Knowing your income tax before your employer deducts TDS lets you plan investments, choose 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 common mistakes to avoid.
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
Use the Income Tax Calculator alongside this guide to verify your numbers as you go.
Step 1: Calculate Gross Total Income
Gross Total Income is the sum of 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, etc.)
Other income heads — add these too:
- Interest on fixed deposits and recurring deposits (taxable in full)
- Savings account interest (taxable; 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 + FD interest ₹50,000 = Gross Total Income ₹12 lakh.
Use the Salary Calculator to break down CTC into taxable components if you only have your cost-to-company figure.
Step 2: Subtract Exemptions (Old Regime Only)
If you are using the old tax regime, several allowances can be claimed as exempt from tax. The new regime does not permit these exemptions.
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)
Use the HRA Calculator to compute this precisely — the rules interact in non-obvious ways. The remaining HRA 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. For the current block (2022–2025), two claims were available.
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 arrive at your Net Salary.
Step 3: Subtract Deductions (Old Regime Only)
Under the old regime, a range of deductions under Chapter VI-A further reduce your taxable income. Under the new regime, skip this step — 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. Use the 80C Deduction Calculator to check whether you have used the full ₹1.5 lakh limit.
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+), the 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 on a self-occupied property. There is no cap for let-out properties (losses can be set off subject to 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 (limit ₹50,000, covering FD interest too).
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): If your net taxable income is ₹12 lakh or below, the rebate wipes out your entire tax liability. Effective tax is ₹0. This rebate does not apply to special-rate income such as LTCG under Section 112A.
New Regime Standard Deduction: ₹75,000 for salaried employees and pensioners. A person with gross salary of ₹12.75 lakh thus has 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 does not exceed ₹5 lakh.
How to apply slabs — always on incremental income: Tax is never a flat percentage of total income. You pay 0% on the first slab, 5% on the next portion, 10% on the next, and so on. For example, taxable income of ₹15 lakh under the new regime = ₹0 (first ₹4L) + ₹20,000 (next ₹4L at 5%) + ₹40,000 (next ₹4L at 10%) + ₹45,000 (next ₹3L at 15%) = ₹1,05,000.
Step 5: Add Surcharge
Surcharge applies only when total income exceeds ₹50 lakh. It is 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) |
The Budget 2023 capped surcharge at 25% under the new regime for all income levels, reducing the effective peak rate from 42.74% to 39%. Marginal relief provisions ensure that the additional tax from crossing a threshold does not exceed the additional income.
Step 6: Add Health and Education Cess
Cess is charged at 4% on (income tax + surcharge). It funds health and education schemes and applies to all taxpayers regardless of income level or regime. There is no deduction or rebate against cess.
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
The new regime saves ₹57,200 at this income level. The old regime would only pull ahead if you claimed deductions exceeding roughly ₹3.75 lakh above the standard deduction.
Use the Old vs New Tax Regime Calculator to run this comparison instantly for your own numbers.
Common Mistakes
Applying a flat rate to your entire income. This is the most frequent error. If your taxable income is ₹15 lakh, the 20% or 30% slab rate applies only to the portion above the lower slab, not to your full ₹15 lakh.
Forgetting the 4% cess. Many online estimates and even payslips display tax before cess. Your actual outgo is always higher — remember to add 4% on top of the computed tax and surcharge.
Ignoring the standard deduction under the new regime. The new regime standard deduction is ₹75,000 (not ₹50,000). Missing this ₹25,000 extra deduction leads to overestimating taxable income.
Not applying the Section 87A rebate. If your net taxable income is ₹12 lakh or below under the new regime, your tax is zero after the rebate. Many salaried employees earning up to ₹12.75 lakh gross qualify once the standard deduction is applied.
Claiming deductions unavailable in the chosen regime. Under the new regime, deductions such as 80C, 80D, HRA exemption, and home loan interest under Section 24(b) are not permitted. Mixing regime rules in a single calculation leads to an incorrect figure.
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).