How to calculate income tax on your salary
Updated 11 October 2026
To calculate income tax on salary, start from your gross salary, take off exempt allowances and the standard deduction, add any other income, subtract the deductions your regime allows, then apply the slab rates, the rebate and 4% cess. The worked example below takes an ₹18 lakh salary through every step in both regimes.
The seven steps
- Gross salary: everything your employer pays you in the year.
- Exempt allowances (old regime): HRA, LTA and similar exemptions.
- Standard deduction: ₹75,000 (new) or ₹50,000 (old), plus professional tax in the old regime.
- Other income: add interest, rent and other income.
- Deductions: 80C, 80D, NPS and home loan interest in the old regime; only the employer's NPS contribution in the new regime.
- Tax: apply slabs, then rebate or marginal relief, surcharge if income is above ₹50 lakh, and 4% cess.
- Compare with TDS: the difference is a refund or tax to pay.
Step 1: gross salary
Gross salary includes basic pay, dearness allowance (DA), HRA, special allowance, bonus, overtime, commission and taxable perquisites such as a company car or rent-free house. It is not the same as CTC: the employer's PF contribution and gratuity provision appear in CTC but are not part of your taxable salary within the usual limits. See CTC vs in-hand salary and salary slip components.
Step 2: exempt allowances
In the old regime, part of some allowances is exempt. The big one is HRA: the least of actual HRA, rent paid minus 10% of salary, and 50% of salary (40% outside the eight big cities). Children education allowance is exempt up to ₹3,000 a month per child and hostel allowance up to ₹9,000 a month per child, for up to two children, under the 2026 Rules. The new regime allows none of these. Use the HRA exemption calculator.
Step 3: standard deduction and professional tax
Subtract the standard deduction. In the old regime also subtract professional tax paid to your state, up to ₹2,500.
Step 4: add other income
Add savings and FD interest, rent (after a 30% standard deduction for house property) and any other income. Your employer may not know about these, which is why the final tax in your return can differ from TDS.
Step 5: deductions
In the old regime: section 80C (now section 123) up to ₹1,50,000, which includes your own PF contribution; section 80D health insurance; ₹50,000 extra for your own NPS contribution; and home loan interest. In both regimes, the employer's NPS contribution (now section 124) is deductible, up to 14% of basic plus DA in the new regime.
Step 6: tax, rebate and cess
Apply the slab rates for 2026-27. In the new regime, taxable income up to ₹12 lakh gets a full rebate, with marginal relief just above. Add 4% cess.
Worked example: ₹18 lakh salary
Old regime. HRA exemption = least of ₹3,60,000 (HRA received), ₹3,00,000 − ₹72,000 = ₹2,28,000 (rent minus 10% of basic), and ₹3,60,000 (50% of basic, as Pune now qualifies) = ₹2,28,000.
Income from salary = ₹18,00,000 − ₹2,28,000 − ₹50,000 − ₹2,500 = ₹15,19,500.
Deductions: 80C ₹1,50,000 (₹86,400 + ₹63,600) + 80D ₹25,000. Taxable income = ₹13,44,500.
Tax = ₹12,500 + ₹1,00,000 + 30% of ₹3,44,500 (₹1,03,350) = ₹2,15,850. Cess ₹8,634. Total ₹2,24,484.
New regime. Taxable income = ₹18,00,000 − ₹75,000 = ₹17,25,000.
Tax = ₹1,20,000 (up to ₹16 lakh) + 20% of ₹1,25,000 (₹25,000) = ₹1,45,000. Cess ₹5,800. Total ₹1,50,800.
The new regime saves Rahul ₹73,684. His employer would deduct about ₹12,567 a month (₹1,50,800 ÷ 12).
Step 7: settle up when you file
After the year ends, compare your final tax with the TDS shown in your Form 130 (Form 16 for 2025-26) and in your Annual Information Statement. Pay any shortfall as self-assessment tax before filing, or claim the excess as a refund. See how to file your ITR.
Shortcut: the income tax calculator runs both regimes side by side, and the salary calculator shows monthly take-home. Ready answers for common salaries: tax on ₹18 lakh, ₹18 lakh CTC in hand.