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How to Calculate Income Tax in India: Step-by-Step Guide with Examples

Raghav

Published: November 18, 2025

25 min read

How to Calculate Income Tax in India: Step-by-Step Guide with Examples

Calculating income tax might seem complicated at first, but once you understand the process, it becomes straightforward. Over the years, I've helped hundreds of people understand their tax calculations, and I've seen how clarity on this topic can help you plan better and save money. This comprehensive guide will walk you through every step of calculating your income tax, with real examples you can follow.

Whether you're a salaried employee, self-employed professional, or business owner, understanding how your tax is calculated is crucial for financial planning. Let's break it down step by step.

Understanding the Basics: What is Income Tax?

Income tax is a tax levied by the government on the income earned by individuals and entities during a financial year (April 1 to March 31). The tax is calculated based on your taxable income, which is your total income minus deductions and exemptions.

Key Concepts:

Gross Total Income (GTI): Your total income from all sources
Deductions: Amounts you can subtract from GTI (Section 80C, 80D, etc.)
Taxable Income: GTI minus deductions
Tax Liability: The actual tax you need to pay based on taxable income

The Two Tax Regimes: Old vs New

Before we dive into calculations, it's crucial to understand that India has two tax regimes, and you need to choose one:

Old Tax Regime

Allows all deductions and exemptions
Lower basic exemption limit (₹2.5 lakh)
Best if you have significant deductions (₹1.5-2 lakh+)

New Tax Regime

Very few deductions allowed
Higher basic exemption limit (₹3 lakh)
Simpler but may not always save more

Important: You must choose one regime for the entire financial year. You cannot mix and match.

Step-by-Step Income Tax Calculation Process

Let me walk you through the complete process with detailed steps:

Step 1: Calculate Your Gross Total Income (GTI)

Your gross total income includes income from all sources:

1. Salary Income:

Basic salary
Dearness Allowance (DA)
House Rent Allowance (HRA)
Special allowances
Bonuses and commissions
Perquisites (company car, accommodation, etc.)

2. Income from House Property:

Rental income from properties
Deemed rental income (if you own more than one house)

3. Capital Gains:

Short-term capital gains (STCG)
Long-term capital gains (LTCG)
From sale of stocks, mutual funds, property, etc.

4. Income from Business/Profession:

Business profits
Professional fees
Self-employment income

5. Income from Other Sources:

Interest from savings accounts
Interest from fixed deposits
Dividends
Other miscellaneous income

Example Calculation:

Salary: ₹12,00,000
Rental Income: ₹2,40,000
Interest Income: ₹30,000
Gross Total Income: ₹14,70,000

Step 2: Calculate Exemptions (Old Regime Only)

Exemptions reduce your taxable income. Common exemptions include:

HRA Exemption:

If you receive HRA and pay rent, you can claim exemption
Exemption = Minimum of:
Actual HRA received
Actual rent paid minus 10% of basic salary
50% of basic salary (metro) or 40% (non-metro)

Standard Deduction:

₹50,000 for salaried individuals (available in both regimes)

Leave Travel Allowance (LTA):

Tax-free travel benefits (subject to conditions)

Example:

HRA Received: ₹2,40,000
Rent Paid: ₹2,00,000
Basic Salary: ₹6,00,000
HRA Exemption = Min(₹2,40,000, ₹2,00,000 - ₹60,000, ₹3,00,000) = ₹1,40,000
Standard Deduction: ₹50,000
Total Exemptions: ₹1,90,000

Step 3: Calculate Deductions (Old Regime Only)

Deductions are subtracted from your gross total income. Common deductions include:

Section 80C: Up to ₹1.5 lakh

ELSS, PPF, life insurance, home loan principal, etc.

Section 80D: Health insurance premiums

Self, spouse, children: ₹25,000
Parents: Additional ₹25,000 (₹50,000 if senior citizens)

Section 24(b): Home loan interest

Up to ₹2 lakh for self-occupied property

Section 80CCD(1B): Additional NPS contribution

Up to ₹50,000 (exclusive, beyond 80C)

Section 80E: Education loan interest

No upper limit

Example:

Section 80C: ₹1,50,000
Section 80D: ₹50,000
Section 24(b): ₹2,00,000
Section 80CCD(1B): ₹50,000
Total Deductions: ₹4,50,000

Step 4: Calculate Taxable Income

Formula: Taxable Income = Gross Total Income - Exemptions - Deductions

Example (Old Regime):

Gross Total Income: ₹14,70,000
Exemptions: ₹1,90,000
Deductions: ₹4,50,000
Taxable Income: ₹14,70,000 - ₹1,90,000 - ₹4,50,000 = ₹8,30,000

Example (New Regime):

Gross Total Income: ₹14,70,000
Standard Deduction: ₹50,000
Taxable Income: ₹14,70,000 - ₹50,000 = ₹14,20,000

Step 5: Apply Tax Slabs

Once you have your taxable income, apply the tax slabs based on your chosen regime.

Tax Slabs: Old Regime (FY 2025-26)

| Income Range | Tax Rate | |--------------|----------| | Up to ₹2,50,000 | Nil (0%) | | ₹2,50,001 - ₹5,00,000 | 5% | | ₹5,00,001 - ₹10,00,000 | 20% | | Above ₹10,00,000 | 30% |

Surcharge:

10% on income above ₹50 lakh
15% on income above ₹1 crore
25% on income above ₹2 crore
37% on income above ₹5 crore

Health and Education Cess: 4% on tax + surcharge

Tax Slabs: New Regime (FY 2025-26)

| Income Range | Tax Rate | |--------------|----------| | Up to ₹3,00,000 | Nil (0%) | | ₹3,00,001 - ₹7,00,000 | 5% | | ₹7,00,001 - ₹10,00,000 | 10% | | ₹10,00,001 - ₹12,00,000 | 15% | | ₹12,00,001 - ₹15,00,000 | 20% | | Above ₹15,00,000 | 30% |

Surcharge and Cess: Same as old regime

Step 6: Calculate Tax Using Slabs

Let me show you how to calculate tax using the slab system:

Example 1: Old Regime Calculation

Taxable Income: ₹8,30,000

Step-by-Step Calculation:

First ₹2,50,000: Nil (0%)
Tax: ₹0

Next ₹2,50,000 (₹2,50,001 to ₹5,00,000): 5%
Tax: ₹2,50,000 × 5% = ₹12,500

Next ₹3,30,000 (₹5,00,001 to ₹8,30,000): 20%
Tax: ₹3,30,000 × 20% = ₹66,000

Total Tax Before Cess:

₹0 + ₹12,500 + ₹66,000 = ₹78,500

Health and Education Cess (4%):

₹78,500 × 4% = ₹3,140

Total Tax Liability:

₹78,500 + ₹3,140 = ₹81,640

Example 2: New Regime Calculation

Taxable Income: ₹14,20,000

Step-by-Step Calculation:

First ₹3,00,000: Nil (0%)
Tax: ₹0

Next ₹4,00,000 (₹3,00,001 to ₹7,00,000): 5%
Tax: ₹4,00,000 × 5% = ₹20,000

Next ₹3,00,000 (₹7,00,001 to ₹10,00,000): 10%
Tax: ₹3,00,000 × 10% = ₹30,000

Next ₹2,00,000 (₹10,00,001 to ₹12,00,000): 15%
Tax: ₹2,00,000 × 15% = ₹30,000

Next ₹3,00,000 (₹12,00,001 to ₹15,00,000): 20%
Tax: ₹3,00,000 × 20% = ₹60,000

Remaining ₹20,000 (Above ₹15,00,000): 30%
Tax: ₹20,000 × 30% = ₹6,000

Total Tax Before Cess:

₹0 + ₹20,000 + ₹30,000 + ₹30,000 + ₹60,000 + ₹6,000 = ₹1,46,000

Health and Education Cess (4%):

₹1,46,000 × 4% = ₹5,840

Total Tax Liability:

₹1,46,000 + ₹5,840 = ₹1,51,840

Complete Calculation Examples

Let me show you complete examples for different income levels:

Example 1: Young Professional (₹8 Lakh Salary)

Income Details:

Basic Salary: ₹4,80,000
HRA: ₹1,20,000
Other Allowances: ₹2,00,000
Total Salary: ₹8,00,000

Old Regime Calculation:

Step 1: Gross Total Income

Salary: ₹8,00,000
GTI: ₹8,00,000

Step 2: Exemptions

HRA (rent paid ₹1,00,000): ₹60,000
Standard Deduction: ₹50,000
Total Exemptions: ₹1,10,000

Step 3: Deductions

Section 80C: ₹1,50,000
Section 80D: ₹25,000
Total Deductions: ₹1,75,000

Step 4: Taxable Income

₹8,00,000 - ₹1,10,000 - ₹1,75,000 = ₹5,15,000

Step 5: Tax Calculation

First ₹2,50,000: ₹0
Next ₹2,50,000: ₹12,500 (5%)
Next ₹15,000: ₹3,000 (20%)
Tax: ₹15,500
Cess (4%): ₹620
Total Tax: ₹16,120

New Regime Calculation:

Step 1: Gross Total Income

Salary: ₹8,00,000
GTI: ₹8,00,000

Step 2: Standard Deduction

₹50,000

Step 3: Taxable Income

₹8,00,000 - ₹50,000 = ₹7,50,000

Step 4: Tax Calculation

First ₹3,00,000: ₹0
Next ₹4,00,000: ₹20,000 (5%)
Next ₹50,000: ₹5,000 (10%)
Tax: ₹25,000
Cess (4%): ₹1,000
Total Tax: ₹26,000

Comparison:

Old Regime Tax: ₹16,120
New Regime Tax: ₹26,000
Savings with Old Regime: ₹9,880

Example 2: Mid-Career Professional (₹15 Lakh Salary with Home Loan)

Income Details:

Basic Salary: ₹9,00,000
HRA: ₹3,00,000
Other Allowances: ₹3,00,000
Total Salary: ₹15,00,000
Home Loan Interest: ₹3,00,000
Home Loan Principal: ₹2,00,000

Old Regime Calculation:

Step 1: Gross Total Income

Salary: ₹15,00,000
GTI: ₹15,00,000

Step 2: Exemptions

HRA (rent paid ₹2,40,000): ₹2,40,000
Standard Deduction: ₹50,000
Total Exemptions: ₹2,90,000

Step 3: Deductions

Section 80C: ₹1,50,000 (includes home loan principal)
Section 80D: ₹75,000 (family + senior citizen parents)
Section 24(b): ₹2,00,000 (home loan interest)
Section 80CCD(1B): ₹50,000 (additional NPS)
Total Deductions: ₹4,75,000

Step 4: Taxable Income

₹15,00,000 - ₹2,90,000 - ₹4,75,000 = ₹7,35,000

Step 5: Tax Calculation

First ₹2,50,000: ₹0
Next ₹2,50,000: ₹12,500 (5%)
Next ₹2,35,000: ₹47,000 (20%)
Tax: ₹59,500
Cess (4%): ₹2,380
Total Tax: ₹61,880

New Regime Calculation:

Step 1: Gross Total Income

Salary: ₹15,00,000
GTI: ₹15,00,000

Step 2: Standard Deduction

₹50,000

Step 3: Taxable Income

₹15,00,000 - ₹50,000 = ₹14,50,000

Step 4: Tax Calculation

First ₹3,00,000: ₹0
Next ₹4,00,000: ₹20,000 (5%)
Next ₹3,00,000: ₹30,000 (10%)
Next ₹2,00,000: ₹30,000 (15%)
Next ₹3,00,000: ₹60,000 (20%)
Remaining ₹-50,000: ₹0 (no income in this bracket)
Tax: ₹1,40,000
Cess (4%): ₹5,600
Total Tax: ₹1,45,600

Comparison:

Old Regime Tax: ₹61,880
New Regime Tax: ₹1,45,600
Savings with Old Regime: ₹83,720

Example 3: High-Income Earner (₹25 Lakh Salary)

Income Details:

Basic Salary: ₹15,00,000
HRA: ₹4,50,000
Other Allowances: ₹5,50,000
Total Salary: ₹25,00,000
Rental Income: ₹3,60,000
Interest Income: ₹40,000
Home Loan Interest: ₹3,50,000
Home Loan Principal: ₹3,00,000

Old Regime Calculation:

Step 1: Gross Total Income

Salary: ₹25,00,000
Rental Income: ₹3,60,000
Interest Income: ₹40,000
GTI: ₹29,00,000

Step 2: Exemptions

HRA (rent paid ₹3,60,000): ₹3,60,000
Standard Deduction: ₹50,000
Total Exemptions: ₹4,10,000

Step 3: Deductions

Section 80C: ₹1,50,000
Section 80D: ₹1,00,000 (family + senior citizen parents)
Section 24(b): ₹2,00,000 (home loan interest)
Section 80CCD(1B): ₹50,000
Section 80E: ₹1,20,000 (education loan interest)
Total Deductions: ₹6,20,000

Step 4: Taxable Income

₹29,00,000 - ₹4,10,000 - ₹6,20,000 = ₹18,70,000

Step 5: Tax Calculation

First ₹2,50,000: ₹0
Next ₹2,50,000: ₹12,500 (5%)
Next ₹5,00,000: ₹1,00,000 (20%)
Next ₹8,70,000: ₹2,61,000 (30%)
Tax: ₹3,73,500
Cess (4%): ₹14,940
Total Tax: ₹3,88,440

New Regime Calculation:

Step 1: Gross Total Income

Salary: ₹25,00,000
Rental Income: ₹3,60,000
Interest Income: ₹40,000
GTI: ₹29,00,000

Step 2: Standard Deduction

₹50,000

Step 3: Taxable Income

₹29,00,000 - ₹50,000 = ₹28,50,000

Step 4: Tax Calculation

First ₹3,00,000: ₹0
Next ₹4,00,000: ₹20,000 (5%)
Next ₹3,00,000: ₹30,000 (10%)
Next ₹2,00,000: ₹30,000 (15%)
Next ₹3,00,000: ₹60,000 (20%)
Remaining ₹13,50,000: ₹4,05,000 (30%)
Tax: ₹5,45,000
Cess (4%): ₹21,800
Total Tax: ₹5,66,800

Comparison:

Old Regime Tax: ₹3,88,440
New Regime Tax: ₹5,66,800
Savings with Old Regime: ₹1,78,360

Understanding Tax Rebate (Section 87A)

Section 87A provides a tax rebate for individuals with taxable income up to ₹7 lakh (old regime) or ₹7.5 lakh (new regime).

Old Regime:

If taxable income ≤ ₹5 lakh: Full rebate of ₹12,500
If taxable income between ₹5-7 lakh: Partial rebate

New Regime:

If taxable income ≤ ₹7.5 lakh: Full rebate of ₹25,000
This effectively means no tax for income up to ₹7.5 lakh

Example:

Taxable Income: ₹6,50,000 (old regime)
Tax Calculated: ₹32,500
Rebate Available: ₹12,500
Tax After Rebate: ₹20,000

Advance Tax and TDS

Advance Tax:

If your estimated tax liability exceeds ₹10,000, you need to pay advance tax
Due dates: 15% by June 15, 45% by September 15, 75% by December 15, 100% by March 15

TDS (Tax Deducted at Source):

Your employer deducts tax from salary
Banks deduct tax on interest income above ₹40,000
This is adjusted against your final tax liability

Example:

Tax Liability: ₹1,00,000
TDS Already Paid: ₹80,000
Tax Payable: ₹20,000

Special Cases and Additional Considerations

Capital Gains Tax

Short-Term Capital Gains (STCG):

Equity: 15% flat
Other assets: As per income tax slab

Long-Term Capital Gains (LTCG):

Equity: 10% on gains above ₹1 lakh
Property: 20% with indexation
Debt funds: 20% with indexation

Dividend Income

Dividends are taxable as per your income tax slab
TDS may be deducted at source

Rental Income

Gross rental income minus standard deduction (30%) or actual expenses
Net rental income is added to taxable income

Common Calculation Mistakes to Avoid

Mistake 1: Not Including All Income Sources

Many people forget interest income, rental income, or capital gains
Include all sources for accurate calculation

Mistake 2: Double Counting Deductions

Don't claim the same amount under multiple sections
Example: NPS contribution under both 80C and 80CCD(1)

Mistake 3: Exceeding Deduction Limits

Section 80C limit is ₹1.5 lakh, not unlimited
Investing more doesn't give more deduction

Mistake 4: Wrong Regime Selection

Choose the regime that saves you more
Use calculators to compare both

Mistake 5: Not Considering Surcharge

High-income earners need to add surcharge
This can significantly increase tax liability

Using Our Income Tax Calculator

While manual calculation helps you understand the process, using our Income Tax Calculator makes it easier and ensures accuracy. Our calculator:

Handles both old and new regimes
Includes all deductions and exemptions
Calculates surcharge and cess automatically
Shows detailed breakdown
Compares both regimes side-by-side

How to Use:

Enter your income details
Add deductions and exemptions
Choose your regime
Get instant tax calculation

Step-by-Step Calculation Checklist

Use this checklist to calculate your income tax:

Step 1: Gather Information

[ ] Salary slips
[ ] Form 16
[ ] Interest certificates
[ ] Rental income details
[ ] Capital gains statements
[ ] Investment proofs

Step 2: Calculate Gross Total Income

[ ] Add all income sources
[ ] Include salary, rental, interest, capital gains
[ ] Verify with Form 16

Step 3: Calculate Exemptions (Old Regime)

[ ] HRA exemption
[ ] Standard deduction
[ ] LTA (if applicable)
[ ] Other exemptions

Step 4: Calculate Deductions (Old Regime)

[ ] Section 80C investments
[ ] Section 80D health insurance
[ ] Section 24(b) home loan interest
[ ] Other deductions

Step 5: Calculate Taxable Income

[ ] GTI - Exemptions - Deductions
[ ] Verify calculation

Step 6: Apply Tax Slabs

[ ] Calculate tax for each slab
[ ] Add all slabs
[ ] Add surcharge (if applicable)
[ ] Add cess (4%)

Step 7: Calculate Final Tax

[ ] Subtract TDS already paid
[ ] Subtract advance tax paid
[ ] Calculate tax payable/refund

Frequently Asked Questions (FAQs)

Q1: How do I know which tax regime to choose?

A: Compare both regimes using our Old vs New Tax Regime Calculator. Generally, if your deductions exceed ₹1.5-2 lakh, old regime saves more. If you have minimal deductions, new regime might be better.

Q2: What is the difference between exemption and deduction?

A: Exemptions reduce your gross total income before calculating taxable income (like HRA). Deductions reduce your taxable income after exemptions (like Section 80C). Both reduce your tax, but exemptions are applied first.

Q3: How is tax calculated on salary income?

A: Tax is calculated on your taxable salary income, which is gross salary minus exemptions (HRA, standard deduction) and deductions (80C, 80D, etc.). The taxable income is then subject to tax slabs.

Q4: What happens if I don't pay advance tax?

A: If your tax liability exceeds ₹10,000 and you don't pay advance tax, you'll be charged interest under Section 234B and 234C. It's better to pay advance tax on time.

Q5: Can I change tax regimes during the year?

A: No, you must choose one regime for the entire financial year. You can switch regimes only at the beginning of a new financial year.

Q6: How do I calculate tax if I have income from multiple sources?

A: Add all income sources to get gross total income. Then apply exemptions and deductions. The final taxable income is subject to tax slabs.

Q7: What is surcharge and when does it apply?

A: Surcharge is an additional tax on high-income earners:

10% on income above ₹50 lakh
15% on income above ₹1 crore
25% on income above ₹2 crore
37% on income above ₹5 crore

Q8: How is health and education cess calculated?

A: Health and education cess is 4% of your tax liability (including surcharge). It's calculated on the total tax amount.

Q9: What if my employer has already deducted TDS?

A: TDS deducted by employer is adjusted against your final tax liability. If TDS is more than your tax liability, you get a refund. If less, you need to pay the balance.

Q10: How do I calculate tax for self-employed individuals?

A: For self-employed, calculate business/professional income (revenue minus expenses), add other income sources, apply deductions, and calculate tax on taxable income using the same slabs.

Q11: What is the tax rebate under Section 87A?

A: Section 87A provides rebate up to ₹12,500 (old regime) or ₹25,000 (new regime) for individuals with taxable income up to ₹7 lakh (old) or ₹7.5 lakh (new). This effectively means no tax for income up to these limits.

Q12: How do capital gains affect my tax calculation?

A: Capital gains are added to your gross total income. STCG is taxed as per your slab, while LTCG has special rates (10% for equity, 20% with indexation for property/debt funds).

Q13: Can I claim deductions if I choose the new regime?

A: The new regime allows very few deductions. Only employer NPS contribution (Section 80CCD(2)) and standard deduction are available. Most other deductions are not allowed.

Q14: How do I calculate tax if I have both salary and business income?

A: Add salary income and business income to get gross total income. Apply exemptions and deductions. Calculate tax on the final taxable income using the same slabs.

Q15: What documents do I need for tax calculation?

A: You need:

Form 16 (from employer)
Salary slips
Interest certificates (from banks)
Investment proofs (for deductions)
Rental agreements (for HRA)
Home loan statements (for interest deduction)
All receipts and certificates for deductions

Real-World Calculation Scenarios

Let me show you some common scenarios:

Scenario 1: Salaried Employee with No Deductions

Income: ₹10,00,000 (salary only)

Old Regime:

GTI: ₹10,00,000
Standard Deduction: ₹50,000
Taxable Income: ₹9,50,000
Tax: ₹1,12,500 + ₹4,500 cess = ₹1,17,000

New Regime:

GTI: ₹10,00,000
Standard Deduction: ₹50,000
Taxable Income: ₹9,50,000
Tax: ₹75,000 + ₹3,000 cess = ₹78,000

Better Option: New Regime (saves ₹39,000)

Scenario 2: Salaried Employee with Home Loan

Income: ₹12,00,000 Home Loan Interest: ₹2,50,000 80C Investments: ₹1,50,000

Old Regime:

GTI: ₹12,00,000
Standard Deduction: ₹50,000
Deductions: ₹4,00,000 (80C + 24b)
Taxable Income: ₹7,50,000
Tax: ₹52,500 + ₹2,100 cess = ₹54,600

New Regime:

GTI: ₹12,00,000
Standard Deduction: ₹50,000
Taxable Income: ₹11,50,000
Tax: ₹1,00,000 + ₹4,000 cess = ₹1,04,000

Better Option: Old Regime (saves ₹49,400)

Final Thoughts

Calculating income tax might seem complex, but following these steps makes it manageable:

Calculate Gross Total Income: Add all income sources
Apply Exemptions: Reduce GTI with exemptions (old regime)
Apply Deductions: Reduce further with deductions (old regime)
Calculate Taxable Income: GTI - Exemptions - Deductions
Apply Tax Slabs: Calculate tax for each income bracket
Add Surcharge and Cess: For high-income earners
Adjust TDS/Advance Tax: Calculate final payable/refund

The key is to be thorough, include all income sources, claim all eligible deductions, and choose the right tax regime. Use our Income Tax Calculator to verify your calculations and ensure accuracy.

Remember, understanding how your tax is calculated helps you plan better, save more, and avoid surprises during tax filing season. Start early, maintain proper documentation, and use the right tools to make tax calculation simple.

If you need help with specific calculations or have questions, use our calculators or reach out through our contact page. Here's to accurate tax calculations and smart tax planning!

Disclaimer: Tax laws and rates may change. The calculations in this guide are based on current tax laws for FY 2025-26. Always verify current rates and consult with a qualified chartered accountant for specific situations. This guide is for informational purposes only and should not be considered as professional tax advice.