Budget 2025 rewrote India's income tax completely. New slabs, zero tax up to ₹12 lakh, a ₹75,000 standard deduction, and a dramatically higher 87A rebate. This guide explains exactly how your tax is calculated in 2026, which regime saves you more money, and every major deduction you should be claiming — with fully worked examples at ₹12L, ₹18L and ₹30L salary.
India uses a progressive slab system — you do not pay the same rate on your entire income. Your income is divided into brackets and each bracket is taxed at a different rate. Only the income within each slab attracts that slab's rate, not your full earnings.
From FY 2025-26 (Assessment Year 2026-27), India has two official regimes: the new default regime with revised slabs from Budget 2025, and the old regime with higher rates but comprehensive deductions. You choose one each year when filing your ITR.
Income tax is administered by the CBDT under the Income Tax Act, 1961. The tax year runs 1 April to 31 March. "FY 2025-26" means income earned between 1 April 2025 and 31 March 2026 — taxed in Assessment Year 2026-27.
Key Budget 2025 change: The 87A rebate under the new regime increased to ₹60,000 — making income up to ₹12 lakh fully tax-free. The standard deduction rose to ₹75,000. Together, salaried individuals earning up to ₹12.75 lakh gross pay zero income tax in 2026.
The new regime is now the default for all taxpayers. Budget 2025 completely restructured the slabs — more brackets, lower rates, and a dramatically higher 87A rebate. Most deductions are removed, but the lower rates and large rebate compensate significantly for anyone not heavily invested in tax-saving instruments.
| Income Slab (Annual) | Tax Rate | Tax on This Slab | Cumulative Tax |
|---|---|---|---|
| ₹0 – ₹4,00,000 | Nil | ₹0 | ₹0 |
| ₹4,00,001 – ₹8,00,000 | 5% | ₹20,000 | ₹20,000 |
| ₹8,00,001 – ₹12,00,000 | 10% | ₹40,000 | ₹60,000 |
| ₹12,00,001 – ₹16,00,000 | 15% | ₹60,000 | ₹1,20,000 |
| ₹16,00,001 – ₹20,00,000 | 20% | ₹80,000 | ₹2,00,000 |
| ₹20,00,001 – ₹24,00,000 | 25% | ₹1,00,000 | ₹3,00,000 |
| Above ₹24,00,000 | 30% | 30% on amount above ₹24L | ₹3,00,000 + |
Source: Finance Act 2025. Applicable for FY 2025-26 (AY 2026-27) and FY 2026-27 (AY 2027-28).
Section 87A rebate under new regime: If your total taxable income (after ₹75,000 standard deduction) is ₹12 lakh or below, the rebate of ₹60,000 eliminates your entire tax liability. For salaried individuals, gross salary up to ₹12.75 lakh = zero tax in 2026.
The old regime has higher slab rates but allows a wide range of deductions. If your total deductions are large — home loan interest, HRA, full 80C, NPS, medical insurance — the old regime can result in meaningfully lower tax than the new one.
| Income Slab (Annual) | Below 60 Years | Senior Citizen (60–79) | Super Senior (80+) |
|---|---|---|---|
| Up to ₹2,50,000 | Nil | — | — |
| Up to ₹3,00,000 | — | Nil | — |
| Up to ₹5,00,000 | — | — | Nil |
| ₹2.5L – ₹5,00,000 | 5% | 5% (above ₹3L) | Nil |
| ₹5,00,001 – ₹10,00,000 | 20% | 20% | 20% |
| Above ₹10,00,000 | 30% | 30% | 30% |
87A rebate under old regime: Only ₹12,500 — applicable only if taxable income is ₹5 lakh or below. Far lower than the ₹60,000 rebate under the new regime. Most people earning above ₹5 lakh receive no rebate at all under the old regime.
The answer depends entirely on the size of your deductions. Here is the full comparison and a breakeven table to show which regime wins at your income level.
| Gross Salary | Deductions Needed for Old Regime to Win | Verdict for Most People |
|---|---|---|
| Up to ₹12.75 lakh | Not relevant — new regime gives zero tax | New Regime Wins |
| ₹15 lakh | Total deductions above ~₹3.25 lakh | Depends on deductions |
| ₹20 lakh | Total deductions above ~₹3.75 lakh | Depends on deductions |
| ₹30 lakh | Total deductions above ~₹4 lakh | Depends on deductions |
| ₹50 lakh+ | Deductions above ~₹4.5 lakh | Old regime may win with home loan |
Rule of thumb for 2026: If you have a home loan (₹2L interest) + HRA + full 80C (₹1.5L), deductions already cross ₹4L — run the old regime numbers. For everyone else — first job, no home loan, no HRA claim — the new regime almost always wins without any effort.
This is the exact sequence the Income Tax Department uses. Follow these steps with your own numbers and you get the same result as any official calculator — no black box, no guessing.
Add all income sources: salary, freelance income, rent received, bank interest, capital gains, and any other earnings. This total is your Gross Total Income (GTI).
New regime: subtract only the ₹75,000 standard deduction. Old regime: subtract standard deduction (₹50,000) plus all eligible deductions — 80C, HRA, home loan interest, 80D, NPS 80CCD(1B), and others.
GTI minus deductions = Taxable Income. Slab rates are applied to this number — not your gross salary. This is the most commonly misunderstood step.
Divide taxable income into slabs and apply each rate only to the income within that bracket. Add all slab taxes together to get total slab tax.
If taxable income is ₹12L or below (new regime) or ₹5L or below (old regime), subtract the applicable rebate. The rebate cannot reduce tax below zero.
Add 10% surcharge on tax if income is ₹50L–₹1Cr; 15% for ₹1Cr–₹2Cr; 25% above ₹2Cr under new regime. Surcharge is on the tax amount — not on your income.
Add 4% cess on (slab tax − rebate + surcharge). Mandatory for every taxpayer, cannot be avoided. On a ₹1 lakh tax bill, cess adds ₹4,000. This final figure is your total income tax payable.
Three complete tax calculations for salaried employees under the new regime — every slab broken out so you can follow the logic and apply it to your own income.
Always compare both regimes at your salary level. At ₹30L with full 80C + NPS + 80D + home loan interest, old-regime deductions can reach ₹4.75L — making it competitive. Run both numbers on ToolLoom's Income Tax Calculator to find your exact saving in rupees.
If you choose the old regime, maximising deductions directly reduces your taxable income and your bill. These are the most significant ones available in 2026.
None of these deductions — except employer NPS contribution under 80CCD(2) and the standard deduction — are available under the new regime. Choosing the new regime means forfeiting 80C, HRA, home loan interest, 80D, and all other Chapter VI-A deductions.
| Deduction | Maximum | Requires Investment? |
|---|---|---|
| Standard Deduction | ₹50,000 | No — automatic for salaried |
| Section 80C | ₹1,50,000 | Yes — PPF, ELSS, LIC, etc. |
| Section 80CCD(1B) — NPS | ₹50,000 | Yes — NPS contribution |
| Section 80D — Medical Insurance | ₹75,000 | Yes — premium payment |
| Section 24(b) — Home Loan Interest | ₹2,00,000 | Yes — home loan required |
| HRA Exemption | As calculated | Yes — rent receipts + landlord PAN |
| Section 80TTA — Savings Interest | ₹10,000 | No — from savings account |
| Total Possible (home loan + HRA + all) | ₹5,35,000+ | — |
Three additions or subtractions sit on top of the slab calculation. Most people understand only the slabs — missing these three means calculating your tax incorrectly.
| Regime | Rebate Amount | Income Limit to Qualify | Result |
|---|---|---|---|
| New Regime | ₹60,000 | Taxable income ≤ ₹12,00,000 | Zero tax payable |
| Old Regime | ₹12,500 | Taxable income ≤ ₹5,00,000 | Zero tax payable |
87A trap: Short-term capital gains (STCG at 20%) and long-term capital gains (LTCG at 12.5% above ₹1.25L) do NOT benefit from the 87A rebate — even if your other income is below ₹12 lakh. Many equity investors miss this and receive a surprise tax bill on mutual fund redemptions.
| Total Income | Surcharge Rate | Applied On |
|---|---|---|
| Up to ₹50 lakh | Nil | — |
| ₹50L – ₹1 Crore | 10% | On your tax amount (not income) |
| ₹1 Crore – ₹2 Crore | 15% | On tax amount |
| ₹2 Crore – ₹5 Crore | 25% | On tax amount — capped at 25% under new regime |
| Above ₹5 Crore | 25% (new) / 37% (old) | On tax amount |
A flat 4% cess applies to every taxpayer's final tax bill — after the rebate and after any surcharge. It cannot be deducted, exempted, or reduced. On a ₹2 lakh tax bill, cess adds ₹8,000, making the final payable ₹2,08,000. Always include cess when estimating your total annual tax outgo.
Millions of taxpayers file under whatever regime their employer defaulted to without checking if it is actually cheaper. The comparison takes five minutes but can save ₹20,000–₹80,000 per year. Always run both numbers before submitting your ITR, even if TDS has been deducted under one regime all year.
Section 80CCD(1B) gives ₹50,000 over and above the ₹1.5L 80C ceiling. At the 30% bracket, this one deduction saves ₹15,600 in tax including cess — a guaranteed 31% return on ₹50,000 invested. Most people who fill 80C completely still miss this separate bucket entirely.
HRA is one of the largest deductions and one of the most scrutinised. Rent above ₹1 lakh per year requires the landlord's PAN. Rent paid to a parent needs actual bank transfer records plus a signed rental agreement. Claiming HRA without documentation triggers notices and disallowances during assessments.
Fixed deposit interest is fully taxable even if TDS was deducted at 10%. Capital gains from equity mutual funds must be reported even without a TDS certificate. Omissions create mismatches with Form 26AS and trigger automated notices from the Income Tax Department.
The deadline for most individuals is 31 July. Late filing costs ₹1,000 (income below ₹5L) or ₹5,000, plus 1% monthly interest under Section 234A. Late filers also lose the right to carry forward capital losses. Mistakes can only be corrected via a revised return filed before 31 December — missing that window locks the error in permanently.
Quick old-regime checklist: Max 80C (₹1.5L) → NPS 80CCD(1B) (₹50K) → Medical insurance for parents 80D (₹50K) → Home loan interest Section 24b (₹2L) → HRA with proper receipts. These five together reduce taxable income by ₹4.5–5.5L and save ₹90,000–₹1,10,000 in tax for those in the 20–30% bracket.