Employees get paid every month on which most of the employers deduct TDS on it. Knowing tax calculation is important otherwise, you will never know if your employer is deducting more taxes from your salary. Your salary that you receive from your employer is taxed under the “Income from salaries” head.
Current rules for FY 2025-26 (AY 2026-27): The new tax regime is the default. Its slabs are: up to Rs. 4 lakh nil; Rs. 4-8 lakh 5%; Rs. 8-12 lakh 10%; Rs. 12-16 lakh 15%; Rs. 16-20 lakh 20%; Rs. 20-24 lakh 25%; above Rs. 24 lakh 30%, with a standard deduction of Rs. 75,000 for salary/pension income and a Section 87A rebate of up to Rs. 60,000, so taxable income up to Rs. 12 lakh attracts no tax. The old regime keeps slabs of nil up to Rs. 2.5 lakh (Rs. 3 lakh for senior citizens, Rs. 5 lakh for super seniors), 5% up to Rs. 5 lakh, 20% up to Rs. 10 lakh and 30% above, with a Rs. 50,000 standard deduction and Section 87A rebate of up to Rs. 12,500 where taxable income does not exceed Rs. 5 lakh. Health and education cess is 4% in both regimes. Deductions such as 80C, 80D and HRA discussed below apply only under the old regime. The due date for most non-audit individual ITRs for AY 2026-27 is 31 July 2026.
Get the Income Tax Calculator to Calculation of Tax Liability on Salary Get Details
Before calculating your tax liability, you must know which tax slab you fall under. Your salary is a cumulative form of many components such as Gross salary, Provident Fund, Leave pay, Insurance, Employee State insurance, Gratuity, and Labour Welfare Fund. You must need to submit all the investment details to the employer to avail all applicable deductions.
Gross Salary
Gross salary = Basic pay + House Rent Allowance (HRA) + Dearness allowance (DA) + transport allowance (TA) + special allowance + other allowance.
Under Section 80C, you can avail deduction up to INR 1.5 lakhs by investing into various tax saving instrument. For higher tax bracket salaries, individuals can save up to INR 45,000 by investing into tax saving instrument.
Investing in Life Insurance Premium, Provident Fund, Equity Linked Savings Scheme, National Savings Certificate, Home Loan monthly installment, Infrastructure Bond, Tuition fees, Pension Funds, and Unit Linked Insurance Plans can avail deduction on your taxable income.
Under Section 80D, you can avail a deduction of up to INR 25,000 for health insurance premium if you are under the age of 60. For senior citizens, the deduction limit is INR 50,000. These Chapter VI-A deductions are available only if you opt for the old tax regime.
The deductions you can avail in HRA are the following:
The entire amount received as HRA
Or,
50% of your basic pay if living in Delhi, Mumbai, Kolkata or Chennai / 40% of your basic pay if living in any other city (for FY 2025-26; from tax year 2026-27 the 50% limit extends to eight cities, adding Bengaluru, Pune, Hyderabad and Ahmedabad)
Or,
Rent paid that is above the amount of 10% of the salary
Deduction against home loan interest and rent payments cannot be claimed if you already own a house in your name. You can show that you are staying on rent in parent’s house to claim HRA exemption. Otherwise, if you are staying in a rented house as your workplace is far from your owned house then also you can claim HRA exemption. In this case, you can also claim home loan interest deductions as well.
The Various Income Tax Deductions Under Section 80 in India Get Details
Deductions on Salary Income
Under Section 16 of the Income Tax Act, deductions on Income from Salary is provisioned which can be claimed for:
- Standard Deduction under Section 16(ia): INR 50,000 in the old regime and INR 75,000 in the new regime for FY 2025-26, allowed automatically against salary or pension income.
- Tax on Employment under Section 16(iii): deducting Professional Tax from salary is allowed while calculating salary income.
- Entertainment Allowance under Section 16(ii): entertainment allowance given by the employer can be claimed as a deduction. Only Government employees can claim this deduction and only 1/5th of the salary(excluding benefits/perquisites/other allowances) or INR 5000, whichever is lesser can be claimed.
After deduction, all the applicable deductions from income, the amount left is your total taxable income.
Computation of Tax
The tax computation book looks something like this:
| Particulars |
Amount |
Amount |
| Basic pay |
|
XXXXX |
| + Dearness allowance |
|
XXX |
| + Annuity |
|
XXX |
| + Bonus |
|
XXX |
| + Commission |
|
XXX |
| + Arrears of salary |
|
XXX |
|
+ House Rent allowance
• Amount of HRA exempted
|
XXX
(XXX) |
XXX |
|
+ Leave travel allowance
• Amount exempted on Leave travel allowance
|
XXX
(XXX) |
XXX |
|
+ Perquisites
• Amount exempted
|
XXX
(XXX) |
XXX |
|
+ other allowances
• Amount exempted
|
XXX
(XXX) |
XXX |
|
+ VRS/ Retrenchment compensation
• Amount exempted
|
XXX
(XXX) |
XXX |
|
+ Gratuity received
• Exempted gratuity
|
XXX
(XXX) |
XXX |
|
+ Leave encashment
• Exempted leave encashment
|
XXX
(XXX) |
XXX |
|
+ Pension
• Amount exempted
|
XXX
(XXX) |
XXX |
| + employer’s contribution (in excess of 12% salary of employee) |
|
XXX |
| + Interest on PF in excess of the notified amount |
|
XXX |
| Gross Salary |
|
XXXXX |
| Deductions under the Section 16: |
|
|
| Entertainment allowance |
|
XXX |
| Professional Tax paid |
|
XXX |
| Income chargeable for tax under Salaries |
|
XXXXX |
Always remember to declare all the investments in the starting of the financial year so that your employer can avail all the deductions for you. forgetting doing so will levy heavy tax liability on your income. However, you can claim by showing the investment proofs at the end of financial year.
Mr. A earns a Gross Salary of INR 40,225.
Break up of his salary:
- Basic = 25000
- HRA =10000
- Travel allowance = 500
- Child's educational allowance = 100
- Medical allowance = 625
- Other allowance = 4000
The exemption he can avail against the allowances above (old regime, FY 2025-26):
- Children's education allowance = INR 100 per month, i.e. INR 1,200 per year.
- Transport allowance and medical allowance exemptions were withdrawn from FY 2018-19 and are now covered by the standard deduction, so they remain fully taxable.
Mr. A owns the house he lives in, so no HRA exemption is available. His annual gross salary is INR 40,225 x 12 = INR 4,82,700, and after the children's education allowance exemption his salary is INR (4,82,700 - 1,200) = INR 4,81,500.
Old regime calculation:
After the standard deduction of INR 50,000, his salary income is INR (4,81,500 - 50,000) = INR 4,31,500.
If he declares a loss of INR 50,000 on house property for the home-loan interest he is paying, his total income becomes INR (4,31,500 - 50,000) = INR 3,81,500.
He can also show investments of INR 50,000 under Section 80C, bringing taxable income to INR (3,81,500 - 50,000) = INR 3,31,500.
He also pays a health insurance premium of INR 12,500 eligible under Section 80D, so his total taxable income is INR (3,31,500 - 12,500) = INR 3,19,000.
So on INR 3,19,000, his old-regime tax works out as follows:
For the first INR 2,50,000, tax liability is NIL.
On the remaining INR 69,000, tax applies at 5%, which is INR 3,450.
Because his taxable income does not exceed INR 5,00,000, the Section 87A rebate (up to INR 12,500) covers the entire INR 3,450, so his tax liability is NIL and no 4% health and education cess is payable.
New regime comparison: from gross salary of INR 4,82,700, the standard deduction of INR 75,000 leaves taxable income of INR 4,07,700. Tax is 5% of INR 7,700 = INR 385, which is fully covered by the Section 87A rebate of up to INR 60,000 (taxable income up to INR 12 lakh). His new-regime tax is also NIL — without locking any money into tax-saving investments.
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