How to calculate income tax in India, step by step
Income tax looks complicated because it is presented as a table of slabs, and a table of slabs answers none of the questions people actually have. The calculation itself is five steps in a fixed order, and once you have seen it run through once it stops being mysterious.
These figures are for FY 2025-26 (AY 2026-27) under the new regime, which is the default unless you opt out.
Step 1: Add up your income
Everything taxed at slab rates: salary, interest from deposits, rent received, professional fees. Capital gains are not part of this — they are taxed at their own rates and calculated separately.
Say your annual salary is ₹20,00,000 with no other income.
Step 2: Subtract what you are allowed to
Under the new regime this is short. The standard deduction on salary is ₹75,000, and the employer's contribution to NPS under section 80CCD(2) is deductible up to 14% of basic pay. That is essentially the list.
Gross income ₹20,00,000
Standard deduction − ₹75,000
Taxable income ₹19,25,000
Under the old regime the standard deduction is ₹50,000, but you can also claim 80C, 80D, HRA exemption and home-loan interest — which is the whole trade, and the subject of its own guide.
Step 3: Apply the slabs
This is the part most people get wrong, and the mistake is always the same: assuming that crossing into a higher slab taxes all your income at the higher rate. It does not. Only the money inside each band is taxed at that band's rate.
The FY 2025-26 new regime slabs:
| Taxable income | Rate |
|---|---|
| Up to ₹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% |
On ₹19,25,000 that works out as:
First ₹4,00,000 at 0% = ₹0
Next ₹4,00,000 at 5% = ₹20,000
Next ₹4,00,000 at 10% = ₹40,000
Next ₹4,00,000 at 15% = ₹60,000
Next ₹3,25,000 at 20% = ₹65,000
────────
Tax before rebate ₹1,85,000
A raise never leaves you worse off. That is a direct consequence of this structure.
Step 4: Subtract the section 87A rebate
This is the step nobody mentions and the one that surprises people most. If your taxable income is ₹12,00,000 or less, the rebate cancels your tax entirely — up to ₹60,000 of it.
That is why a salary of ₹12,75,000 comes out at zero tax: the ₹75,000 standard deduction brings taxable income to exactly ₹12,00,000, the slab tax on that is ₹60,000, and the rebate wipes out all of it.
Our ₹19,25,000 is well above the limit, so no rebate applies.
What if you are just over the line?
Marginal relief protects you. Without it, one rupee over ₹12,00,000 would cost about ₹60,000. Instead your income tax is capped at the amount by which your income exceeds the limit — earn ₹12,10,000 and the tax is ₹10,000, not ₹61,500.
One wrinkle worth knowing: the 4% cess is charged on top of that capped figure, so take-home dips by a few hundred rupees across the relief band before recovering at roughly ₹12,75,000. The old regime has no marginal relief on 87A at all, so its ₹5,00,000 limit is a genuine cliff.
Step 5: Add surcharge and cess
Surcharge applies only above ₹50 lakh of taxable income — 10% above ₹50 lakh, 15% above ₹1 crore, 25% above ₹2 crore. The old regime adds a 37% band above ₹5 crore; the new regime caps at 25%. Marginal relief applies at each threshold too.
Health and education cess is 4%, charged on tax plus surcharge, and it applies to everyone.
Tax before rebate ₹1,85,000
Section 87A rebate − ₹0
Surcharge + ₹0
Cess at 4% + ₹7,400
──────────
Total tax payable ₹1,92,400
Divide by twelve and you have the monthly TDS your employer should be deducting: about ₹16,033.
The whole thing in one line
(Gross − deductions) → slabs → −87A rebate → +surcharge → +4% cess
Common mistakes
- Applying one rate to everything. The slabs are progressive. Only the income inside a band is taxed at that band's rate.
- Confusing gross with taxable. The rebate threshold and the surcharge thresholds are both measured on taxable income, after deductions — which is why the standard deduction can be worth far more than ₹75,000 of tax if it drops you under a threshold.
- Assuming the new regime is always cheaper. It depends entirely on the deductions you actually claim.
- Forgetting cess. Four percent is small but it is charged on everyone, so the headline rate always understates the real cost slightly.
Do it with your own numbers
The Income Tax Calculator runs all five steps and shows each one, for FY 2025-26 or FY 2024-25, under both regimes at once — so you can see not only what you owe but which choice costs less. It applies the rebate and standard deduction automatically, handles senior-citizen exemption limits, and runs entirely in your browser: your salary is never uploaded anywhere.