Business Original explainer
How your salary is taxed in India, what changed in Budget 2025, and how to pick between the new and old regimes.
Every year, millions of Indians pay a share of what they earn to the government. That share is income tax, and it helps pay for roads, schools, hospitals, defence and many other public services. Yet for most people, the rules feel confusing. There are two systems, several slabs and a long list of deductions. This guide explains the basics in plain language, so you can understand how your own tax is worked out.
All the rates in this article are for the financial year 2025-26, which runs from 1 April 2025 to 31 March 2026.
Income tax is a tax on the money you earn in a year. Salary is the most common source, but the same idea applies to business earnings, rent, interest from a bank deposit and profit from selling an asset. The government does not tax every rupee you receive. It first allows certain amounts to be taken out, and then applies a rate to what is left. That remaining amount is called taxable income.
Tax is charged in slabs. A slab is simply a band of income, and each band has its own rate. Only the part of your income that falls inside a band is taxed at that band's rate. So if you move into a higher slab, only the extra income is taxed at the higher rate, not your whole salary. This is the point many people misunderstand, and it makes a large difference to the final bill.
Since the new regime became the default, most taxpayers are placed in it unless they actively choose the old one. It has wider slabs and lower rates, but it gives up most deductions. In other words, you pay tax on more of your income, but at gentler rates, and you do not need to collect proofs for investments or rent to claim a long list of tax breaks.
For 2025-26, the new-regime slabs for an individual are:
The basic exemption is Rs 4 lakh, which means the first Rs 4 lakh of taxable income is not taxed at all. Salaried people also get a standard deduction of Rs 75,000, which is taken off their salary before the slabs are applied. That is why a salary of up to Rs 12.75 lakh can end up with no tax, as explained below.
Budget 2025 raised the rebate under Section 87A in the new regime. If your taxable income is Rs 12 lakh or less, a rebate of up to Rs 60,000 wipes out the tax worked out from the slabs. On exactly Rs 12 lakh, the slab calculation gives Rs 60,000, so the rebate cancels it in full.
There are two limits to remember. First, the rebate is mainly for resident individuals, and it does not remove tax on some kinds of income that are taxed at special rates, such as certain capital gains. Second, just above Rs 12 lakh there is marginal relief, which stops your tax from jumping by more than the extra income you earned.
The old regime is the earlier system, and it is still available if you choose it when you file. Its slabs are narrower, so the top rate starts much sooner. For a person below 60, income up to Rs 2.5 lakh is not taxed, income from Rs 2.5 lakh to Rs 5 lakh is taxed at 5 per cent, income from Rs 5 lakh to Rs 10 lakh is taxed at 20 per cent, and income above Rs 10 lakh is taxed at 30 per cent. Senior citizens get a higher starting point: Rs 3 lakh for people aged 60 to 80, and Rs 5 lakh for people above 80.
What the old regime loses in slab rates, it can make up in deductions. You can claim up to Rs 1.5 lakh a year under Section 80C for things such as provident fund contributions, Public Provident Fund, life insurance premiums and certain mutual funds. Health insurance premiums can bring a deduction under Section 80D, up to Rs 25,000 for most people and up to Rs 50,000 for senior citizens. House rent allowance and home-loan interest can also reduce taxable income in the old regime, and its standard deduction is Rs 50,000. Its rebate is smaller, though: up to Rs 12,500, and only when taxable income is Rs 5 lakh or less.
There is no single right answer. If you have few deductions, the new regime usually wins, because its rates are lower and the Rs 12 lakh rebate is generous. If you pay a large rent, have a home loan, or invest heavily in the options covered by Section 80C and Section 80D, the old regime can still come out ahead. The honest way to decide is to work out your tax under both systems with your real figures, and pick the lower number.
For salaried people, the employer estimates the yearly tax and deducts a little from every month's pay. This is called tax deducted at source, or TDS. At the end of the year you file an income tax return, which compares the tax due with the tax already paid. If too much was deducted, you get a refund. If too little was paid, you pay the balance. A 4 per cent health and education cess is added to the tax in both regimes.
This explainer was written by The Daily Short's desk from the sources listed above. It is general information, not professional advice. Spot an error? Tell us via the Contact page and we will correct it. Follow our official Instagram @the.daily.short.