Calculating income tax in India follows a fixed sequence. Once you know the steps, Form 16 and the ITR portal stop feeling like a black box. This walkthrough uses FY 2025-26 (AY 2026-27) rules for salaried employees.
Step 1: Start with gross salary
Add basic, HRA, special allowance and other taxable components from your Form 16. Do not use CTC — employer PF and gratuity provisions are not fully taxable the same way.
Step 2: Subtract standard deduction
Salaried employees get ₹75,000 standard deduction under the new regime and ₹50,000 under the old regime. This is automatic — you do not need proofs.
Step 3: Apply regime-specific deductions
Old regime only: 80C (up to ₹1.5L), 80D, HRA exemption, home loan interest (Section 24b up to ₹2L). New regime: almost none of these — lower slab rates instead.
Step 4: Apply slabs and Section 87A rebate
For a resident individual in the new regime, the 87A rebate can offset ordinary slab-rate tax when total income is at most ₹12 lakh (about ₹12.75L gross if salary is the only income, after the standard deduction). Special-rate income such as many capital gains still counts toward ₹12 lakh, and its tax is not rebated. Then add 4% health and education cess on any tax that remains.
The takeaway
Do not calculate by hand for filing — use an income tax calculator, then verify against Form 16 and AIS on the income tax portal.