Figuring out your income tax shouldn't feel like decoding a legal document. In simple terms, income tax on salary in India is calculated by first arriving at your gross taxable income (your salary minus exemptions and the standard deduction), then applying deductions based on the tax regime you choose, and finally applying the slab rates for FY 2026-27 plus health and education cess. For most salaried employees, income up to ₹12.75 lakh (after the standard deduction) is effectively tax-free under the new regime, thanks to a rebate that brings the net tax liability to zero.
This guide walks through the entire calculation step by step, compares the old and new tax regimes, and includes a worked example so you can see exactly how the numbers come together.
Understanding the Basics: CTC vs. Gross Salary vs. Taxable Income
Before calculating tax, it helps to untangle three terms that often get confused:
- CTC (Cost to Company): The total amount your employer spends on you annually, including salary, employer PF contributions, insurance, and other benefits. This is not the amount you actually take home or the amount taxed.
- Gross Salary: Your salary before any deductions, typically CTC minus employer-side contributions like PF and gratuity.
- Taxable Income: What's left after subtracting exemptions (like HRA) and the standard deduction from your gross salary. This is the figure that actually gets taxed.
A common mistake is calculating tax directly on CTC. In reality, several components get excluded or adjusted before you arrive at the number that matters for tax purposes.
Step 1: Choose Your Tax Regime (Old vs. New)
India currently allows salaried employees to choose between two tax regimes each year, and this choice significantly affects how your tax is calculated.
- New Tax Regime (default): Lower slab rates, fewer deductions and exemptions allowed.
- Old Tax Regime: Higher slab rates, but with access to deductions like Section 80C, Section 80D, and HRA exemption.
Since the Union Budget 2026 made no changes to slab rates for FY 2026-27, the structure introduced in the previous budget continues to apply. It's not mandatory to stick with the default new regime, you can choose whichever regime results in lower tax liability, and this choice can even be revised at the time of filing your return.
Income Tax Slabs for FY 2026-27 (New Regime)
A standard deduction of ₹75,000 applies to salaried individuals and pensioners under the new regime. On top of that, a rebate under Section 87A brings tax liability down to zero for net taxable income up to ₹12,00,000, meaning salaried employees earning up to roughly ₹12.75 lakh (after the standard deduction) effectively pay no income tax at all under this regime.
Income Tax Slabs for FY 2026-27 (Old Regime)
The old regime retains its long-standing structure for individual taxpayers under 60:
The old regime allows a much wider range of deductions, HRA exemption, Section 80C investments, Section 80D health insurance premiums, and more, which is why it can still work out cheaper for taxpayers with significant eligible investments or high rent payments, despite the higher headline rates.
Step 2: Calculate Your Gross Taxable Income
Start with your gross salary, then subtract any applicable exemptions:
- HRA (House Rent Allowance) exemption: Available under the old regime only, calculated based on the lowest of: actual HRA received, rent paid minus 10% of basic salary, or 50%/40% of basic salary depending on city.
- Standard deduction: ₹75,000 for salaried employees under the new regime.
- Leave Travel Allowance (LTA): Exempt under specific conditions, primarily under the old regime.
Under the new regime, most exemptions beyond the standard deduction don't apply, which is part of why its slab rates are structured lower to compensate.
Step 3: Apply Deductions (Old Regime Only)
If you've opted for the old regime, this is where you can meaningfully reduce your taxable income:
- Section 80C: Deductions up to ₹1.5 lakh for investments like PPF, ELSS mutual funds, life insurance premiums, and EPF contributions.
- Section 80D: Deductions for health insurance premiums paid for yourself, your spouse, children, and parents.
- Employer NPS contributions (Section 80CCD(2)): Available under both regimes, and notably, the new regime allows employer NPS contributions up to 14% of basic salary as a deduction, a benefit retained specifically to keep some retirement-savings incentive within the otherwise deduction-light new regime.
Step 4: Apply the Slab Rates and Calculate Tax
Once you have your net taxable income, apply the relevant slab rates progressively, each portion of income is taxed at the rate for that specific bracket, not your entire income at the highest applicable rate.
Worked Example: ₹12.75 Lakh Salary (New Regime)
- Gross annual salary: ₹12,75,000
- Standard deduction: ₹75,000
- Net taxable income: ₹12,00,000
- Tax calculation:
- ₹0–₹4,00,000: Nil
- ₹4,00,001–₹8,00,000 (5%): ₹20,000
- ₹8,00,001–₹12,00,000 (10%): ₹40,000
- Total tax before rebate: ₹60,000
- Section 87A rebate: Since net taxable income is exactly ₹12,00,000, the rebate reduces this to zero.
- Final tax payable: ₹0
This is exactly why salaries up to roughly ₹12.75 lakh are commonly described as "tax-free" under the new regime, the rebate, not a slab exemption, is doing the work here.
What Happens Just Above ₹12 Lakh?
Since the rebate has a hard ceiling at ₹12,00,000 of net taxable income, crossing that threshold by even a small amount could theoretically create a large tax jump. To prevent this, marginal relief applies just above the threshold, ensuring the additional tax owed never exceeds the amount by which income exceeds ₹12 lakh.
Step 5: Add Surcharge (If Applicable)
For higher earners, a surcharge applies on top of the base tax calculation:
- 10% surcharge for income above ₹50 lakh
- 15% surcharge for income above ₹1 crore
- 25% surcharge for income above ₹2 crore (capped at 25% under the new regime)
Step 6: Add Health and Education Cess
A 4% Health and Education Cess is added to the total tax liability (including any surcharge), for both regimes. This is a fixed final step in every income tax calculation, regardless of income level or regime chosen.
How TDS Works for Salaried Employees
Most salaried employees don't pay tax as a lump sum, it's deducted monthly by the employer as TDS (Tax Deducted at Source), based on your declared investments, regime choice, and projected annual income. At the start of each financial year, employees typically submit an investment declaration, and TDS is calculated and spread across monthly paychecks accordingly. Any mismatch between actual and declared investments gets reconciled when you file your income tax return.
Your Form 16, issued annually by your employer, summarizes the salary paid and TDS deducted, and is the primary document used to file your income tax return.
Old vs. New Regime: Which Should You Choose?
There's no universal answer, it depends on your specific financial situation:
- Choose the new regime if: You don't have significant investments in 80C instruments, don't pay substantial rent (or don't claim HRA), and prefer simplicity with lower headline rates.
- Choose the old regime if: You have substantial deductions available, high rent with HRA exemption, significant Section 80C/80D investments, or home loan interest deductions that meaningfully reduce your taxable income.
As a general rule of thumb, if your total eligible deductions under the old regime exceed roughly ₹4-5 lakh (depending on your income level), the old regime may still work out cheaper despite the higher slab rates. Since this crossover point varies by income and specific deductions, it's worth calculating both ways before deciding rather than assuming the default new regime is automatically better.
Frequently Asked Questions
How is income tax calculated on salary in India? Gross salary is reduced by exemptions and the standard deduction to arrive at net taxable income. Slab rates for FY 2026-27 are then applied progressively, followed by any applicable surcharge and a 4% health and education cess.
What is the income tax slab for salaried employees in 2026-27? Under the new regime: nil up to ₹4 lakh, 5% up to ₹8 lakh, 10% up to ₹12 lakh, 15% up to ₹16 lakh, 20% up to ₹20 lakh, 25% up to ₹24 lakh, and 30% above that, with a ₹75,000 standard deduction and a rebate that zeroes out tax up to ₹12 lakh net taxable income.
Which is better, old or new tax regime? It depends on your deductions. The new regime suits those with minimal investments or rent claims, while the old regime can be cheaper if you have significant Section 80C, 80D, or HRA deductions.
How much salary is tax-free in India? Under the new regime for FY 2026-27, salaried employees earning up to approximately ₹12.75 lakh (after the ₹75,000 standard deduction) pay effectively zero tax due to the Section 87A rebate.
What deductions can salaried employees claim? Under the old regime: Section 80C (up to ₹1.5 lakh), Section 80D (health insurance), and HRA exemption. Under the new regime, primarily the standard deduction and employer NPS contributions under Section 80CCD(2).
How is TDS deducted from salary? Employers calculate expected annual tax liability based on your declared regime and investments, then deduct it proportionally each month as TDS, reconciled at year-end through your Form 16 and income tax return.
Final Thoughts
Calculating income tax on your salary in India comes down to a consistent sequence: determine your net taxable income, choose the regime that minimizes your liability, apply the correct slab rates, then add surcharge and cess where applicable. For most salaried employees under the new regime in FY 2026-27, income up to roughly ₹12.75 lakh carries no tax burden at all, but this depends entirely on accurately calculating your net taxable income first. Since slab rates, rebate limits, and deduction rules can shift with each Union Budget, it's always worth confirming current figures directly on the official Income Tax Department portal before filing.
Want to see your exact tax liability under both regimes side by side? Try our India Income Tax Calculator (Old vs. New Regime) to compare your numbers instantly, or read our detailed breakdown of the old tax regime vs. new tax regime to understand which one fits your specific financial situation. For a broader look at how income tax compares to other tax types, our guide on income tax vs. sales tax explains the key structural differences, useful context if you're comparing tax systems across countries.
Tax slabs, rebate limits, and deduction rules referenced above reflect Union Budget 2026 provisions for FY 2026-27 (AY 2027-28), which retained the structure introduced in the previous budget. Since these figures can change in future Union Budgets, always verify current rates on the official Income Tax Department portal (incometax.gov.in) before filing your return.