Understanding Income Tax in India FY 2025-26
Income tax is a direct tax levied by the Government of India on individuals and entities based on their annual income. For Financial Year 2025-26 (Assessment Year 2026-27), taxpayers have the option to choose between the old tax regime with deductions or the new simplified tax regime with lower rates but fewer exemptions.
New Tax Regime vs Old Tax Regime: Which to Choose?
New Tax Regime (Default from FY 2023-24)
Tax Slabs for FY 2025-26:
- Up to ₹3,00,000 - Nil
- ₹3,00,001 to ₹7,00,000 - 5%
- ₹7,00,001 to ₹10,00,000 - 10%
- ₹10,00,001 to ₹12,00,000 - 15%
- ₹12,00,001 to ₹15,00,000 - 20%
- Above ₹15,00,000 - 30%
Standard Deduction: ₹50,000 for salaried individuals
No other deductions allowed - No 80C, 80D, HRA, home loan interest, etc.
Old Tax Regime
Tax Slabs:
- Up to ₹2,50,000 - Nil (₹3,00,000 for senior citizens, ₹5,00,000 for super senior citizens)
- ₹2,50,001 to ₹5,00,000 - 5%
- ₹5,00,001 to ₹10,00,000 - 20%
- Above ₹10,00,000 - 30%
Available Deductions: 80C (₹1.5L), 80D (₹25K-₹1L), HRA, home loan interest (₹2L), etc.
How to Calculate Income Tax
Step 1: Calculate Gross Total Income
Add all sources of income:
- Salary: Basic + DA + HRA + Allowances + Bonus
- House Property: Rental income (or notional rent)
- Business/Profession: Net profit from business
- Capital Gains: Profit from sale of assets (stocks, property, etc.)
- Other Sources: Interest income, dividends, etc.
Step 2: Calculate Deductions (Old Regime Only)
Chapter VI-A Deductions:
- Section 80C: Up to ₹1,50,000
- EPF, PPF, Life Insurance Premium
- ELSS Mutual Funds, NSC
- Home Loan Principal Repayment
- Tuition Fees, Sukanya Samriddhi Yojana
- Section 80D: Health insurance premiums
- Self/Family: ₹25,000 (₹50,000 for senior citizens)
- Parents: Additional ₹25,000 (₹50,000 for senior citizens)
- Preventive health checkup: ₹5,000 (included in above limit)
- Section 80CCD(1B): Additional ₹50,000 for NPS
- Section 24(b): Home loan interest up to ₹2,00,000
- Section 80E: Education loan interest (no limit)
- Section 80G: Donations to eligible institutions (50% or 100%)
Step 3: Calculate Taxable Income
Taxable Income = Gross Total Income - Total Deductions
Step 4: Apply Tax Slabs
Calculate tax based on chosen regime's tax slabs
Step 5: Add Cess
4% Health & Education Cess on total tax amount
Step 6: Deduct TDS/Advance Tax
Final tax liability = Total tax + Cess - TDS already deducted
Example Calculation: New vs Old Regime
Scenario: Salaried Individual
- Annual Salary: ₹12,00,000
- EPF Contribution: ₹1,50,000
- Health Insurance: ₹25,000
- Home Loan Interest: ₹2,00,000
- NPS Contribution: ₹50,000
New Tax Regime Calculation
Gross Income: ₹12,00,000
Standard Deduction: -₹50,000
Taxable Income: ₹11,50,000
Tax Calculation:
- Up to ₹3,00,000: ₹0
- ₹3,00,001 to ₹7,00,000: ₹4,00,000 × 5% = ₹20,000
- ₹7,00,001 to ₹10,00,000: ₹3,00,000 × 10% = ₹30,000
- ₹10,00,001 to ₹11,50,000: ₹1,50,000 × 15% = ₹22,500
Total Tax: ₹72,500
Add 4% Cess: ₹72,500 × 1.04 = ₹75,400
Old Tax Regime Calculation
Gross Income: ₹12,00,000
Standard Deduction: -₹50,000
80C Deduction: -₹1,50,000
80D Deduction: -₹25,000
80CCD(1B) - NPS: -₹50,000
24(b) - Home Loan: -₹2,00,000
Taxable Income: ₹8,25,000
Tax Calculation:
- Up to ₹2,50,000: ₹0
- ₹2,50,001 to ₹5,00,000: ₹2,50,000 × 5% = ₹12,500
- ₹5,00,001 to ₹8,25,000: ₹3,25,000 × 20% = ₹65,000
Total Tax: ₹77,500
Less 87A Rebate: Not applicable (income > ₹5 lakh)
Add 4% Cess: ₹77,500 × 1.04 = ₹80,600
Comparison
- New Regime Tax: ₹75,400
- Old Regime Tax: ₹80,600
- Winner: New Regime (saves ₹5,200)
Note: For this example, new regime is better despite having investments. However, if home loan interest was lower or absent, old regime might be better.
Which Regime Should You Choose?
Choose New Tax Regime If:
- You have minimal investments/deductions
- You don't have home loan or major insurance premiums
- Your total deductions under old regime are less than ₹2.5-3 lakhs
- You prefer simplicity and don't want to plan tax-saving investments
- Your income is below ₹10 lakhs or above ₹20 lakhs
Choose Old Tax Regime If:
- You have significant investments in 80C (EPF, PPF, ELSS, etc.)
- You pay high health insurance premiums
- You have home loan with high interest component
- Total deductions exceed ₹3-4 lakhs annually
- You're planning major tax-saving investments anyway
HRA Exemption Calculation (Old Regime Only)
HRA Exemption is Minimum of:
- Actual HRA received
- Rent paid minus 10% of basic salary
- 50% of basic salary (for metro cities) or 40% (for non-metro)
Example
- Basic Salary: ₹6,00,000
- HRA Received: ₹3,00,000
- Rent Paid: ₹2,40,000
- City: Mumbai (Metro)
Calculation:
- Actual HRA: ₹3,00,000
- Rent - 10% of Basic: ₹2,40,000 - ₹60,000 = ₹1,80,000
- 50% of Basic: ₹3,00,000
Minimum: ₹1,80,000 (exempt from tax)
Taxable HRA: ₹3,00,000 - ₹1,80,000 = ₹1,20,000
How to Save Maximum Tax
For Salaried Individuals (Old Regime)
- Max out 80C (₹1.5L):
- EPF: ₹50,000
- PPF: ₹50,000
- ELSS: ₹50,000
- Health Insurance 80D (₹50K):
- Self + Parents coverage: ₹50,000
- NPS 80CCD(1B) (₹50K):
- Additional tax benefit
- Home Loan Interest 24(b) (₹2L):
- Self-occupied property
- Education Loan 80E:
- Full interest deductible
Total Possible Savings: Up to ₹5 lakh in deductions!
Tax Saving Tips
- Plan early: Don't wait till March to invest
- Use salary structure: Optimize allowances (meal, fuel, mobile)
- Declare investments: Provide investment proof to employer to reduce TDS
- File returns on time: Avoid penalties and interest
- Keep documents: Maintain all investment proofs for 6 years
- Check Form 26AS: Verify all TDS entries
- Use advance tax: If you have other income, pay advance tax to avoid interest
Important Tax Deadlines FY 2025-26
- June 15, 2025: First advance tax installment (15%)
- September 15, 2025: Second advance tax installment (45%)
- December 15, 2025: Third advance tax installment (75%)
- March 15, 2026: Fourth advance tax installment (100%)
- July 31, 2026: ITR filing deadline for individuals
- December 31, 2026: Belated/revised return filing deadline
Common Mistakes to Avoid
- Not comparing regimes: Calculate tax in both regimes before choosing
- Forgetting standard deduction: ₹50K available in both regimes now
- Over-investing in 80C: Don't lock money just for tax savings
- Not claiming HRA: Many forget to claim HRA exemption
- Missing Form 12BB: Submit investment proofs to employer
- Wrong ITR form: Use correct form based on income sources
- Not reporting all income: Declare all sources including interest, dividends
- Late filing: File before July 31 to avoid penalties
Tax Saving Investment Options
Best Options Under Section 80C
- ELSS Mutual Funds:
- 3-year lock-in (shortest)
- Potential 12-15% returns
- Market-linked
- PPF (Public Provident Fund):
- 15-year tenure
- 7.1% interest (2025)
- Tax-free returns
- Government-backed
- EPF (Employee Provident Fund):
- Automatic deduction from salary
- 8.25% interest (2025)
- Employer contribution
- NSC (National Savings Certificate):
- 5-year tenure
- 7.7% interest
- Post office investment
- Tax-Saving FD:
- 5-year lock-in
- 6.5-7.5% interest
- Interest taxable
Conclusion
Income tax calculation in India requires understanding both tax regimes and making an informed choice based on your financial situation. Key points:
- New regime is default but may not always be beneficial
- Calculate tax under both regimes before deciding
- Plan investments early in the financial year
- Utilize all available deductions if using old regime
- File returns on time to avoid penalties
- Review and revise regime choice annually based on changing circumstances
Calculate your income tax: Use our Income Tax Calculator to compare both regimes and choose the best option for you.
Remember: Tax planning is not just about saving tax, but about making smart financial decisions that align with your long-term goals!