How Do Income Tax Slabs Determine Tax?

2025-07-21

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Key Takeaways

India uses a progressive tax system, where income is taxed in slabs. Higher income leads to higher tax rates.
New income tax slabs for FY 2025–26 range from 0% (for income up to ₹4 lakh) to 30% (for income above ₹24 lakh).
Surcharge on high income applies beyond ₹50 lakh, but the maximum surcharge rate has been capped at 25% under the new regime.
Enhanced rebate under Section 87A now makes income up to ₹12.75 lakh (including standard deduction) tax-free for salaried individuals.
Marginal relief ensures that your tax liability doesn’t spike unfairly if your income just crosses a rebate threshold.

India follows a progressive tax system, where an individual is taxed based on their income level. That means if the income increases, the tax rates also increase, leading to fair governance. Under the Income Tax Act, the computation of tax liabilities takes place by applying slab rates on the net taxable income. However, the slabs may change every financial year.

Currently, you have the option of following either of the two tax regimes in India: old or new. The new tax regime is applicable by default to all taxpayers, and one has to opt for the old regime if one wants to opt for it specifically.

Start Understanding Taxation with Income Tax Slabs

As a taxpayer, you must pay your income tax based on the applicable slab rates. The income tax slabs include a range of different incomes with corresponding tax rates. You must update yourself regarding the changes in these slabs during every budget announcement.

The slabs were earlier divided into three parts based on the age of the individuals. However, under the new regime, there is no such age-wise classification for simplification of tax computation.

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New Regime: Explore Income Tax Slab for FY 2025-26

As per the Budget 2025 announcement, the following income tax slabs are applicable for the financial year 2025-26, i.e., the assessment year 2026-27:

Income Range (in ₹)	Income Tax Rate
0 to 4,00,000	Nil
4,00,001 to 8,00,000	5%
8,00,001 to 12,00,000	10%
12,00,001 to 16,00,000	15%
16,00,001 to 20,00,000	20%
20,00,001 to 24,00,000	25%
Above 24,00,000	30%

Important Note: These new income tax slabs are applicable for the new regime and will come into effect during ITR filing for FY 2025-26.

Did You Know?

More than 93% of income tax returns were filed online in FY 2023–24 using e filing 2.0.

Source: The Economic Times.

Discover the Enhanced Tax Rebate Under Budget 2025

As per the Budget 2025, the tax rebate has been enhanced to ₹12 lakh. Here’s how the rebate has been witnessing changes over the years:

Tax Rebate Limit Under Old Regime for FY 2024-25	Tax Rebate Limit Under New Regime for FY 2024-25	Tax Rebate Limit Under New Regime for FY 2025-26
₹5 lakhs	₹7 lakhs	₹ 12 lakhs

Taxpayers are allowed to claim a standard deduction of ₹75,000 above the ₹12 lakh rebate limit. That means you can enjoy tax-free income up to ₹ 12.75 lakhs (for salaried individuals and pensioners).

Know What is Surcharge on Income Tax

If your income exceeds a particular threshold limit, an additional tax called the ‘surcharge’ will be charged on top of your existing tax rates. The surcharge is for high-income earners, and the rates are as follows:

Total Income	Applicable Surcharge Rate
Total income is more than ₹50 lakhs but less than ₹1 crore	10%
Total income is more than ₹1 crore but less than ₹2 crore	15%
Total income is more than ₹2 crore but less than ₹5 crore	25%
Total income is more than ₹5 crore	37%

The high surcharge rate of 37% has been reduced to 25% under the new tax regime, which is applicable from 01/04/2023.

Important Note:

A Surcharge of 25% or 37% is not applicable to the following:

Income from dividends
Capital gain taxable under Section 111A, 112A, and 115AD. The highest surcharge applicable on these incomes will be capped at 15%

Health and education cess at 4% is further added to the income tax liability.

What is the Concept of Marginal Relief: Basics

Marginal relief is a tax benefit provided to the taxpayer whose income slightly exceeds the basic threshold, which would otherwise have nil tax liability. That means, for FY 2025-26, if your income exceeds slightly above ₹12 lakhs, you can opt for marginal relief.

Let’s understand with an example. Your taxable income is ₹12,20,000, which is just slightly above the 12 lakh limit. Without marginal relief, the entire ₹12,20,000 would have been taxable. However, fortunately, that is not the case.

Marginal relief is introduced to ensure that your total tax payable does not exceed your excess income above ₹12 lakh.

First, income tax is calculated as per normal slab rates of ₹12,20,000, which amounts to ₹63,000. Now, this amount is surpassing your excess income above ₹12 lakh, i.e. 20,000. So, now your income tax with marginal relief will be ₹20,000. That means you save ₹43,000.

Understand Tax Calculation Under Various Scenarios for FY 2025-26

If you want to understand tax calculation better, go through the three different scenarios below. It will help you get a clear perspective on how the tax slabs are structured and how to use them for computation:

Scenario I

Your income is ₹11 lakh, which is less than ₹12 lakh. It means that you are eligible for a full tax rebate under Section 87A. Thus, the total tax payable is zero.

Scenario II

Your income is ₹12,75,000. Avail ₹75,000 standard deduction for salary income under the new regime; your taxable income will be ₹12,00,000. Thus, you are eligible for the Section 87A rebate, and your tax liability is zero.

Scenario III

Your net taxable income is ₹80 lakhs (after factoring in standard deduction). Calculate the final income tax liability under the new regime.
Here, as the income exceeds ₹ 12 lakh, the rebate under Section 87A is not applicable. So, go with the following steps:

Step 1: First, compute income tax as per slab rates:

Income Range and Tax Rate	Computation	Amount
Upto 4,00,000		0
₹4,00,001 to ₹8,00,000 at 5%	4,00,000 x 5%	₹20,000
₹8,00,001 to ₹12,00,000 at 10%	4,00,000 x 10%	₹40,000
₹12,00,001 to ₹16,00,000 at 15%	4,00,000 x 15%	₹60,000
₹16,00,001 to ₹20,00,000 at 20%	4,00,000 x 20%	₹80,000
₹20,00,001 to ₹24,00,000 at 25%	4,00,000 x 25%	₹1,00,000
From 24,00,001 to 80,00,000, i.e. on 56,00,000 at 30%	56,00,000 x 30%	₹16,80,000

Total Tax Liability before Surcharge

=₹0+₹20,000+₹40,000+₹60,000+₹80,000+₹1,00,000+₹16,80,000

= ₹19,80,000

Step 2: Apply a 10% surcharge as the income exceeds ₹50 lakh but is less than 1 crore

Surcharge = 10% of tax liability without surcharge = 10% on ₹19,80,000

Surcharge = ₹1,98,000

Step 3: Calculation of Health and Education Cess at 4%

Health & Education Cess = 4% on tax and surcharge = 4% (₹19,80,000+ ₹1,98,000)

Health & Education Cess = ₹87,120

Step 4: Determining Total Final Tax Liability

Tax+Surcharge+Cess = ₹19,80,000+ ₹1,98,000+₹87,120

Final Tax Liability = ₹22,65,120

Conclusion

In India, tax rules keep evolving every financial year. However, the computation is easy once you know the basic rules. This guide provides you with an overview of the tax computations for individuals following the new regime for FY 2025-26. Understand concepts like Section 87A rebate and marginal relief to reduce your tax liability and enjoy enhanced savings.

Glossary

e filing 2.0: The advanced income tax filing platform by the government of India for simpler and quicker ITR filing.
Income Tax Slab: The structure of tax rates against various ranges of income under the New and Old tax regimes.
Section 80C: A provision of the Income Tax Act for deduction up to ₹1.5 lakh for particular investments.
ULIP: Unit Linked Insurance Plan brings insurance together with equity/debt investment.
Section 10(10D): Tax-free maturity benefits from life insurance policies, subject to specific conditions.

FAQs

Taxpayers have to forego some of the deductions and exemptions available under the old regime if they opt for the new regime. It may include the foregoing of section 80C deductions, LTA, and even HRA. However, rebate under Section 87A is enhanced to ₹12 lakh, and you can also use ₹75,000 standard deduction against salary income in the new regime.

The choice between the two actually depends on the taxpayer’s financial situation and preferences. The new tax regime simplifies tax computation and offers lower tax rates. However, the old tax regime can be favourable for those who qualify for several deductions and exemptions.

Exemptions on gratuity, leave encashment, and interest on home loans on let-out property are available in the new regime, to name a few. Similarly, deductions under Section 80CCD(2), 80JJA, and more are available.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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