How to Calculate Income Tax on Salary with Example (2026-27)
A complete step-by-step guide to calculating your income tax liability, understanding gross salary, exemptions, standard deductions, and the New vs Old Tax Regime.
Understanding how to calculate income tax on salary is a crucial financial skill for every salaried professional in India. While your employer provides you with a Form 16 at the end of the financial year, knowing the exact mechanics behind your tax calculation helps you plan your investments better, negotiate your Cost to Company (CTC) more effectively, and ensure you are maximizing your take-home pay.
In India, income tax is levied on an individual's total income earned during a financial year (April 1 to March 31). The tax liability is calculated based on predefined tax slabs introduced by the government. With the introduction of the New Tax Regime (which is now the default regime), the calculation process has undergone significant changes compared to the traditional Old Tax Regime.
In this comprehensive guide, we will break down the entire process of calculating income tax on salary step-by-step, complete with practical examples for a clear understanding. Let's dive in!
1Calculate Your Gross Salary
The first step in computing your tax is to calculate your Gross Salary. Your Gross Salary is the aggregate of all the components mentioned in your payslip before any deductions (like PF, TDS, or Professional Tax) are applied.
Components of Gross Salary typically include:
- Basic Salary: The core component of your salary, usually 40% to 50% of your CTC. It is fully taxable.
- Dearness Allowance (DA): Paid to compensate for inflation (mostly applicable to government employees). Fully taxable.
- House Rent Allowance (HRA): Paid to meet accommodation expenses. It is partially or fully exempt under the Old Regime (Sec 10(13A)) but fully taxable in the New Regime.
- Leave Travel Allowance (LTA): Allowance for domestic travel expenses. Exempt under specific conditions in the Old Regime, but fully taxable in the New.
- Special Allowance / Bonus / Incentives: Any other allowances or performance bonuses. These are generally fully taxable.
2Deduct Exemptions (Only for Old Tax Regime)
If you opt for the Old Tax Regime, you are eligible to claim certain exemptions on your allowances. These exemptions reduce your gross salary, thereby lowering your taxable income. (Note: If you choose the New Tax Regime, you must skip this step as most exemptions are disallowed).
HRA Exemption
Exemption is the minimum of:
1. Actual HRA received.
2. 50% of Basic (Metro) or 40% (Non-Metro).
3. Actual Rent Paid minus 10% of Basic.
LTA Exemption
Exemption on the actual travel cost (ticket fare only) incurred during a domestic trip. Can be claimed twice in a block of four years.
Net Salary = Gross Salary – Applicable Exemptions
3Subtract Standard Deduction & Other Deductions
Once you have your Net Salary, the next step is to subtract the Standard Deduction and chapter VI-A deductions (like 80C, 80D).
Standard Deduction (Section 16(ia))
A flat deduction allowed to all salaried employees.
- New Regime: ₹75,000 (from FY 2025-26 onwards).
- Old Regime: ₹50,000.
Professional Tax (Section 16(iii))
The exact professional tax deducted by your employer (max ₹2,500/year) is deductible from your salary income in the Old Regime.
Chapter VI-A Deductions (Old Regime Only)
- Section 80C: Up to ₹1.5 Lakhs (EPF, PPF, ELSS, LIC, Home Loan Principal).
- Section 80D: Medical Insurance Premiums (₹25k for self, extra ₹50k for senior citizen parents).
- Section 24(b): Home loan interest up to ₹2 Lakhs.
4Calculate Income Tax based on Slabs
Now that we have the Net Taxable Income, we apply the income tax slab rates. Use the interactive calculator below to see exactly how your tax is computed under both regimes.
Interactive Income Tax Calculator
FY 2025-26 (AY 2026-27)
Example: How Tax is Calculated on a 12 Lakh Salary
Let us take a practical example. Suppose Rohan earns a gross salary of ₹12,00,000 per annum. Let's see how his tax is calculated under the New Tax Regime for FY 2025-26.
- Up to ₹4,00,000 : Nil
- ₹4,00,001 to ₹8,00,000 (5% of 4L) : ₹20,000
- ₹8,00,001 to ₹11,25,000 (10% of 3.25L) : ₹32,500
* Note: In the New Tax Regime, if your taxable income is ₹12,00,000 or below, you pay absolutely ZERO tax thanks to the enhanced rebate under section 87A.
Example: How much tax for a 17 Lakhs salary?
Now let's look at someone earning a bit more, say a gross salary of ₹17,00,000. Because their income crosses the ₹12 Lakh threshold, they do not get the 87A rebate.
- 0 to 4L : Nil
- 4L to 8L (5%) : ₹20,000
- 8L to 12L (10%) : ₹40,000
- 12L to 16L (15%) : ₹60,000
- 16L to 16.25L (20% of 25k) : ₹5,000
New Tax Regime vs Old Tax Regime: Which is Better?
The Finance Ministry has made the New Tax Regime the default tax regime from FY 2023-24 onwards, and sweetened it further for FY 2025-26. But which one should you choose?
The New Tax Regime
- Has lower slab rates.
- Tax-free income up to ₹12 Lakhs (with rebate).
- Standard deduction of ₹75,000 is available.
- Disallows 80C, 80D, HRA, and LTA exemptions.
- Best for: People who don't have heavy investments, home loans, or high house rent.
The Old Tax Regime
- Allows all deductions (80C, 80D, 24b).
- Allows exemptions like HRA and LTA.
- Tax slab rates are higher (up to 30% above 10L).
- Tax-free limit is only up to ₹5 Lakhs (with rebate).
- Best for: Individuals with home loans, hefty HRA claims, and ₹1.5L+ in 80C investments.
Frequently Asked Questions (FAQ)
How do I calculate income tax for my salary?
To calculate income tax on your salary: 1. Calculate Gross Salary. 2. Subtract Standard Deduction (₹75k for New Regime). 3. Subtract applicable exemptions/deductions (Old Regime only). 4. Arrive at Net Taxable Income. 5. Apply the tax slab percentages. 6. Add 4% Health & Education Cess.
How is tax calculated on a 12 lakh salary?
In the New Tax Regime (FY 2025-26), a ₹12 Lakh gross salary yields a taxable income of ₹11,25,000 (after ₹75,000 standard deduction). The computed tax is ₹52,500. However, because the taxable income is below ₹12 Lakhs, you get a full rebate under Section 87A, resulting in ZERO tax liability.
How much tax for 17 lakhs salary?
For a ₹17 Lakh gross salary in the New Regime: Taxable income is ₹16,25,000. Based on the slabs (0-4L: Nil, 4-8L: 5%, 8-12L: 10%, 12-16L: 15%, >16L: 20%), the basic tax is ₹1,25,000. Adding 4% cess (₹5,000), the total tax liability is ₹1,30,000.
How is tax calculated in a new regime with an example?
In the new regime, tax calculation is straightforward as most exemptions are removed. For example, if Gross Income = ₹14,00,000. Less Standard Deduction = ₹75,000. Taxable Income = ₹13,25,000. Tax on first 4L = 0. Tax on 4L to 8L = ₹20,000 (5%). Tax on 8L to 12L = ₹40,000 (10%). Tax on 12L to 13.25L = ₹18,750 (15%). Total Tax = ₹78,750 + 4% Cess = ₹81,900.
What is the standard deduction for salaried employees?
The standard deduction is a flat reduction from your gross salary. For FY 2025-26, the standard deduction has been increased to ₹75,000 under the New Tax Regime, while it remains ₹50,000 under the Old Tax Regime.
Can I include my salary arrears in the income tax calculation?
Yes, salary arrears received in the current financial year must be added to your Gross Salary. However, you can claim tax relief under Section 89(1) by filing Form 10E so that you are not penalized with a higher tax slab due to the delayed payment of past salary.
Is it mandatory to choose the New Tax Regime?
No, it is not mandatory. However, the New Tax Regime is the "Default" regime. If you wish to file your taxes under the Old Regime to claim exemptions (like HRA, 80C), you must explicitly opt out of the New Regime while filing your return or declaring investments to your employer.
How do I calculate taxable income from house property?
To calculate income from house property: Take the Net Annual Value (Rental Income minus municipal taxes). Deduct a standard deduction of 30% under Sec 24(a). Deduct the home loan interest under Sec 24(b). The resulting figure is your Income from House Property, which is then added to your salary income.
Rohit Kushwaha
Software Engineer & Creator of mysalarycalculator.in
I'm Rohit Kushwaha, a Software Engineer with 3+ years of experience in developing web applications and digital solutions. By combining technology with practical financial tools, I built mysalarycalculator.in to help Indian professionals easily understand their salary, taxes, EPF, gratuity, and take-home income.
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