Income Tax on Salary — Calculation, Exemptions & New Regime FY 2025-26

Salary income tax calculation (FY 2025-26, new regime default): Step 1: Gross salary = CTC − employer PF − perquisites. Step 2: Subtract exemptions: HRA (Section 10(13A)), LTA (Section 10(5)), gratuity (Section 10(10)), leave encashment (Section 10(10AA)). Step 3: Subtract standard deduction: ₹75,000. Step 4: Add taxable perquisites (company car, rent-free accommodation). Step 5: Net taxable salary. Apply new regime slabs: 0-4L: 0%, 4-8L: 5%, 8-12L: 10%, 12-16L: 15%, 16-20L: 20%, 20-24L: 25%, 24L+: 30%. Add 4% cess. Section 87A rebate: if net taxable income ≤ ₹12L, full tax rebated (zero tax). Effectively: zero tax up to ₹12.75L (₹12L + ₹75K standard deduction). Surcharge: 10% on income 50L-1Cr; 15% on 1Cr-2Cr; 25% on 2Cr+.

Salary tax exemptions: HRA (House Rent Allowance — Section 10(13A)): exempt = minimum of (i) actual HRA, (ii) rent paid − 10% salary, (iii) 50% salary (metro) / 40% salary (non-metro). Salary = basic + DA. LTA (Leave Travel Allowance — Section 10(5)): actual travel cost (domestic, economy class) — 2 journeys in 4 calendar years. Gratuity (Section 10(10)): ₹20L lifetime exempt. Leave encashment (Section 10(10AA)): up to ₹25L at retirement. Uniform allowance (Section 10(14)): actual for work uniform. Children education allowance: ₹100/month × 2 children; hostel: ₹300/month × 2 children. Meal coupons: ₹50/meal (up to 2/day). EPF employer contribution: up to 12% of basic+DA exempt. NPS employer contribution: up to 10% of basic+DA exempt (Section 80CCD(2)). Phone/internet reimbursement: actual bills exempt. Note: In new regime, most allowances except HRA + standard deduction are NOT available.

Old regime vs new regime for salaried employees: New regime (default from FY 2023-24): Lower slab rates. Standard deduction ₹75K. Only HRA, LTA, gratuity, leave encashment exemptions. Cannot claim 80C, 80D, 80G, HRA deduction. NPS employer contribution (Section 80CCD(2)) allowed. Rebate: zero tax up to ₹12.75L. Old regime (must opt in via Form 10-IEA): Higher slab rates. All deductions: 80C (₹1.5L), 80D (₹25K/₹50K), 80G, HRA, LTA, all allowances. Suitable for: high 80C investments + HRA + home loan. Break-even: new regime better if total deductions < ₹3.75L approximately. Switching: can switch each year for salaried employees. Once opted out of new regime, can switch back once. Form 10-IEA: submit to employer at beginning of year. Employer deducts TDS accordingly. If Form 10-IEA not submitted: new regime by default.

Form 16: Tax deduction certificate issued by employer to employee. Two parts: Part A: TDS deducted and deposited quarter-wise; employer TAN, PAN, assessment year. Part B: Salary breakdown, exemptions claimed, deductions, net taxable income, tax calculation. When issued: by June 15 after financial year end. Example: For FY 2025-26, Form 16 issued by June 15, 2026. How to use: File ITR-1 (Sahaj) or ITR-2 using Form 16 data. Pre-filled ITR: salary data auto-populated from Form 16 on income tax portal. Verify Form 26AS / AIS: cross-check TDS with 26AS before filing. If multiple employers: Form 16 from each employer; declare all at primary employer for correct TDS deduction. If wrong TDS: pay self-assessment tax or claim refund in ITR. Form 16A: for non-salary TDS (FD interest, professional fees). Form 12BB: employee declaration to employer (HRA, LTA, investments) at start of year.

TDS on salary — Section 192: Employer deducts TDS on estimated annual salary at the start of each month. Rate: based on applicable slab (not a flat percentage). Employer calculates: estimated annual salary − exemptions − deductions → tax → divide by 12 = monthly TDS. Employee must declare: investments (80C, 80D), HRA, home loan interest — via Form 12BB. If underpaid TDS: employee must pay advance tax or self-assessment tax. Interest under Section 234B: 1% per month if advance tax < 90% of total tax. Interest under Section 234C: 1% per month for each installment shortfall. If excess TDS: claim refund in ITR — typically processed in 2-3 months. Job change: inform new employer of previous salary + TDS; new employer considers for annual TDS. If not informed: total tax under-deducted; personal liability to pay shortfall + interest. TDS return: employer files Form 24Q quarterly. Employee can see TDS in Form 26AS and AIS on IT portal.