How income tax on salary is calculated
Salaried taxpayers in India choose between two regimes each year. The new regime offers wider slabs and a bigger standard deduction but almost no exemptions; the old regime keeps HRA, 80C, NPS and home loan benefits at higher slab rates. The calculation runs in four steps for either choice.
Step 1 — Compute gross salary
Add basic pay, dearness allowance, HRA, transport allowance, bonus and any perquisite value for the full financial year. For government employees this is the total of all payslip earnings.
Step 2 — Apply deductions
The new regime allows only the ₹75,000 standard deduction and the employer's NPS contribution under 80CCD(2). The old regime allows a ₹50,000 standard deduction plus HRA exemption, ₹1.5 lakh under 80C, ₹50,000 under 80CCD(1B), ₹2 lakh of home loan interest and medical insurance under 80D.
Step 3 — Apply slab rates
Tax is charged progressively — each slab rate applies only to the income falling in that band. The Section 87A rebate makes taxable income up to ₹12 lakh tax free in the new regime and up to ₹5 lakh in the old regime.
Step 4 — Add cess and surcharge
A 4% health and education cess is added to the tax. Incomes above ₹50 lakh attract surcharge from 10% to 25%, with marginal relief where the surcharge exceeds the extra income.