How To Calculate Income Tax in 2025 – Step-by-Step Guide with Examples

Let’s say Mr. Sharma is a 35-year-old working in Mumbai. He earns:

• ₹7,00,000 (basic salary)
• ₹3,00,000 (HRA)
• ₹2,00,000 (special allowance)
  
  

That’s a gross salary of ₹12,00,000. Here’s how his tax is calculated—step-by-step, friendly and easy!

• HRA exemption: ₹1,50,000
• Standard deduction: ₹50,000
• Net salary: ₹12,00,000 - ₹1,50,000 - ₹50,000 = ₹10,00,000
• Deductions (80C): ₹70,000 (PF + LIC)
• Taxable income: ₹10,00,000 - ₹70,000 = ₹9,30,000
• Tax calculation:
  
  
  • ₹2.5L–₹5L @5% = ₹12,500
  • ₹5L–₹9.3L @20% = ₹86,000
  • Total tax = ₹98,500
  • Add cess @4% = ₹3,940
  • Total payable = ₹1,02,440

Isn’t it interesting how simple tax calculation can be once broken down? Let’s dive deeper!

What Is Income Tax?

Let’s say Rina works as a software engineer and earns ₹10,00,000 annually. In India, the income tax system uses tax slabs. For simplicity, let’s assume the tax slabs are: 0% for income up to ₹2,50,000, 5% for income between ₹2,50,001 and ₹5,00,000, 20% for income between ₹5,00,001 and ₹10,00,000, and 30% for income above ₹10,00,000.

Since Rina's income is ₹10,00,000, she falls into the third slab, and here’s how her tax is calculated:

Read More – Smart Tax-Saving Strategies for Salaried Individuals

• 0% on ₹2,50,000
• 5% on ₹2,50,000 = ₹12,500
• 20% on ₹5,00,000 = ₹1,00,000
  
  

Total Tax: ₹1,12,500

Summary in pointers:

1. Income tax is calculated based on income slabs.
2. Tax rates increase with higher income.
3. Rina pays tax on ₹2,50,000 at 5% and ₹5,00,000 at 20%.
4. Total tax payable is ₹1,12,500 for ₹10,00,000 income.

The Basic Formula for Calculating Income Tax

Let’s take the example of Amit, who works as a marketing manager in a company. His gross annual salary is ₹12,00,000. To calculate his income tax, he first needs to determine his taxable income, considering deductions and applicable tax rates.

Step 1: Gross Salary and Deductions

Amit’s gross salary is ₹12,00,000. He is eligible for deductions under sections like 80C (for investments in PPF, life insurance, etc.) of ₹1,50,000, and other deductions like 80D for medical insurance worth ₹25,000. So, his taxable income is:

Gross Salary = ₹12,00,000
Deductions = ₹1,50,000 (80C) + ₹25,000 (80D)
Taxable Income = ₹12,00,000 - ₹1,75,000 = ₹10,25,000

Step 2: Tax Calculation

Next, we apply the tax slabs:

1. ₹2,50,000 - ₹5,00,000 is taxed at 5%
2. ₹5,00,001 - ₹10,00,000 is taxed at 20%
3. ₹10,00,001 and above is taxed at 30%
   
   

Since Amit’s taxable income is ₹10,25,000, it falls into the third bracket.

• Tax on ₹2,50,000 = 5% of ₹2,50,000 = ₹12,500
• Tax on ₹5,00,000 = 20% of ₹5,00,000 = ₹1,00,000
• Tax on ₹25,000 (₹10,25,000 - ₹10,00,000) = 30% of ₹25,000 = ₹7,500
  
  

Total Tax = ₹12,500 + ₹1,00,000 + ₹7,500 = ₹1,20,000

There’s also a tax rebate (if applicable), but Amit doesn’t qualify for any in this case.

Summary in Pointers:

1. Gross Salary = ₹12,00,000
2. Deductions (80C, 80D, etc.) = ₹1,75,000
3. Taxable Income = ₹10,25,000
4. Tax Calculation:
   
   
   • ₹2,50,000 @ 5% = ₹12,500
   • ₹5,00,000 @ 20% = ₹1,00,000
   • ₹25,000 @ 30% = ₹7,500
     
     
     
5. Total Tax = ₹1,20,000
   
   

Tax Calculation Table
 

Old Tax Regime vs New Tax Regime Tax Slab Rates

Here’s a comparative table of the Old Tax Regime vs New Tax Regime Slab Rates for FY 2024–25 for Individuals, HUFs, AOPs, BOIs, or Artificial Juridical Persons:

How To Calculate Tax on Salary?

Let’s say Mr. Sharma, a 35-year-old marketing professional working in Mumbai. He earns a basic salary of ₹7,00,000 annually, along with House Rent Allowance (HRA) of ₹3,00,000 and special allowances of ₹2,00,000. He also contributes ₹50,000 to his Provident Fund (PF) and pays ₹20,000 annually towards a life insurance policy.

He has opted for the Old Tax Regime and wants to calculate his income tax liability for FY 2024–25.

Step-by-Step Salary Tax Calculation

1. Compute Gross Salary
   Basic Salary + HRA + Special Allowance = ₹7,00,000 + ₹3,00,000 + ₹2,00,000 = ₹12,00,000
   
   
2. Calculate Exemptions
   HRA exemption (assumed) = ₹1,50,000
   
   
3. Deduction under Section 16
   Standard deduction = ₹50,000
   
   
4. Determine Net Salary
   Gross Salary - Exemptions - Standard Deduction = ₹12,00,000 - ₹1,50,000 - ₹50,000 = ₹10,00,000
   
   
5. Apply Deductions (80C, etc.)
   PF: ₹50,000 + Insurance Premium: ₹20,000 = ₹70,000
   
   
6. Compute Taxable Income
    Net Salary - Deductions = ₹10,00,000 - ₹70,000 = ₹9,30,000
   
   
7. Apply Tax Slabs (Old Regime)
   
   
   
   • Up to ₹2.5L: Nil
   • ₹2.5L–₹5L: 5% of ₹2.5L = ₹12,500
   • ₹5L–₹9.3L: 20% of ₹4.3L = ₹86,000
   • Total Tax = ₹98,500
     
     
8. Calculate Final Tax Payable
    Add Health & Education Cess @ 4% = ₹3,940
    Final Tax = ₹98,500 + ₹3,940 = ₹1,02,440
   
   Also Read – How to Calculate HRA in Salary – Complete Guide with Examples
   
   

Summary Table

Conclusion

Paying income tax becomes super easy when you know your income, your savings, and which tax slab you fall into. Just like Rina, Amit, and Mr. Sharma, you can calculate your tax step by step. Choose the right regime, old or new, based on what suits you best. Simple planning and understanding can help you save more and stay stress-free at tax time!

FAQs

Q1: How is income tax computed in India?

Income tax is computed on tax slabs and eligible deductions on your entire taxable income.

Q2: What are the popular deductions under the old tax regime?

Popular deductions are Section 80C (such as PF, LIC) and Section 80D (mediclaim).

Q3: What is the distinction between old and new tax regimes?

The old regime provides exemptions, whereas the new regime has lower rates but no significant exemptions.

Q4: How much tax will I have to pay if I make ₹12,00,000 annually?

Depends on deductions and options exercised; for instance, Mr. Sharma pays ₹1,02,440 under the old regime.

Q5: Do I have to pay tax if my income is less than ₹2.5 lakh?

No, income up to ₹2.5 lakh is exempt from tax under both regimes.

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