How Income Tax Is Calculated in India (FY 2025-26)
Income tax in India is levied on your total income earned during a financial year — from 1 April to 31 March. For income earned in FY 2025-26, you file your return in Assessment Year (AY) 2026-27, typically by 31 July 2026. The calculation begins with your gross total income, which includes salary, income from house property, capital gains, business or professional income, and income from other sources. From this gross figure, eligible deductions and exemptions are subtracted to arrive at your taxable income. Progressive slab rates are then applied to this taxable income to determine your base tax liability. Finally, a health and education cess of 4% is added to the tax amount, and any applicable rebate under Section 87A may reduce your liability to zero for lower income brackets.
Understanding Tax Slabs and Progressive Taxation
India uses a progressive tax system, meaning different portions of your income are taxed at different rates. You do not pay a single flat rate on your entire income. For example, under the new tax regime for FY 2025-26, income up to ₹4 lakh is tax-free, income between ₹4 lakh and ₹8 lakh is taxed at 5%, between ₹8 lakh and ₹12 lakh at 10%, and so on up to 30% for income above ₹24 lakh. Each slab only applies to the income falling within that range. This structure ensures that lower-income earners pay proportionally less tax while higher earners contribute more. After computing slab-wise tax, the rebate under Section 87A can eliminate your entire tax bill if your taxable income stays within the prescribed threshold — ₹12 lakh under the new regime and ₹5 lakh under the old regime for FY 2025-26.
New Tax Regime vs Old Tax Regime: Key Differences
Since Budget 2020, Indian taxpayers can choose between two parallel tax regimes every financial year. The new tax regime, which is now the default from FY 2023-24 onwards, offers lower slab rates and a standard deduction of ₹75,000 (for FY 2025-26) but does not allow most chapter VI-A deductions like Section 80C, 80D, or HRA exemptions. The old tax regime retains the traditional slab structure with higher rates but permits the full range of deductions and exemptions that salaried taxpayers have relied on for decades — including investments under Section 80C (up to ₹1.5 lakh), health insurance under Section 80D, HRA exemption, home loan interest under Section 24(b), and donations under Section 80G. You must actively opt into the old regime when filing your return if you wish to claim these deductions. The choice is annual: you can switch regimes each year based on whichever structure results in lower tax for your specific situation.
Who Should Choose the New Tax Regime?
The new tax regime tends to benefit taxpayers who do not have significant deductions to claim. If you are a young professional without substantial investments in PPF, ELSS, or life insurance, do not pay rent (and therefore cannot claim HRA), and have minimal health insurance premiums, the lower slab rates combined with the ₹75,000 standard deduction and the generous ₹12 lakh rebate threshold often result in lower or zero tax. Salaried individuals with gross income up to approximately ₹12.75 lakh may pay no tax at all under the new regime thanks to the standard deduction and Section 87A rebate. The new regime also simplifies compliance — fewer documents to gather, fewer proofs to maintain, and a faster filing experience. If simplicity and a predictable tax outcome matter more to you than maximising deductions, the new regime is likely your best choice.
Who Should Choose the Old Tax Regime?
The old tax regime remains advantageous for taxpayers who actively invest in tax-saving instruments and can claim substantial deductions. If you maximise your Section 80C limit of ₹1.5 lakh through PPF, ELSS, EPF, life insurance, or home loan principal repayment, pay significant health insurance premiums under Section 80D, receive HRA as part of your salary and pay rent, or have home loan interest deductions, the old regime can significantly reduce your taxable income. A salaried employee earning ₹15–20 lakh with ₹1.5 lakh in 80C, ₹25,000 in 80D, and ₹1.2 lakh HRA exemption could see their taxable income drop by over ₹3 lakh compared to the new regime. High earners with diverse deductions, individuals with home loans, and those with dependants requiring health cover often find the old regime more tax-efficient despite its higher nominal slab rates.
Health & Education Cess and Final Tax Payable
After calculating your income tax using the applicable slab rates and applying any rebate under Section 87A, a health and education cess of 4% is levied on the tax amount. This cess funds government healthcare and education initiatives and applies uniformly under both regimes. For instance, if your tax after rebate is ₹50,000, the cess adds ₹2,000, bringing your total tax payable to ₹52,000. Your employer may deduct tax at source (TDS) throughout the year based on your declared regime and investments. When you file your ITR, the final computation reconciles TDS against actual liability — resulting in either a refund or an additional tax payment. Using an income tax calculator like this one before the filing season helps you estimate your liability, compare regimes, and plan investments or advance tax payments accordingly.
File Your ITR with Expert Support
Choosing the right tax regime is only the first step. Filing your Income Tax Return accurately requires matching Form 16 with AIS and 26AS, selecting the correct ITR form, and claiming every eligible deduction without errors. At anumati, we combine smart document verification with expert review to file your return correctly the first time. Our platform automatically compares both regimes, detects mismatches, and recommends the option that minimises your tax outgo. Learn about our ITR filing service or start filing your ITR online in minutes — upload your documents, pay transparent fees, and get your return filed within 24–48 hours. The deadline for AY 2026-27 is 31 July 2026; late filing attracts penalties up to ₹5,000 under Section 234F.
Disclaimer: This calculator is for estimation purposes only. Consult a tax professional for exact calculations. Tax laws are subject to change; always verify current rates on the Income Tax Department portal before filing.