Most people know roughly how much tax they pay but not precisely how the government arrives at that figure. The formula is not a secret — it follows a fixed six-step sequence that has been the same structure for decades, even as slab thresholds and deduction rules shift with each Union Budget. Once you understand the chain, you can calculate your own tax in ten minutes and spot whether a payslip, Form 16, or tax software has something wrong.
The calculation chain
Every income-tax computation in India follows the same order:
- Gross total income — all income before any adjustment.
- Subtract the standard deduction — a flat deduction for salaried/pensioners, different in each regime.
- Subtract Chapter VI-A deductions (old regime only) — 80C, 80D, HRA, home-loan interest and similar qualifying amounts.
- Apply progressive slabs to taxable income to get the slab tax.
- Apply Section 87A rebate — cancels the slab tax if income is within the limit.
- Add surcharge (incomes above ₹50 lakh only), then add 4% cess on the combined total.
The result is your total tax payable.
Step 1: Gross total income
For most salaried employees this is the gross salary shown on Form 16. Anyone with other income — bank FD interest, rental income, capital gains from mutual funds — adds those amounts in. This guide focuses on salary income, where the computation is most uniform and most relevant to the widest number of taxpayers.
Step 2: Standard deduction
Before applying slabs, a flat deduction is allowed without any receipts or proof. It comes off the gross salary first:
| Regime | Standard deduction (FY 2025-26) |
|---|---|
| Old regime | ₹50,000 |
| New regime | ₹75,000 |
The standard deduction was raised to ₹75,000 for the new regime starting FY 2024-25 and remains at ₹50,000 for the old regime.
Step 3: Chapter VI-A deductions (old regime only)
If you are on the old tax regime, a further set of deductions can reduce taxable income below the gross-minus-standard-deduction figure. The new regime does not allow most of these:
| Section | What it covers | Maximum deduction |
|---|---|---|
| 80C | PPF, EPF, ELSS, NSC, life insurance, home-loan principal, tuition fees | ₹1,50,000 |
| 80CCD(1B) | Additional NPS contribution (over and above 80C limit) | ₹50,000 |
| 80D | Health insurance premiums (higher limit for senior-citizen insured) | ₹25,000–₹1,00,000 |
| 24(b) | Home-loan interest on self-occupied property | ₹2,00,000 |
| HRA | Rent paid — lowest of actual HRA, 50%/40% of salary, or rent paid minus 10% salary | Calculated by formula |
The new regime forgoes nearly all of the above. Its only commonly-retained employer deduction is Section 80CCD(2) — employer contributions to NPS — which is allowed in both regimes.
Step 4: Taxable income
Taxable income is the income that slab rates are actually applied to:
Taxable income = Gross salary − Standard deduction − Chapter VI-A deductions (old regime)
For the new regime, Chapter VI-A deductions are zero, so taxable income = Gross salary − ₹75,000.
Step 5: Slab tax
Indian income tax is progressive: only the income within each band is taxed at that band’s rate. Your top slab rate is not the rate on your whole income.
New regime slabs for FY 2025-26 (age-independent)
| Taxable income band | Rate |
|---|---|
| Up to ₹4,00,000 | 0% |
| ₹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% |
Old regime slabs for FY 2025-26
| Taxable income band (below 60) | Rate |
|---|---|
| Up to ₹2,50,000 | 0% |
| ₹2,50,001 – ₹5,00,000 | 5% |
| ₹5,00,001 – ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
The basic exemption limit is higher for resident seniors: ₹3,00,000 for age 60–79, and ₹5,00,000 for age 80 and above. The new regime uses the same slabs for all age groups.
Step 6: Section 87A rebate
If taxable income is at or below the regime’s rebate threshold, the slab tax is cancelled entirely by the Section 87A rebate:
| Regime | Rebate threshold (taxable income) | Maximum rebate |
|---|---|---|
| Old regime | ₹5,00,000 | ₹12,500 |
| New regime (FY 2025-26) | ₹12,00,000 | ₹60,000 |
For the new regime, a marginal-relief provision prevents a cliff: taxable income just above ₹12 lakh is taxed at most at the excess over ₹12 lakh, not the full slab amount. This means a salaried person earning up to roughly ₹12.75 lakh gross (₹12L taxable after the ₹75K standard deduction) pays zero tax.
The old regime has no marginal relief at its ₹5 lakh threshold — exceeding it by even ₹1 triggers the full slab tax on the excess with no transition protection.
Step 7: Surcharge
Surcharge is a percentage levied on the slab tax (before cess), applying only to high incomes. The vast majority of taxpayers — anyone earning below ₹50 lakh — pay no surcharge:
| Total income above | Surcharge rate (old regime) | Surcharge rate (new regime, capped) |
|---|---|---|
| ₹50 lakh | 10% | 10% |
| ₹1 crore | 15% | 15% |
| ₹2 crore | 25% | 25% |
| ₹5 crore | 37% | 25% (capped) |
Marginal relief also applies at each surcharge threshold in both regimes to prevent bracket cliff effects.
Step 8: Health & Education cess
A flat 4% applies to the total of (slab tax + surcharge), after any rebate. There are no exceptions or carve-outs for cess. If the 87A rebate has zeroed out the slab tax, cess is also zero because there is nothing to apply it to.
Worked example: New regime, ₹15 lakh gross salary
Salaried, below 60, FY 2025-26:
| Step | Amount |
|---|---|
| Gross salary | ₹15,00,000 |
| Less: standard deduction | − ₹75,000 |
| Taxable income | ₹14,25,000 |
| Slab tax: 0% × ₹4,00,000 | ₹0 |
| Slab tax: 5% × ₹4,00,000 | ₹20,000 |
| Slab tax: 10% × ₹4,00,000 | ₹40,000 |
| Slab tax: 15% × ₹2,25,000 | ₹33,750 |
| Total slab tax | ₹93,750 |
| Section 87A rebate (₹14.25L > ₹12L — no rebate) | ₹0 |
| Surcharge (₹15L < ₹50L — none) | ₹0 |
| Cess @ 4% of ₹93,750 | ₹3,750 |
| Total tax payable | ₹97,500 |
Worked example: Old regime, ₹15 lakh gross salary with ₹3.5 lakh deductions
Same taxpayer opts for old regime, claiming full 80C (₹1.5L), health insurance 80D (₹50K), and home-loan interest under Section 24(b) (₹1.5L):
| Step | Amount |
|---|---|
| Gross salary | ₹15,00,000 |
| Less: standard deduction | − ₹50,000 |
| Less: 80C + 80D + Section 24(b) | − ₹3,50,000 |
| Taxable income | ₹11,00,000 |
| Slab tax: 0% × ₹2,50,000 | ₹0 |
| Slab tax: 5% × ₹2,50,000 | ₹12,500 |
| Slab tax: 20% × ₹5,00,000 | ₹1,00,000 |
| Slab tax: 30% × ₹1,00,000 | ₹30,000 |
| Total slab tax | ₹1,42,500 |
| Section 87A rebate (₹11L > ₹5L — no rebate) | ₹0 |
| Surcharge (₹15L < ₹50L — none) | ₹0 |
| Cess @ 4% of ₹1,42,500 | ₹5,700 |
| Total tax payable | ₹1,48,200 |
At this income and deduction level the new regime (₹97,500) is cheaper by ₹50,700. For the old regime to win at ₹15 lakh, total deductions would need to reach roughly ₹6.5 lakh or more. The income tax calculator computes both regimes side by side so you can find your exact crossover.
Practical use cases
- Comparing job offers. Two offers with different gross salaries translate to different take-home amounts depending on slab position. Running both through the calculation shows the after-tax gap, not just the gross difference.
- Understanding Form 16. The TDS certificate follows exactly this chain. If the deductions in Form 16 differ from what you plan to claim at filing, you’ll owe or receive the difference when filing your ITR.
- Planning a deduction purchase. Knowing your marginal slab rate tells you precisely how much each rupee of 80C or 80D is worth: ₹0.20 per rupee in the 20% slab (×1.04 cess = ₹0.208), and ₹0.30 per rupee in the 30% slab (×1.04 = ₹0.312).
- Evaluating a salary raise. If a raise pushes you into the next slab, only the portion above the band boundary is taxed at the new rate — the raise is always worth taking.
Common mistakes
- Applying the top rate to the entire income. If your income sits in the 30% slab, 30% applies only to the portion above the previous band boundary. Your effective rate on total income is substantially lower.
- Forgetting the standard deduction. Many people look up the slab table and apply it directly to gross salary, skipping the ₹50K or ₹75K that comes off first.
- Confusing total income with taxable income. Deductions reduce taxable income, not the gross. The slabs are applied to taxable income after deductions — a meaningful distinction when deductions are large.
- Assuming the 87A rebate is always available. The moment taxable income crosses ₹5L (old) or ₹12L (new), the standard rebate disappears. In the old regime this creates a hard cliff with no protection; the new regime has marginal relief above ₹12L.
- Ignoring cess on the final figure. A slab-tax estimate of ₹1,00,000 is actually ₹1,04,000 after the 4% cess. Every “slab rate” quote needs to be grossed up.
Key takeaways
- Income tax follows six steps in fixed order: income → standard deduction → other deductions (old regime) → taxable income → slab tax → rebate → surcharge + cess.
- Progressive slabs mean each band is taxed only at its own rate — the 30% rate never applies to your entire salary.
- The new regime’s ₹75,000 standard deduction plus the ₹12L Section 87A rebate makes gross salaries up to ~₹12.75 lakh tax-free for salaried employees.
- Cess is mandatory at 4% on all taxable income; a rebate that zeros the slab tax also zeros the cess.
- Surcharge applies only above ₹50 lakh — the vast majority of taxpayers never encounter it.
Frequently asked questions
Do I pay tax on every rupee I earn? No. The first band of income is taxed at 0% (up to ₹4L in the new regime, ₹2.5L in the old). Progressive slabs mean each band is taxed only on the income within it.
What is a surcharge and does it affect most people? Surcharge is an extra levy on the slab tax for incomes above ₹50 lakh. Anyone earning less than ₹50 lakh pays no surcharge at all — that covers the vast majority of individual taxpayers.
Can I choose my regime freely each year? Salaried employees can choose between old and new regimes at the start of each financial year by informing their employer. The new regime is the default from FY 2023-24 onwards; you must explicitly opt into the old one. Business income taxpayers have a one-time choice with a restricted opt-back window.
What is Form 16 and how does it relate to this calculation? Form 16 is the TDS certificate your employer issues, showing gross salary, deductions claimed on your behalf, and the TDS deducted. The tax in Part B of Form 16 follows exactly this six-step sequence — and if the employer’s computation differs from your actual deductions, you settle the difference at ITR filing.
What is the difference between FY and AY? The Financial Year (FY) is the year you earn the income (April to March). The Assessment Year (AY) is the following year when you file the return. Income earned in FY 2025-26 (April 2025 – March 2026) is filed and assessed in AY 2026-27.
If I have salary and FD interest, how are they combined? Both are added to get gross total income. The standard deduction applies only to the salary component; FD interest is added as “income from other sources.” The combined gross then flows through the calculation chain above.
This guide describes the income-tax calculation for resident individuals under the Income Tax Act as amended for FY 2025-26. Tax rules change with each Union Budget; the treatment of capital gains, business income, non-resident status, and alternative minimum tax are outside the scope of this article. Consult a qualified chartered accountant or the official Income Tax Department portal for advice specific to your income mix and filing situation.