Your total annual income is not necessarily the same as your taxable income. Exemptions, deductions and the applicable tax rules determine the amount on which tax is ultimately calculated.. This is because the figure of taxable income will differ after taking into account various deductions, exemptions, and other sources of income. There will be a difference in the calculation depending on whether you choose the old or new tax scheme. This implies that when calculating your tax, you must start by determining your taxable income.
What is Taxable Income?
Taxable income is the amount of income that remains after applying the exemptions and deductions allowed under the applicable tax rules.
A simple way to look at it is:
Taxable Income = Gross Total Income − Exemptions − Eligible Deductions
Gross total income can include salary, income from house property, business or profession, capital gains and income from other sources.
The calculation is not always this simple because different types of income have different rules. Capital gains, for example, are generally taxed separately from ordinary slab-rate income.
What is Included in Taxable Income?
Your total income can come from several sources:
- Salary: Basic salary, allowances, bonuses and other taxable components.
- House property: Rental income and taxable income from property.
- Business or profession: Profits earned from business or professional activities.
- Capital gains: Profits from selling assets such as shares, mutual funds or property.
- Other sources: Interest, dividends, certain gifts and other taxable receipts.
Not every amount received during the year is automatically taxable. The tax treatment depends on the nature of the income and the applicable provisions.
What is Excluded or Exempt from Taxable Income?
Some income or components may be exempt, either fully or subject to specific conditions.
Common examples include:
- Eligible agricultural income
- Certain components of house rent allowance under the old regime
- Eligible leave travel concession
- Certain specified allowances and benefits
- Income covered by specific exemptions under the Income Tax Act
The availability of several exemptions depends on the tax regime. The new regime generally offers lower slab rates but fewer exemptions and deductions than the old regime.
How to Calculate Taxable Income
The calculation can be broken down into a few steps:
Step 1: Add income from all applicable sources.
Start with salary, rental income, business income, capital gains and other taxable income.
Step 2: Calculate income under each head.
Apply the rules applicable to salary, house property, business income and other sources.
Step 3: Account for exempt income.
Remove income that is specifically exempt under the applicable provisions.
Step 4: Claim eligible deductions.
Under the old regime, deductions such as Section 80C and Section 80D may reduce taxable income, subject to conditions.
Step 5: Arrive at taxable income.
The resulting figure is used to calculate tax, with separate rules applying to certain types of income such as capital gains.
Taxable Income Calculation Example
Suppose an individual earns:
- Salary: ₹12,00,000
- Interest income: ₹50,000
- Eligible deductions under the old regime: ₹1,50,000
Assuming there are no other exemptions or income sources:
Gross Total Income = ₹12,00,000 + ₹50,000 = ₹12,50,000
Taxable Income = ₹12,50,000 − ₹1,50,000 = ₹11,00,000
The final tax payable would then depend on the applicable tax regime, slab rates and any rebate or other relief available.
This is a simplified example. Actual calculations can involve exemptions, standard deduction, special-rate income and other adjustments.
Taxable Income Under the Old vs New Tax Regime
The tax regime can change the way you arrive at taxable income.
| Particulars | Old Tax Regime | New Tax Regime |
|---|---|---|
| Standard deduction for salaried taxpayers | Available | Available |
| Common deductions such as 80C | Available, subject to conditions | Generally not available |
| HRA exemption | Available, subject to conditions | Generally not available |
| Tax rates | Higher | Lower |
| Default regime | No | Yes |
| Ability to choose | Yes | Yes |
For non-business taxpayers, the choice between regimes can generally be made each year in the ITR. The new regime is the default regime.
How to Calculate Tax on Taxable Income
Once taxable income is calculated, apply the relevant tax slabs.
For AY 2026-27, the new regime has the following slabs for individuals below 60 years:
| Taxable Income | Tax Rate |
|---|---|
| Up to ₹4 lakh | Nil |
| ₹4 lakh–₹8 lakh | 5% |
| ₹8 lakh–₹12 lakh | 10% |
| ₹12 lakh–₹16 lakh | 15% |
| ₹16 lakh–₹20 lakh | 20% |
| ₹20 lakh–₹24 lakh | 25% |
| Above ₹24 lakh | 30% |
A rebate under Section 87A is available in the new regime for eligible resident individuals with total income up to ₹12 lakh, subject to the applicable conditions.
After calculating income tax, add the applicable surcharge, if any, and health and education cess.
The old regime continues to have different slabs and allows more deductions and exemptions.
Common Deductions That Can Reduce Taxable Income
For taxpayers using the old regime, some commonly claimed deductions depending on eligibility, include:
- Section 80C: Eligible investments and payments, subject to the prescribed limit.
- Section 80D: Eligible health insurance premiums.
- Section 80CCD(1B): Additional deduction for certain NPS contributions.
- Section 80E: Eligible interest paid on an education loan.
- Section 80G: Certain eligible donations.
- Section 24(b): Eligible interest deduction on a home loan for a self-occupied property, subject to conditions.
The new regime significantly restricts the availability of these deductions, so simply adding up deductions from the old regime will not give the correct taxable income under the new regime.
Key Things to Check Before Calculating Taxable Income
Before starting the calculation, check:
- Your tax regime: The deductions available can change significantly.
- All income sources: Don't overlook interest, dividends, rent or capital gains.
- Form 16: Compare your salary details with the information reported by your employer.
- Investment proofs: Check eligible deductions before claiming them.
- Capital gains: Apply the tax rules relevant to the specific asset.
- TDS: Tax already deducted is adjusted against your final tax liability.
- Tax year: Use the provisions applicable to the relevant assessment year.
Conclusion
Calculating taxable income is less about finding one number and more about putting the right pieces together. Start with your income from different sources, remove applicable exemptions, claim eligible deductions and then apply the relevant tax rules.
The tax regime you choose can make a significant difference, particularly if you have substantial deductions under the old regime. A careful calculation can therefore help you estimate your liability before filing your return.
Frequently Asked Questions (FAQs)
What deductions are allowed under the new tax regime?
The new regime allows fewer deductions than the old regime. Certain employer contributions to NPS and some specified deductions remain available, subject to applicable conditions.
Can I switch from the new tax regime to the old one?
For taxpayers without business or professional income, the regime can generally be changed each year while filing the ITR. Different rules apply to taxpayers with business or professional income.
What is standard deduction in income tax?
A standard deduction is a fixed deduction from eligible salary or pension income before calculating taxable income. It is available under both tax regimes, subject to the applicable rules.
How much salary is tax-free in India?
There is no single tax-free salary figure for everyone. The answer depends on the tax regime, income type, deductions and rebates. Under the new regime for AY 2026-27, eligible resident individuals with total income up to ₹12 lakh can receive a Section 87A rebate.
How is taxable salary calculated from Form 16?
Start with the salary income reported in Form 16. Then account for the applicable standard deduction, exemptions and eligible deductions based on your chosen tax regime.
What is taxable income in salary?
Taxable salary is the portion of salary income that remains taxable after applying the relevant exemptions and deductions.
How is taxable income calculated from gross salary?
Start with gross salary, subtract eligible exemptions and the applicable standard deduction, then account for other income and eligible deductions to arrive at taxable income.
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