How to Calculate Income Tax on Salary: A Worked Example (Old vs New Regime)

Most people never see the slab-by-slab arithmetic behind their tax bill, since Form 16 or a filing tool does it for them. This is how to calculate income tax on salary manually, working through one full example, so it's clear how the number is actually built, and why two people with the same salary can end up owing very different amounts.

Start with gross salary, not taxable income

Tax isn't calculated on your full salary. It's calculated on taxable income, which is gross salary minus deductions the law allows you to subtract first. The new and old regimes allow different deductions, which is the main reason the same salary produces different tax bills under each.

Let's work through one example: a salaried individual with a gross annual salary of ₹15,00,000, no other income.

How to calculate income tax in the new regime

Under the new regime for FY 2025-26 (AY 2026-27), a salaried individual gets a flat standard deduction of ₹75,000. Almost nothing else, no 80C, no HRA, no home loan interest on a self-occupied property, is deductible.

Taxable income: ₹15,00,000 − ₹75,000 = ₹14,25,000

Apply the new regime slabs to this (ClearTax, Income Tax Slabs FY 2025-26):

Total tax before cess: ₹20,000 + ₹40,000 + ₹33,750 = ₹93,750. Add 4% health and education cess: ₹93,750 × 1.04 = ₹97,500 (rounded).

Since taxable income here is above ₹12 lakh, the Section 87A rebate doesn't apply, that rebate only zeroes out tax when taxable income is ₹12 lakh or below.

How to calculate income tax in the old regime

Under the old regime, assume this person claims the full ₹1,50,000 under Section 80C (EPF, ELSS, life insurance premium) and ₹25,000 under Section 80D (health insurance premium), along with the ₹50,000 standard deduction.

Taxable income: ₹15,00,000 − ₹50,000 − ₹1,50,000 − ₹25,000 = ₹12,75,000

Old regime slabs (ClearTax, Income Tax Slabs FY 2025-26):

Total tax before cess: ₹12,500 + ₹1,00,000 + ₹82,500 = ₹1,95,000. Add 4% cess: ₹1,95,000 × 1.04 = ₹2,02,800.

In this example, the new regime comes out well ahead, ₹97,500 versus ₹2,02,800, because the old regime's deductions (₹2,25,000 total here) aren't enough to offset its steeper slab structure at this income level. Someone claiming a large home loan interest deduction or HRA on top of 80C and 80D could easily flip this result. That's the whole point of running the numbers yourself rather than assuming one regime is generally "better."

Where the ₹12 lakh "tax-free" claim comes from

You may have seen claims that income up to ₹12 lakh, or ₹12.75 lakh for salaried taxpayers, is tax-free under the new regime. This is real, but it works through a rebate, not a higher exemption limit. The basic nil-rate slab is still ₹4 lakh. Resident individuals with taxable income up to ₹12 lakh get a Section 87A rebate of up to ₹60,000, which cancels out the tax that would otherwise apply. Add the ₹75,000 standard deduction for salaried employees, and gross salary up to ₹12.75 lakh results in zero tax, provided taxable income doesn't cross ₹12 lakh after the deduction (ClearTax, Income Tax Slabs FY 2025-26). Cross that line by even ₹1, and the rebate no longer applies, so the calculation reverts to ordinary slab tax on the full taxable amount.

That's the core of how to calculate income tax, whichever regime you're in: get to taxable income first, then apply the slabs one by one rather than a single rate on the whole amount.

For a deeper comparison of when each regime wins, Old vs New Tax Regime: How to Actually Decide Using Your Own Numbers walks through the decision in more depth than fits here. And Income Tax Slabs for FY 2025-26 (AY 2026-27): Old vs New Regime has the full slab tables for reference.