How to Calculate Tax on Your Salary in India (FY 2025–26) — Step by Step
Want to compute your income tax manually? This guide shows you exactly how — with simple rules, clear steps, and fully worked numerical examples (digit-by-digit). By the end you'll be able to calculate your tax liability and estimate take-home pay under both the Old Tax Regime and the New Tax Regime.
Overview — What affects your tax on salary
- Gross salary components (basic, HRA, allowances, bonus).
- Deductions & exemptions you claim (e.g., Section 80C, 80D, HRA, NPS).
- Which tax regime you choose: Old vs New.
- Cess (4%) and surcharge (if applicable for higher incomes).
Step 1 — Determine your Gross Annual Salary
Start with the total annual cost to company (CTC) or gross salary offered by your employer. This includes:
- Basic salary
- House Rent Allowance (HRA)
- Special allowances / conveyance / food coupons
- Employer PF contribution (included in CTC but not taxable for employee)
- Bonus / variable pay
Step 2 — Convert salary components to taxable salary
From gross salary, remove employer contributions to statutory funds (employer PF is not taxable in employee hands). Add taxable allowances. Example formula:
Taxable Salary (before exemptions) =
Gross Annual Salary
− Employer PF (if shown separately)
+ Taxable allowances (if any)
Step 3 — Choose a tax regime
Old Regime: Allows many deductions (Section 80C, 80D, HRA, home loan interest, etc.).
New Regime: Lower slab rates but fewer deductions. You cannot claim most exemptions/deductions if you opt for the new regime.
Step 4 — Subtract allowed exemptions & deductions to get Taxable Income
Under the Old Regime you can subtract:
- Standard deductions (if applicable)
- Section 80C (up to ₹1.5 lakh)
- Section 80D (health insurance premiums)
- Home loan interest (Section 24) / HRA (computed separately)
- Other specific deductions (80E, 80G etc.)
Under the New Regime, you subtract only the limited set of allowances allowed in the new rules (basic exemption and a few others as per current law).
Step 5 — Apply slab rates to the Taxable Income
Apply the appropriate slab rates (Old or New). After computing gross tax, add Health & Education Cess = 4% on the tax amount. Add surcharge if your taxable income crosses surcharge thresholds (usually > ₹50 lakh, > ₹1 crore etc.).
Worked Examples — Digit-by-digit (so you can verify)
Example A — Salary ₹3,00,000 per year (simple case)
Assumptions: No deductions. Use Old or New regime — both similar at this low level.
Gross annual salary = ₹3,00,000
Old regime:
Personal exemption = ₹2,50,000
Taxable income = ₹3,00,000 − ₹2,50,000 = ₹50,000
Apply slab:
0 – ₹2,50,000 : 0% → taxable portion here is ₹0 (since taxable income is ₹50,000 only)
So tax before cess = ₹0
Cess 4% on ₹0 = ₹0
Net tax payable = ₹0
Result: Zero tax payable for ₹3 lakh if no other taxable income — but remember other allowances or lack thereof can change things.
Example B — Salary ₹6,00,000 per year (common salaried case)
Assumptions: No deductions (for simplicity), Old regime slabs used.
Gross annual salary = ₹6,00,000
Old regime:
Personal exemption = ₹2,50,000
Taxable income = ₹6,00,000 − ₹2,50,000 = ₹3,50,000
Apply slabs (Old regime rates):
1) ₹0 – ₹2,50,000 : 0% → first ₹2,50,000 taxed at 0% → tax = ₹0
2) ₹2,50,001 – ₹5,00,000 : 5% → remaining taxable within this slab = min(₹3,50,000 − ₹2,50,000 , ₹2,50,000) = ₹1,00,000 → tax = 5% of ₹1,00,000 = 0.05 × 100,000 = ₹5,000
3) Slabs above ₹5,00,000 not applicable because taxable income is ₹3,50,000
Total tax before cess = ₹5,000
Cess (4% of ₹5,000) = 0.04 × 5,000 = ₹200
Net tax payable = ₹5,000 + ₹200 = ₹5,200
Result: Tax ≈ ₹5,200 annually for ₹6 lakh salary with no deductions.
Example C — Salary ₹12,00,000 per year (detailed, with deductions)
Assumptions:
- Gross salary = ₹12,00,000
- Employee claims 80C = ₹1,50,000 (PF/ELSS)
- Health insurance 80D = ₹15,000
- HRA exemption computed = ₹1,20,000 (example)
Step 1: Calculate Gross taxable income before deductions
Gross salary = ₹12,00,000
Step 2: Subtract exemptions/deductions (Old Regime)
80C = ₹1,50,000
80D = ₹15,000
HRA exemption = ₹1,20,000
Total deductions/exemptions = ₹1,50,000 + ₹15,000 + ₹1,20,000 = ₹2,85,000
Taxable income = ₹12,00,000 − ₹2,85,000 = ₹9,15,000
Step 3: Apply Old regime slabs to ₹9,15,000
Slab calculations:
1) ₹0 – ₹2,50,000 : 0% → taxed portion = ₹0; tax = ₹0
2) ₹2,50,001 – ₹5,00,000 : 5% → slab amount = ₹2,50,000; tax = 0.05 × 2,50,000 = ₹12,500
3) ₹5,00,001 – ₹10,00,000 : 20% → taxable portion in this slab = min(₹9,15,000 − ₹5,00,000, ₹5,00,000) = ₹4,15,000; tax = 0.20 × 4,15,000 = ₹83,000
Total tax before cess = ₹12,500 + ₹83,000 = ₹95,500
Cess 4% = 0.04 × 95,500 = ₹3,820
Net tax payable = ₹95,500 + ₹3,820 = ₹99,320
Result: Net tax ≈ ₹99,320 for ₹12 lakh gross with the stated deductions.
Example D — Salary ₹35,00,000 per year (higher income with surcharge rules)
Assumptions: No major deductions. We show surcharge rules briefly (surcharge applies from certain higher income thresholds — verify current law for exact surcharge % at your income level).
Gross salary = ₹35,00,000
Assume taxable income = ₹35,00,000 (no deductions)
Old regime slab tax (quick):
1) 0 – 2,50,000 : 0% → tax = ₹0
2) 2,50,001 – 5,00,000 : 5% on 2,50,000 = ₹12,500
3) 5,00,001 – 10,00,000 : 20% on 5,00,000 = ₹1,00,000
4) 10,00,001 – 35,00,000 : 30% on 25,00,000 = ₹7,50,000
Total tax before cess = ₹12,500 + ₹1,00,000 + ₹7,50,000 = ₹8,62,500
Surcharge: applicable at certain thresholds (e.g., 10% / 15% etc). For the sake of this example, assume a surcharge of 10% applies (confirm exact rate by current law)
Surcharge on tax = 10% of ₹8,62,500 = 0.10 × 8,62,500 = ₹86,250
Tax + Surcharge = ₹8,62,500 + ₹86,250 = ₹9,48,750
Cess 4% on (Tax + Surcharge) = 0.04 × 9,48,750 = ₹37,950
Net tax payable = ₹9,48,750 + ₹37,950 = ₹9,86,700
Result: Net tax ≈ ₹9,86,700 (note: surcharge percent must be checked against current thresholds — this example used 10% as illustration).
How to calculate HRA exemption (practical quick method)
HRA exemption (least of the following three):
- Actual HRA received from employer
- Rent paid − 10% of basic salary
- 50% of basic salary (if metro city) or 40% (if non-metro)
Compute all three and take the minimum. That minimum is exempt from tax.
How to estimate monthly take-home from salary
Simple formula:
Monthly take-home ≈ (Gross annual salary − Net tax payable − Employee PF contribution − other employee deductions) ÷ 12
Remember employer PF adds to CTC but employee PF (typically 12% of basic) reduces take-home.
Common mistakes to avoid when calculating salary tax
- Forgetting to include non-cash taxable benefits (e.g., perquisites, rental value).
- Using gross CTC directly without removing employer PF or including employer contributions correctly.
- Missing HRA receipts or claiming wrong HRA exemption formula.
- Ignoring cess and surcharge at higher incomes.
Practical checklist (do this before filing)
- Gather your salary slip and Form 16
- List all deductions you can claim (80C, 80D, 80E, HRA, home loan interest)
- Compute taxable income = Gross − exemptions − deductions
- Apply slab rates exactly and add cess & surcharge
- Compare Old vs New regime — pick the one with lower final tax (you can recompute each year)
Frequently Asked Questions (FAQ)
Q1 — Do I pay tax on my entire salary once I cross the basic exemption limit?
No. India uses a slab system. Only income above each slab threshold is taxed at the slab rate. For example, if taxable income is ₹6 lakh, only the amount in the ₹2.5–5 lakh slab and above is taxed at 5% and higher slabs — not the whole ₹6 lakh.
Q2 — Should I pick the Old or New regime?
Calculate both ways. If you have large deductions (80C, 80D, home loan interest, HRA), the Old Regime often works better. If you have few deductions and prefer simplicity, the New Regime can be cheaper.
Q3 — How do I account for employer PF and NPS?
Employer PF (its employer portion) is part of CTC but not taxable in many contexts; employee PF is deducted from your salary and reduces take-home. NPS contributions by you can provide additional deductions under certain sections (80CCD). Always include these in deduction calculations where allowed.
Q4 — Where do I find the exact surcharge rate?
Surcharge rates depend on taxable income brackets and change over time. Check the latest Finance Act / CBDT notification or your CA/tax advisor for exact surcharge percentages applicable to FY 2025–26.
Q5 — Can I do this safely without a CA?
Yes, for straightforward salaried cases you can compute tax yourself using the steps above. For complex returns (capital gains, business income, international income, large investments), consult a CA.
Final words — Make it routine
Learning to calculate tax on your salary is empowering. Use the step-by-step approach here, plug your numbers, and double-check cess and surcharge. If you want, provide your salary components (basic, HRA, PF, bonuses, declared 80C, 80D etc.) and I will compute the tax and approximate monthly take-home for you — digit-by-digit.