How do you calculate income tax in India for FY 2026-27? Compute Gross Total Income across all five heads, subtract eligible deductions (old regime only), apply the applicable slab rates to arrive at tax before surcharge, add surcharge if income exceeds Rs. 50 lakh, then add 4% health and education cess. Under the new regime, income up to Rs. 12 lakh attracts zero net tax after the Section 87A rebate.
Income tax calculation in India follows a fixed sequence defined under the Income Tax Act, 1961. Whether you are a salaried employee, a business owner, or a retiree living on pension and fixed deposit interest, the five-step framework applies uniformly. The slabs, rebates, and standard deduction have changed significantly for FY 2026-27 (Assessment Year 2027-28), and understanding the exact numbers prevents both overpayment and ITR filing errors.
The 5-Step Framework for Calculating Income Tax in India
Every income tax computation begins with classifying income under the five heads recognised by the Income Tax Act, then working through the following sequence:
Step 1: Compute Gross Total Income (GTI) Add all income across the five heads:
- Salaries (including perquisites and allowances after exemptions)
- Income from House Property (net annual value after 30% standard deduction for let-out property)
- Profits and Gains from Business or Profession (PGBP)
- Capital Gains (short-term and long-term, computed separately with special rates)
- Income from Other Sources (FD interest, dividend above Rs. 10 lakh threshold, lottery winnings)
Step 2: Apply Chapter VI-A Deductions (old regime only) Under the old tax regime, deduct eligible amounts under sections such as 80C (up to Rs. 1.5 lakh), 80D (medical insurance), 80G (donations), and others. Under the new tax regime, these deductions are not available; only the standard deduction of Rs. 75,000 for salaried individuals and pensioners applies.
Step 3: Arrive at Total Taxable Income Total Taxable Income = GTI minus Chapter VI-A deductions (and minus standard deduction where applicable).
Step 4: Apply Slab Rates and Special Capital Gains Rates Apply the normal slab rates to the remaining income. Capital gains are taxed at special rates: long-term capital gains on listed equity above Rs. 1.25 lakh at 12.5%, short-term capital gains on listed equity at 20%, and other capital gains per applicable rates.
Step 5: Add Surcharge and Health & Education Cess If total income exceeds Rs. 50 lakh, a surcharge applies on the income tax computed in Step 4. Then add health and education cess at 4% on (income tax + surcharge). This gives the final tax payable.
New Tax Regime Slab Rates for FY 2026-27 (AY 2027-28)
Tax Rate Chart
New Tax Regime Slab Rates : FY 2026-27 (AY 2027-28)
Applicable to individuals, HUFs, and firms under Section 115BAC. Section 87A rebate makes net tax zero for taxable income up to Rs. 12 lakh.
Up to Rs. 4 lakh
Nil slab : no tax
Rs. 4L to Rs. 8L
Tax: up to Rs. 20,000
Rs. 8L to Rs. 12L
Section 87A rebate covers tax up to this slab
Rs. 12L to Rs. 16L
87A rebate does not apply above Rs. 12L
Rs. 16L to Rs. 20L
Standard deduction Rs. 75K for salaried
Rs. 20L to Rs. 24L
Surcharge starts above Rs. 50L
Above Rs. 24L
Plus surcharge if income exceeds Rs. 50L
Source: Finance Act 2025 : Income Tax Act, 1961, Section 115BAC
The Finance Act 2025 revised the new regime slabs effective FY 2026-27. These are the rates applicable to individuals, HUFs, and firms opting for the new regime under Section 115BAC:
Key features: standard deduction of Rs. 75,000 for salaried employees and pensioners; Section 87A rebate wipes out tax liability when net taxable income does not exceed Rs. 12,00,000; salaried employees with gross salary up to Rs. 12,75,000 pay zero tax after the standard deduction reduces taxable income to Rs. 12,00,000.
Old Tax Regime Slab Rates for FY 2026-27
Standard deduction under the old regime is Rs. 50,000 for salaried employees. The Section 87A rebate under the old regime is Rs. 12,500, available only when total income does not exceed Rs. 5,00,000. The old regime permits Chapter VI-A deductions; for many taxpayers with large 80C, 80D, and HRA claims, it still files lower tax than the new regime. See the old vs new tax regime comparison guide for a break-even analysis.
Surcharge and Health & Education Cess: How They Add Up
Surcharge is computed as a percentage of income tax (before cess) and depends on total income:
New Tax Regime:
Old Tax Regime:
The Marginal Relief provision prevents the incremental income above the surcharge threshold from being taxed more than the incremental income itself. After adding surcharge, health and education cess of 4% is applied to the combined amount. Cess has no minimum income threshold; it applies even if surcharge is zero.
Section 87A Rebate: When Your Tax Becomes Zero
Section 87A provides a tax rebate that reduces tax liability to zero for taxpayers below the income ceiling. For a full treatment of eligibility and edge cases, see the Section 87A rebate guide for AY 2026-27.
Under the new regime for AY 2027-28: if net taxable income (after standard deduction) does not exceed Rs. 12,00,000, the rebate equals the full tax computed on that income, making net tax payable nil. The rebate does not apply to special-rate income such as short-term capital gains on listed equities.
Under the old regime: the rebate is Rs. 12,500 and is available only when total income does not exceed Rs. 5,00,000.
Worked Example 1: Salaried Employee at Rs. 12 Lakh
Facts: Gross salary Rs. 12,00,000; new regime elected.
The employee pays zero income tax. The gross salary threshold for zero tax under the new regime for salaried employees is Rs. 12,75,000 (Rs. 12L taxable after Rs. 75K deduction).
Worked Example 2: Salaried Employee at Rs. 15 Lakh (New Regime)
Facts: Gross salary Rs. 15,00,000; new regime.
The Section 87A rebate does not apply because taxable income (Rs. 14.25L) exceeds Rs. 12L. For an evaluation of whether the old regime would reduce tax at this salary level given typical deduction profiles, the regime comparison guide provides a structured break-even table.
Worked Example 3: Business Owner at Rs. 30 Lakh Net Profit
Facts: Business net profit Rs. 30,00,000; new regime; no salary, no standard deduction available for business income.
No surcharge since income is below Rs. 50 lakh. Business owners must also compute advance tax instalments on this liability 15% by June 15, 45% by September 15, 75% by December 15, 100% by March 15). Review ITR filing plans at Tax Garden for assisted computation and filing.
Worked Example 4: Senior Citizen on Pension and FD Interest
Facts: Age 65; pension Rs. 5,00,000; FD interest Rs. 3,00,000; new regime; total income Rs. 8,00,000.
Pension is taxed as salary under the new regime; standard deduction of Rs. 75,000 applies.
The Section 87A rebate does not apply here because taxable income (Rs. 7.25L) exceeds Rs. 12L? No: Rs. 7.25L is below Rs. 12L, so the rebate of Rs. 16,250 applies, and cess is levied on the post-rebate tax. Since the rebate equals the full tax, net tax is Rs. 0. The senior citizen pays zero income tax on this income combination under the new regime.
Note for old regime: the senior citizen basic exemption limit is Rs. 3,00,000 (not Rs. 2,50,000), and TDS on FD interest (Section 194A) has a higher threshold of Rs. 1,00,000 for senior citizens under Finance Act 2025 rules.
Quick Reference Table: Approximate Tax at Common Income Levels (New Regime, Salaried)
How to Verify Your Calculation Before Filing ITR
Three cross-checks prevent errors before you submit:
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Form 16 vs. self-computed tax: The employer's tax deducted at source (TDS) shown in Part B of Form 16 should match your computed tax. Differences arise when the employer used the old regime but you elect the new regime in ITR, or vice versa.
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Form 26AS and AIS: The Annual Information Statement lists all income reported to the tax department: salary TDS, FD interest TDS, dividend, property transactions, and securities transactions. Reconcile your GTI with AIS line items before computing tax.
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Advance tax reconciliation: If you had business or investment income beyond salary, verify that advance tax paid (from challan 280) matches the instalments due. Shortfall attracts interest under Sections 234B and 234C.
The Income Tax Department's e-filing portal offers a built-in tax calculator, but it does not account for marginal relief on surcharge, special capital gains rates, or regime-optimisation scenarios. A practitioner review catches these differences before filing.
This article is based on the Finance Act 2025 provisions applicable to FY 2026-27 (AY 2027-28). Slab rates, rebate limits, and surcharge thresholds are sourced from the Income Tax Act, 1961 as amended. The worked examples assume no capital gains income unless stated. Taxpayers with equity investments, property transactions, or foreign income should obtain a separate computation for those components.
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