reduce their taxable income. Some of the most common deductions include:
- Section 80C: Deductions for investments like life insurance premiums, provident fund, and tax-saving fixed deposits, up to ₹1.5 lakh.
- Section 10(13A): HRA (House Rent Allowance) exemption.
- Section 80D: Deductions for premiums paid on health insurance.
- Standard Deduction: ₹50,000 for salaried employees.
- Section 80G: Donations to charitable organizations.
Let’s assume you qualify for the following under the old tax regime:
- Standard Deduction of ₹50,000.
- Tax-saving investments under Section 80C of ₹1,00,000.
Your taxable income would now be:
Taxable Income=Gross Income−Deductions=620,000−(50,000+100,000)=₹470,000
New Tax Regime Deductions:
Under the new tax regime, you can benefit from lower tax rates, but it comes with fewer deductions and exemptions. The key deductions still allowed in the new tax regime are:
- NPS (National Pension System) Contribution: Employer contributions to NPS are eligible for tax deductions.
- EPF (Employees’ Provident Fund) Contributions: Employee and employer contributions to EPF remain eligible for tax benefits.
- Gratuity: Gratuity is tax-free up to certain limits.
- Leave Encashment: For government employees, leave encashment is tax-free up to a specified amount.
However, most of the common deductions such as those under Section 80C, Section 80D, Section 10(13A) (HRA), and other exemptions are not available under the new tax regime.
If you opt for the new tax regime, your taxable income would still be ₹620,000 as you wouldn’t be able to claim deductions for tax-saving investments or HRA.
Step 3: Determine the Applicable Tax Slab
For FY 2025-26, the Indian government has introduced revised tax slabs. The new tax slabs for individual taxpayers below 60 years of age are as follows:
Income | Tax Rate |
---|---|
₹0 – ₹4,00,000 | Nil |
₹4,00,001 – ₹8,00,000 | 5% |
₹8,00,001 – ₹12,00,000 | 10% |
₹12,00,001 – ₹16,00,000 | 15% |
₹16,00,001 – ₹20,00,000 | 20% |
₹20,00,001 – ₹24,00,000 | 25% |
Above ₹24,00,000 | 30% |
As your taxable income of ₹4,70,000 falls in the ₹4,00,001 – ₹8,00,000 range, it will be taxed at 5%.
Step 4: Apply the Enhanced Tax Rebate Under Section 87A (New Tax Regime)
In Budget 2025, the government introduced a significant enhancement to the tax rebate under Section 87A for taxpayers opting for the new tax regime.
Now, resident individuals with a total income of up to ₹12,00,000 (or ₹12.75 lakh for salaried individuals, considering the standard deduction of ₹75,000) will not have to pay any income tax under the new tax regime. This change marks a significant increase from the previous rebate limit of ₹7,00,000, providing relief to a larger number of taxpayers.
For those earning slightly above ₹12,00,000, a marginal relief mechanism has been introduced. This ensures that taxpayers do not pay excessive tax due to a slight increase in income beyond the threshold. The tax payable will be limited to the amount exceeding the rebate threshold.
Since your taxable income is ₹4,70,000, which is well below ₹12,00,000, you will be eligible for the Section 87A rebate under the new tax regime. As a result, your income tax payable will be ₹0.
Step 5: Calculate the Tax Payable
Now, let’s calculate the tax payable on your taxable income:
- For the first ₹4,00,000 – No tax is applied.
- For the next ₹70,000 (₹4,70,000 – ₹4,00,000) – Tax is applied at 5%:
Tax=70,000×5%=₹3,500
Since you qualify for the Section 87A rebate under the new tax regime, this amount will be reduced to ₹0.
Example Breakdown for Income Tax on Salary
Here’s a recap of the calculations:
- Gross Income: ₹6,20,000
- Deductions:
- Old Tax Regime: ₹1,50,000 (Standard Deduction + Section 80C)
- New Tax Regime: No deductions applied.
- Taxable Income:
- Old Tax Regime: ₹4,70,000
- New Tax Regime: ₹6,20,000 (No deductions)
- Tax Payable:
- Old Tax Regime: ₹3,500 (after applying the 5% tax rate on ₹70,000)
- New Tax Regime: ₹0 (after applying the Section 87A rebate)
Conclusion
The income tax calculation for salaried individuals is a simple process when you know the right steps and applicable tax slabs. The revised tax slabs for FY 2025-26 aim to ease the tax burden for middle-income earners, providing them with more disposable income. By understanding the available deductions and exemptions, you can optimize your tax planning and save more.
- If you opt for the old tax regime, you can claim deductions such as those under Section 80C and Section 10(13A) (HRA), which will reduce your taxable income.
- If you choose the new tax regime, you benefit from lower tax rates, but you cannot claim most deductions. However, the enhanced Section 87A rebate significantly benefits individuals with taxable income up to ₹12,00,000, eliminating tax liability for many taxpayers in this range.
Always compare both tax regimes to see which one provides the best tax savings in your situation. If you need help making this decision or calculating your tax liability, consulting a tax expert or financial advisor could be beneficial.
Note: Tax calculations are based on the current rules. Please consult with a tax professional or refer to the latest government guidelines to confirm the most accurate tax calculation for your situation.