Knowing your income tax before your employer deducts TDS lets you plan investments, pick the right tax regime, and avoid a surprise tax demand at filing time. This guide walks through every step of the FY 2026-27 calculation for both the old and new tax regimes, with a worked example and the mistakes people make most often.
What you need before you start:
- Your gross salary breakdown (basic, HRA, allowances, bonus)
- A list of investments and expenses you plan to claim as deductions
- Form 16 or payslips for any income already received this year
- Interest certificates from banks for FD or savings account income
Keep the Income Tax Calculator open alongside this guide to check your numbers as you go.
Step 1: Calculate Gross Total Income
Gross Total Income adds up all your income heads before any exemptions or deductions.
Salary head:
- Basic salary
- HRA received (the full amount, before any exemption)
- Special allowances and LTA received
- Bonus, incentives, or arrears
- Perquisites valued at their taxable amount (company car, accommodation, and so on)
Other income heads add to this too:
- Interest on fixed deposits and recurring deposits (taxable in full)
- Savings account interest (taxable; the exemption comes later under 80TTA)
- Rental income from property (net of 30% standard deduction on the property)
- Short-term or long-term capital gains from shares, mutual funds, or property
Example: Gross salary ₹11.5 lakh plus FD interest ₹50,000 gives Gross Total Income of ₹12 lakh.
If you only have your cost-to-company figure, run it through the Salary Calculator to break CTC down into taxable components.
Step 2: Subtract Exemptions (Old Regime Only)
Under the old tax regime, several allowances can be claimed as exempt from tax. The new regime doesn't permit these exemptions at all.
HRA Exemption: the exempt portion is the lowest of:
- HRA actually received
- Rent paid minus 10% of basic salary
- 50% of basic salary (metro cities: Delhi, Mumbai, Chennai, Kolkata) or 40% (other cities)
The HRA Calculator computes this precisely since the three rules interact in ways that aren't always obvious. Whatever HRA remains after the exemption is taxable.
Leave Travel Allowance (LTA): Exempt for actual travel costs within India, claimed for two journeys in a block of four calendar years. The current block (2022-2025) allows two claims.
Meal Coupons / Food Allowance: Up to ₹50 per meal, for two meals a day on working days (roughly ₹26,400 per year), is exempt.
After subtracting all exemptions, you land on your Net Salary.
Step 3: Subtract Deductions (Old Regime Only)
The old regime lets a range of deductions under Chapter VI-A further reduce your taxable income. Skip this step entirely under the new regime, where only the standard deduction of ₹75,000 applies.
Standard Deduction: ₹75,000 (new regime) / ₹50,000 (old regime): All salaried employees and pensioners get this deduction without any proof or investment.
Section 80C: up to ₹1,50,000: Covers EPF contributions, PPF deposits, ELSS mutual funds, life insurance premiums, NSC, home loan principal repayment, children's tuition fees, and Sukanya Samriddhi deposits. Check whether you've used the full ₹1.5 lakh limit with the 80C Deduction Calculator.
Section 80D: Health Insurance Premiums:
- ₹25,000 for premiums paid for self, spouse, and children
- Additional ₹25,000 for parents below 60 years (total ₹50,000)
- If parents are senior citizens (60+), that additional limit rises to ₹50,000 (total ₹75,000)
Section 80CCD(1B): NPS: An additional ₹50,000 over and above the 80C limit for contributions to the National Pension System Tier I account.
Section 24(b): Home Loan Interest: Up to ₹2,00,000 per year on interest paid for a self-occupied property. No cap applies for let-out properties, though losses can only be set off subject to certain rules.
Section 80TTA: Savings Account Interest: Up to ₹10,000 on interest earned from savings accounts with banks, post offices, or co-operative societies. Senior citizens use 80TTB instead, with a ₹50,000 limit that also covers FD interest.
After all deductions, you have your Net Taxable Income.
Step 4: Apply Tax Slabs
New Regime, FY 2026-27
| Net Taxable Income | Tax Rate |
|---|---|
| Up to ₹4,00,000 | 0% |
| ₹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% |
Section 87A Rebate (New Regime): Net taxable income at ₹12 lakh or below wipes out your entire tax liability through this rebate. Effective tax is ₹0, though it doesn't extend to special-rate income such as LTCG under Section 112A.
New Regime Standard Deduction: ₹75,000 for salaried employees and pensioners. Someone earning a gross salary of ₹12.75 lakh ends up with taxable income of exactly ₹12 lakh and pays zero tax.
Old Regime, FY 2026-27
| Net Taxable Income | Tax Rate |
|---|---|
| Up to ₹2,50,000 | 0% |
| ₹2,50,001 – ₹5,00,000 | 5% |
| ₹5,00,001 – ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Section 87A Rebate (Old Regime): Tax is nil if net taxable income doesn't exceed ₹5 lakh.
Slabs apply to incremental income, always. Tax is never a flat percentage of your total income. You pay 0% on the first slab, 5% on the next portion, 10% on the one after, and so on. Taxable income of ₹15 lakh under the new regime, for instance, works out to ₹0 (first ₹4L) plus ₹20,000 (next ₹4L at 5%) plus ₹40,000 (next ₹4L at 10%) plus ₹45,000 (next ₹3L at 15%), totalling ₹1,05,000.
Step 5: Add Surcharge
Surcharge kicks in only once total income exceeds ₹50 lakh, and it's charged on the income tax amount, not on income directly.
| Total Income | Surcharge Rate |
|---|---|
| ₹50 lakh – ₹1 crore | 10% |
| ₹1 crore – ₹2 crore | 15% |
| ₹2 crore – ₹5 crore | 25% |
| Above ₹5 crore | 37% (old regime) / 25% (new regime, capped) |
Budget 2023 capped surcharge at 25% under the new regime across all income levels, bringing the effective peak rate down from 42.74% to 39%. Marginal relief provisions make sure the additional tax from crossing a threshold never exceeds the additional income that crossed it.
Step 6: Add Health and Education Cess
Cess runs at 4% on income tax plus surcharge. It funds health and education schemes and applies to every taxpayer regardless of income level or regime, with no deduction or rebate available against it.
Formula: Total Tax Payable = (Income Tax + Surcharge) × 1.04
Worked Example: ₹12 Lakh Gross Salary
Assumptions: Salaried, metro city, no capital gains.
Old Regime Calculation
| Item | Amount |
|---|---|
| Gross salary | ₹12,00,000 |
| Less: Standard deduction | ₹50,000 |
| Less: 80C (EPF + PPF + ELSS) | ₹1,50,000 |
| Less: 80D (self health insurance) | ₹25,000 |
| Net Taxable Income | ₹9,75,000 |
Tax computation:
- 0% on ₹0–₹2,50,000 = ₹0
- 5% on ₹2,50,001–₹5,00,000 = ₹12,500
- 20% on ₹5,00,001–₹9,75,000 = ₹95,000
- Total tax before cess = ₹1,07,500
- Cess at 4% = ₹4,300
- Total payable = ₹1,11,800
New Regime Calculation
| Item | Amount |
|---|---|
| Gross salary | ₹12,00,000 |
| Less: Standard deduction | ₹75,000 |
| Net Taxable Income | ₹11,25,000 |
Tax computation (slabs):
- 0% on ₹0–₹4,00,000 = ₹0
- 5% on ₹4,00,001–₹8,00,000 = ₹20,000
- 10% on ₹8,00,001–₹11,25,000 = ₹32,500
- Total tax before cess = ₹52,500
- Cess at 4% = ₹2,100
- Total payable = ₹54,600
At this income level, the new regime saves ₹57,200. The old regime only pulls ahead once claimed deductions exceed roughly ₹3.75 lakh above the standard deduction.
Run this comparison instantly for your own numbers with the Old vs New Tax Regime Calculator.
Common Mistakes
Applying a flat rate to your entire income. This trips up more people than anything else. At ₹15 lakh taxable income, the 20% or 30% slab rate applies only to the portion above the lower slab, never to the full ₹15 lakh.
Forgetting the 4% cess. Plenty of online estimates and even payslips display tax before cess. Your actual outgo always runs higher, so add 4% on top of the computed tax and surcharge.
Ignoring the standard deduction under the new regime. It's ₹75,000, not ₹50,000. Miss that extra ₹25,000 and you'll overestimate taxable income.
Skipping the Section 87A rebate. Net taxable income at ₹12 lakh or below under the new regime means zero tax after the rebate. A lot of salaried employees earning up to ₹12.75 lakh gross qualify once the standard deduction is applied, and don't realize it.
Claiming deductions unavailable in the chosen regime. The new regime doesn't permit 80C, 80D, HRA exemption, or home loan interest under Section 24(b). Mix rules from both regimes in one calculation and the figure comes out wrong.
Key Terms
- TDS, Tax Deducted at Source: Tax withheld by your employer or bank at the time of payment and deposited with the government on your behalf.
- Standard Deduction: A flat deduction for salaried employees and pensioners, ₹75,000 under the new regime and ₹50,000 under the old regime for FY 2026-27.
- Section 87A: A rebate that reduces tax to zero for individuals with net taxable income up to ₹5 lakh (old regime) or ₹12 lakh (new regime).
- Cess: A 4% levy charged on income tax plus surcharge to fund health and education programmes.
- Surcharge: An additional percentage levied on income tax when total income exceeds ₹50 lakh, rising in steps up to 25% (new regime) or 37% (old regime).