Learn how to calculate income tax on your salary step by step. Includes CTC breakdown, taxable vs non-taxable components, and detailed calculations under both old and new tax regimes for Rs 8 lakh, 12 lakh and 18 lakh salaries.
Understanding how income tax is calculated on your salary is essential for financial planning. Most salaried employees rely on their employer's payroll department to handle tax deductions, but this means you never really know whether you are paying the right amount, whether you could save more, or how your CTC translates into take-home pay.
This guide breaks down the entire process, from understanding your CTC components to computing tax under both the old and new regimes, with real examples at three common salary levels: Rs 8 lakh, Rs 12 lakh and Rs 18 lakh per annum.
Step 1: Understand your salary structure
Your CTC (Cost to Company) is not your taxable income. Several components of CTC are either non-taxable or qualify for exemptions and deductions. Here is a typical salary breakup:
Taxable components: - Basic Salary (fully taxable) - Dearness Allowance (DA) (fully taxable) - Special Allowance (fully taxable) - Bonus or Performance Incentive (fully taxable) - Other taxable allowances
Partially exempt components: - House Rent Allowance (HRA): exempt under Section 10(13A) if you pay rent, subject to the three-condition formula - Leave Travel Allowance (LTA): exempt for actual travel expenses within India, twice in a block of four years
Non-taxable or employer contributions: - Employer's contribution to EPF (exempt up to 12 percent of basic salary) - Employer's contribution to NPS (exempt up to 10 percent of basic salary under Section 80CCD(2)) - Gratuity (exempt under certain conditions) - Medical insurance premium paid by employer
Step 2: Calculate gross taxable salary
Start with gross salary (all payments received from the employer) and subtract exemptions:
Gross Salary = Basic + DA + HRA + Special Allowance + LTA + Bonus + Other Allowances
Less: Exempt allowances - HRA exemption (under old regime) - LTA exemption (under old regime) - Standard deduction: Rs 75,000 (new regime) or Rs 50,000 (old regime)
Net Taxable Salary = Gross Salary - Exempt Allowances - Standard Deduction
Step 3: Add income from other sources
If you have income beyond salary, add it: - Savings account interest (taxable, but Rs 10,000 exempt under Section 80TTA in old regime) - Fixed deposit interest (fully taxable) - Rental income from property - Capital gains from stocks or mutual funds - Any other income
Gross Total Income = Net Taxable Salary + Income from Other Sources
Step 4: Subtract deductions (old regime only)
Under the old regime, you can claim deductions:
| Section | Deduction | Maximum |
|---|---|---|
| 80C | PPF, ELSS, EPF, LIC, tuition fees, home loan principal | Rs 1,50,000 |
| 80CCD(1B) | Additional NPS contribution | Rs 50,000 |
| 80D | Health insurance premium | Rs 25,000 to Rs 1,00,000 |
| 80TTA | Savings account interest | Rs 10,000 |
| 24(b) | Home loan interest (self-occupied) | Rs 2,00,000 |
| 80E | Education loan interest | No limit |
| 80G | Donations to approved charities | Varies |
Under the new regime, only the standard deduction of Rs 75,000 and employer NPS contribution under 80CCD(2) are available.
Taxable Income = Gross Total Income - Deductions
Step 5: Apply the tax slab rates
New Tax Regime (FY 2026-27)
| Income slab | Tax rate |
|---|---|
| Up to Rs 4,00,000 | Nil |
| Rs 4,00,001 to Rs 8,00,000 | 5% |
| Rs 8,00,001 to Rs 12,00,000 | 10% |
| Rs 12,00,001 to Rs 16,00,000 | 15% |
| Rs 16,00,001 to Rs 20,00,000 | 20% |
| Rs 20,00,001 to Rs 24,00,000 | 25% |
| Above Rs 24,00,000 | 30% |
Rebate under Section 87A: If taxable income is up to Rs 12,00,000, you get a rebate of up to Rs 60,000, effectively making income up to Rs 12 lakh tax-free under the new regime.
Old Tax Regime (FY 2026-27)
| Income slab | Tax rate |
|---|---|
| Up to Rs 2,50,000 | Nil |
| Rs 2,50,001 to Rs 5,00,000 | 5% |
| Rs 5,00,001 to Rs 10,00,000 | 20% |
| Above Rs 10,00,000 | 30% |
Rebate under Section 87A: If taxable income is up to Rs 5,00,000, you get a rebate of up to Rs 12,500.
Add Health & Education Cess at 4 percent on the total tax computed.
Example 1: Salary of Rs 8 Lakh per annum
Salary structure: - Basic: Rs 4,00,000 - HRA: Rs 2,00,000 - Special Allowance: Rs 2,00,000 - Rent paid: Rs 12,000 per month (Rs 1,44,000 per year), non-metro city
New Regime Calculation
Gross Salary: Rs 8,00,000 Less: Standard deduction: Rs 75,000 Taxable Income: Rs 7,25,000
Tax calculation: - Up to Rs 4,00,000: Nil - Rs 4,00,001 to Rs 7,25,000 (Rs 3,25,000 at 5%): Rs 16,250 - Total tax before rebate: Rs 16,250 - Section 87A rebate: Rs 16,250 (income below Rs 12 lakh, full rebate applies) - Tax payable: Nil
Old Regime Calculation
Gross Salary: Rs 8,00,000 Less: HRA exemption (minimum of Rs 2,00,000; Rs 1,44,000 - Rs 40,000 = Rs 1,04,000; Rs 1,60,000): Rs 1,04,000 Less: Standard deduction: Rs 50,000 Net salary income: Rs 6,46,000
Less: Section 80C (EPF Rs 48,000 + PPF Rs 1,00,000): Rs 1,48,000 Less: Section 80D (health insurance): Rs 25,000 Taxable Income: Rs 4,73,000
Tax calculation: - Up to Rs 2,50,000: Nil - Rs 2,50,001 to Rs 4,73,000 (Rs 2,23,000 at 5%): Rs 11,150 - Section 87A rebate: Rs 11,150 (income below Rs 5 lakh) - Tax payable: Nil
Verdict: At Rs 8 lakh salary, both regimes result in zero tax if you claim available deductions. The new regime is simpler. Use our income tax calculator to verify with your exact numbers.
Example 2: Salary of Rs 12 Lakh per annum
Salary structure: - Basic: Rs 6,00,000 - HRA: Rs 3,00,000 - Special Allowance: Rs 3,00,000 - Rent paid: Rs 18,000 per month (Rs 2,16,000 per year), metro city
New Regime Calculation
Gross Salary: Rs 12,00,000 Less: Standard deduction: Rs 75,000 Taxable Income: Rs 11,25,000
Tax calculation: - Up to Rs 4,00,000: Nil - Rs 4,00,001 to Rs 8,00,000 (Rs 4,00,000 at 5%): Rs 20,000 - Rs 8,00,001 to Rs 11,25,000 (Rs 3,25,000 at 10%): Rs 32,500 - Total tax: Rs 52,500 - Section 87A rebate: Rs 52,500 (income below Rs 12 lakh, full rebate) - Tax payable: Nil
Old Regime Calculation
Gross Salary: Rs 12,00,000 Less: HRA exemption (minimum of Rs 3,00,000; Rs 2,16,000 - Rs 60,000 = Rs 1,56,000; Rs 3,00,000): Rs 1,56,000 Less: Standard deduction: Rs 50,000 Net salary income: Rs 9,94,000
Less: Section 80C (EPF Rs 72,000 + PPF Rs 78,000): Rs 1,50,000 Less: Section 80D: Rs 25,000 Less: Section 80CCD(1B) NPS: Rs 50,000 Taxable Income: Rs 7,69,000
Tax calculation: - Up to Rs 2,50,000: Nil - Rs 2,50,001 to Rs 5,00,000 (Rs 2,50,000 at 5%): Rs 12,500 - Rs 5,00,001 to Rs 7,69,000 (Rs 2,69,000 at 20%): Rs 53,800 - Total tax: Rs 66,300 - Cess at 4%: Rs 2,652 - Tax payable: Rs 68,952
Verdict: At Rs 12 lakh salary, the new regime results in zero tax thanks to the Rs 12 lakh rebate threshold, while the old regime costs approximately Rs 69,000 even with full deductions. The new regime wins clearly at this salary level. For a deeper analysis of regime selection, see our guide on new tax regime changes for FY 2026-27.
Example 3: Salary of Rs 18 Lakh per annum
Salary structure: - Basic: Rs 9,00,000 - HRA: Rs 4,50,000 - Special Allowance: Rs 4,50,000 - Rent paid: Rs 25,000 per month (Rs 3,00,000 per year), metro city
New Regime Calculation
Gross Salary: Rs 18,00,000 Less: Standard deduction: Rs 75,000 Taxable Income: Rs 17,25,000
Tax calculation: - Up to Rs 4,00,000: Nil - Rs 4,00,001 to Rs 8,00,000 (Rs 4,00,000 at 5%): Rs 20,000 - Rs 8,00,001 to Rs 12,00,000 (Rs 4,00,000 at 10%): Rs 40,000 - Rs 12,00,001 to Rs 16,00,000 (Rs 4,00,000 at 15%): Rs 60,000 - Rs 16,00,001 to Rs 17,25,000 (Rs 1,25,000 at 20%): Rs 25,000 - Total tax: Rs 1,45,000 - Cess at 4%: Rs 5,800 - Tax payable: Rs 1,50,800
Old Regime Calculation
Gross Salary: Rs 18,00,000 Less: HRA exemption (minimum of Rs 4,50,000; Rs 3,00,000 - Rs 90,000 = Rs 2,10,000; Rs 4,50,000): Rs 2,10,000 Less: Standard deduction: Rs 50,000 Net salary income: Rs 15,40,000
Less: Section 80C: Rs 1,50,000 Less: Section 80CCD(1B) NPS: Rs 50,000 Less: Section 80D: Rs 50,000 (self + parents) Less: Section 24 home loan interest: Rs 2,00,000 Taxable Income: Rs 10,90,000
Tax calculation: - Up to Rs 2,50,000: Nil - Rs 2,50,001 to Rs 5,00,000 (Rs 2,50,000 at 5%): Rs 12,500 - Rs 5,00,001 to Rs 10,00,000 (Rs 5,00,000 at 20%): Rs 1,00,000 - Rs 10,00,001 to Rs 10,90,000 (Rs 90,000 at 30%): Rs 27,000 - Total tax: Rs 1,39,500 - Cess at 4%: Rs 5,580 - Tax payable: Rs 1,45,080
Verdict: At Rs 18 lakh with maximum deductions including home loan interest, the old regime saves approximately Rs 5,700 compared to the new regime. However, this requires a home loan and full utilisation of all deductions. Without the home loan deduction, the new regime would be cheaper. To verify for your own salary, check our HRA calculator and income tax calculator.
Key takeaways
- The new regime is better for most employees earning up to Rs 12 to 15 lakh who do not have significant deductions.
- The old regime benefits those with home loans, high HRA claims, NPS contributions and full Section 80C utilisation.
- The break-even point is typically around Rs 3.75 lakh to Rs 4.5 lakh in total deductions. If your deductions exceed this, the old regime may save more.
- Always run both calculations with your actual numbers before choosing a regime. Do not rely on general rules of thumb.
This guide covers the most common salary scenarios. For more complex situations involving capital gains, rental income or business income, consult a chartered accountant. For standard salaried income, the formulas and steps above are all you need to calculate your tax accurately.
Frequently asked questions
How do I calculate income tax on my salary?
Start with your gross salary, subtract exempt allowances like HRA and standard deduction to get net taxable salary. Add income from other sources. Under the old regime, subtract deductions under sections 80C, 80D, 24 and others. Apply the slab rates and add 4 percent health and education cess.
Is there zero tax on salary up to Rs 12 lakh under the new regime?
Yes, under the new tax regime for FY 2026-27, salaried employees with taxable income up to Rs 12 lakh effectively pay zero tax thanks to the Section 87A rebate of up to Rs 60,000. With the Rs 75,000 standard deduction, a gross salary of up to Rs 12.75 lakh can be tax-free.
Which is better for Rs 15 lakh salary: old or new tax regime?
At Rs 15 lakh salary, the new regime is usually better unless you have total deductions exceeding Rs 4 lakh including HRA, 80C, 80D, NPS and home loan interest. Calculate your tax under both regimes using your actual deduction amounts before deciding. The break-even depends on your specific situation.
What is the standard deduction for salaried employees?
The standard deduction for FY 2026-27 is Rs 75,000 under the new tax regime and Rs 50,000 under the old regime. This is a flat deduction from salary income that requires no proof or investment. It is automatically applied when computing taxable income from salary.
How is HRA exemption calculated for tax purposes?
HRA exemption is the minimum of three amounts: actual HRA received, rent paid minus 10 percent of basic salary, and 50 percent of basic salary for metro cities or 40 percent for non-metro cities. This exemption is only available under the old tax regime and requires rent receipts as proof.
Does employer EPF contribution count as taxable income?
Employer EPF contribution up to 12 percent of basic salary is exempt from tax. Any contribution above 12 percent is taxable. Employee EPF contribution qualifies for deduction under Section 80C up to Rs 1.5 lakh. The interest earned on EPF is tax-free up to a contribution threshold of Rs 2.5 lakh per year.
How can I save more income tax on my salary legally?
Under the old regime, maximise Section 80C investments, claim HRA exemption, invest in NPS for the additional Rs 50,000 deduction under 80CCD(1B), take health insurance under 80D, and use home loan interest deduction under Section 24. Under the new regime, restructure your CTC to increase non-taxable components.
What is the difference between CTC and taxable income?
CTC is the total cost your employer bears including salary, EPF contribution, gratuity and other benefits. Taxable income is much lower because it excludes employer EPF and gratuity contributions, HRA exemption, standard deduction and all eligible deductions. Typically, taxable income is 50 to 70 percent of CTC.