Taxable Income

How to Calculate Your Taxable Income: A Simple Step-by-Step Guide [2025 Update]

Did you know that the tax levied on every individual is different depending on their income?

Understanding taxable income is crucial for everyone filing taxes in India. In fact, income tax received from taxpayers is the main source of funding for public services in our country. However, navigating the complexities of what constitutes taxable income in India and how to calculate your total taxable income can be challenging for many of us.

Most income is taxable unless it’s specifically exempted by law. Additionally, the normal tax rates applicable to a resident individual will depend on their age. Under the revised income tax regime, effective from the financial year 2025-26, individuals earning up to Rs. 4 lakh will not be taxed.

In this comprehensive guide, we’ll walk you through a simple step-by-step process to calculate your net taxable income. From understanding what exactly taxable income means to identifying various income sources and applying eligible deductions, we’ve got you covered with everything you need to know for the 2025 tax year.

What is Taxable Income in India?

Understanding taxable income requires examining the framework established by Indian tax legislation. The Income Tax Act of 1961 serves as the foundation for determining what portion of your earnings is subject to taxation.

Definition and scope under Indian tax law

Taxable income represents the portion of your earnings on which tax must be paid to the government in a particular tax year. Essentially, it’s the amount that remains after eligible deductions and exemptions are subtracted from your total income. This amount forms the basis for calculating your tax liability under the Income Tax Act, 1961.

The scope of taxable income in India varies based on your residential status. The Income Tax Act classifies individuals into three categories:

• Resident and Ordinarily Resident (ROR)
• Resident but Not Ordinarily Resident (RNOR)
• Non-Resident Indian (NRI)

For Resident and Ordinarily Residents, worldwide income is taxable in India, including foreign income even if not received or brought into India. Meanwhile, for Non-Residents, only Indian-source income is taxable. RNOR individuals fall between these categories—their Indian-source income is taxable along with income from businesses controlled from India.

The Income Tax Act governs taxation for various entities, including:

• Individuals
• Hindu Undivided Families (HUFs)
• Companies
• Firms
• Body of Individuals (BOI)
• Local authorities
• Any other artificial juridical person

Primarily, taxable income encompasses both earned and unearned income. Earned income comes directly from work, such as salaries, wages, bonuses, and self-employment income. Unearned income (passive income) includes canceled debts, unemployment benefits, lottery winnings, interest income, and dividends. Furthermore, income from selling investments like stocks or property is taxable as capital gains if those assets increased in value before being sold.

Difference between gross and net taxable income

Gross income represents your total earnings before any deductions or exemptions. To clarify, this includes your basic salary, allowances (house rent, dearness, transport), bonuses, commissions, overtime pay, and other financial benefits provided by your employer.

Consequently, gross total income for a financial year comprises all income received or receivable, including:

• Income from salary or pension
• Income from house property
• Profits from business or profession
• Capital gains
• Income from other sources (interest, dividends, etc.)
• Gifts and royalties

Net taxable income, on the other hand, is what remains after subtracting eligible deductions and exemptions from your gross income. For this purpose, you must consider:

1. Exemptions: These are tax-free portions of your income. Examples include agricultural income, house rent allowance, and leave travel allowance.
2. Deductions: These are eligible expenses and investments that can be subtracted from your total income. The Income Tax Act provides deductions under various sections like 80C, 80D, and 80G.

Your net taxable income calculation differs based on which tax regime you choose—old or new. The old regime allows more exemptions and deductions but has higher tax rates for certain income brackets. The new regime offers lower tax rates but limits available deductions.

Understanding the distinction between gross and net taxable income is crucial when calculating your tax liability. The difference represents the amount you can potentially save through strategic planning of your deductions and exemptions.

Types of Income That Are Taxable

The Indian taxation system classifies income into five primary categories, each governed by specific provisions of the Income Tax Act. Let’s examine these income types that combine to form your total taxable income.

Income from salary

All forms of employee compensation fall under this category. Primarily, this includes basic salary, wages, bonuses, commissions, and tips received from an employer. This income is covered under Sections 15 to 17 of the Income Tax Act. Notably, perquisites or benefits provided by employers—such as company cars, rent-free accommodation, or stock options—are also taxable. Salaried individuals receive Form 16 from their employer, documenting their salary details and tax deducted at source (TDS).

Income from house property

This category encompasses rental income from buildings and adjacent land owned by the taxpayer. Income from both residential and commercial properties can be classified under this head. The Income Tax Act provides certain deductions against house property income:

• 30% standard deduction on rental income under Section 24(a)
• Home loan interest deduction under Section 24(b)
• Property taxes paid during the financial year

For self-occupied property, the gross annual value is considered zero, whereas for let-out property, it’s the rental value.

Profits and gains from business or profession

Any income generated through business activities, freelancing, or professional services (such as doctors, lawyers, or consultants) constitutes this category. Partnership firms are taxed as separate entities, with partners declaring any remuneration, interest on capital, or share of profit received from the firm in their personal returns. Although, the share of profit from the firm is exempt in partners’ hands under Section 10(2A).

Capital gains

Capital gains refer to profits earned from selling capital assets such as land, buildings, jewelry, or virtual digital assets like cryptocurrencies. These gains are classified into:

• Short-Term Capital Gains (STCG): Assets held for up to 24 months (12 months for certain securities)
• Long-Term Capital Gains (LTCG): Assets held for more than 24 months (more than 12 months for certain securities)

After Budget 2024, Long-Term Capital Gains are taxed at a flat 12.5%, without the benefit of indexation. Additionally, for listed equity shares, long-term capital gains arising from sales are eligible for exemption up to Rs.1.25 lakhs.

Income from other sources

This residuary category captures income that doesn’t fit into the four categories above. According to Section 56 of the Income Tax Act, this includes:

• Interest on savings accounts, fixed deposits, and recurring deposits
• Dividends from shares and mutual funds
• Family pension
• Lottery winnings, crossword puzzles, card games, and gambling (taxed at 30%)
• Rental income from machinery or equipment when not part of business income
• Gifts exceeding Rs. 50,000 in a financial year

Understanding these income classifications is vital for accurate tax calculation. Each income type has specific tax treatments and available deductions that impact your overall tax liability.

How to Calculate Your Total Taxable Income

Calculating your taxable income might seem daunting, yet with a systematic approach, you’ll find it’s quite manageable. By breaking down the process into four simple steps, I’ll help you determine exactly how much of your income is subject to taxation for the 2025-26 financial year.

Step 1: Add all income sources

Initially, you need to aggregate all your income from various sources into what’s called your “gross total income.” This comprehensive figure includes:

• Income from salary or pension
• Income from house property (rental income)
• Profits and gains from business or profession
• Capital gains (short-term and long-term)
• Income from other sources (interest, dividends, etc.)

For example, if you earn a salary of Rs. 10,75,000 and have income from other sources amounting to Rs. 2,00,000, your gross total income would be Rs. 12,75,000. Remember to include all taxable components of your salary such as basic pay, allowances, bonuses, and any other benefits provided by your employer.

Step 2: Subtract eligible exemptions

Following this, subtract all applicable exemptions from your gross income. The most common exemptions include:

• House Rent Allowance (HRA): If you live in a rented accommodation, you can claim exemption based on the lowest of:
  • Actual HRA received
  • Rent paid minus 10% of basic salary
  • 50% of salary for metros or 40% for non-metros
• Standard Deduction: For FY 2024-25, salaried individuals can claim Rs. 50,000 under the old tax regime or Rs. 75,000 under the new tax regime
• Leave Travel Allowance (LTA): Exemption for travel expenses during leave (excluding food, accommodation, etc.)

Remember that many of these exemptions are only available under the old tax regime.

Step 3: Apply deductions under Chapter VI-A

Subsequently, subtract eligible deductions under Chapter VI-A, which significantly reduce your tax burden. Major deductions include:

• Section 80C: Investments in PPF, ELSS, life insurance premiums, etc. (limit: Rs. 1,50,000)
• Section 80CCD(1B): Additional deduction for NPS contribution (limit: Rs. 50,000)
• Section 80D: Health insurance premiums (limit: Rs. 25,000 for self/family, Rs. 50,000 for senior citizen parents)
• Section 24(b): Home loan interest (up to Rs. 2,00,000 for self-occupied property)
• Section 80E: Education loan interest (no upper limit)
• Section 80G: Donations to charitable organizations
• Section 80TTA: Savings account interest (up to Rs. 10,000)

These deductions primarily apply under the old tax regime, whereas the new tax regime offers lower tax rates but eliminates most deductions.

Step 4: Arrive at net taxable income

Ultimately, after subtracting all eligible exemptions and deductions from your gross total income, you arrive at your net taxable income—the amount on which your tax liability is calculated.

Let’s illustrate with an example:

Mr. Rahul has a salary of Rs. 12,50,000 and has made the following investments:

• Life Insurance Premium: Rs. 40,000
• EPF: Rs. 60,000
• PPF: Rs. 50,000
• NPS: Rs. 50,000
• Medical Insurance: Rs. 25,000
• Interest on Education Loan: Rs. 20,000
• Charitable Donations: Rs. 10,000
• Savings Account Interest: Rs. 8,000

His total deductions under Chapter VI-A amount to Rs. 2,63,000. After standard deduction of Rs. 50,000, his net taxable income becomes Rs. 9,37,000.

Without these deductions, his tax liability would be approximately Rs. 1,79,400, whereas with deductions, it reduces to Rs. 90,896—resulting in tax savings of Rs. 88,504.

Keep in mind that your tax calculation will differ based on whether you opt for the old or new tax regime. The new regime (default for FY 2025-26) offers simplified tax slabs with fewer deductions, while the old regime allows extensive deductions but has higher base rates.

Once you’ve calculated your net taxable income, you can determine your tax liability by applying the appropriate tax slabs and rates for your chosen regime.

Common Deductions to Reduce Taxable Income

Strategic use of tax deductions can dramatically reduce your total taxable income and resulting tax liability. Let’s explore the most impactful deductions available under the Income Tax Act.

Section 80C: Investments and savings

Section 80C allows deductions up to Rs. 1,50,000 for investments in tax-saving instruments. This includes contributions to Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity Linked Savings Scheme (ELSS). Additionally, life insurance premiums, tuition fees for children’s education, and principal repayment of home loans qualify under this section. Primarily, these deductions are available only under the old tax regime.

Section 80D: Health insurance premiums

Under Section 80D, you can claim deductions for health insurance premiums up to Rs. 25,000 for yourself, spouse, and dependent children. This limit increases to Rs. 50,000 if you or your spouse is a senior citizen. Furthermore, an additional deduction of up to Rs. 25,000 is available for insurance premiums paid for parents, which increases to Rs. 50,000 if they are senior citizens. Moreover, you can claim Rs. 5,000 for preventive health check-ups within these overall limits.

Section 24(b): Home loan interest

Section 24(b) provides deduction for interest paid on home loans. For self-occupied property, you can claim up to Rs. 2,00,000 annually, provided the construction is completed within five years of taking the loan. Nevertheless, for rented properties, the entire interest amount is deductible. Indeed, this deduction significantly reduces taxable income for homeowners.

Section 80E: Education loan interest

Education loan interest is fully deductible under Section 80E without any upper limit. This benefit is available for higher education loans taken for yourself, spouse, children, or students for whom you’re the legal guardian. The deduction starts from the year you begin repayment and continues for eight years or until interest is fully repaid, whichever is earlier.

Section 80G: Donations

Section 80G offers deductions for donations to specified relief funds and charitable institutions. Depending on the institution, you can claim either 100% or 50% deduction of the donated amount. Notably, donations above Rs. 2,000 must be made through modes other than cash to qualify for deduction. This provision encourages philanthropic contributions while reducing your taxable income.

Check out this blog on Section 10 Tax Exemptions.

Tax Slabs and Examples for FY 2025-26

The FY 2025-26 brings significant changes to income tax slabs, particularly with enhanced blocks of Rs. 4 lakhs and the introduction of a 25% tax rate. Understanding these slabs is essential for calculating your tax liability accurately.

New tax regime slab rates

The revised tax slabs under the new regime for FY 2025-26 (AY 2026-27) are:

Under this regime, individuals can claim standard deduction of Rs. 75,000, yet most other deductions and exemptions are unavailable.

Old tax regime slab rates

The old regime continues with previous slabs:

This regime allows various exemptions and deductions under Section 80C to 80U.

Example: Tax calculation for Rs. 12 lakh income

For a person with Rs. 12 lakh gross income under the new regime:

• Standard deduction: Rs. 75,000
• Net taxable income: Rs. 11,25,000
• Tax calculation:
  • First Rs. 4 lakh: Nil
  • Rs. 4-8 lakh: Rs. 20,000 (5% of Rs. 4 lakh)
  • Rs. 8-11.25 lakh: Rs. 32,500 (10% of Rs. 3.25 lakh)
  • Total tax: Rs. 52,500
  • After rebate under Section 87A: Rs. 0

Hence, a person earning Rs. 12 lakh pays zero tax under the new regime.

Example: Tax calculation for Rs. 20 lakh income

For a person with Rs. 20 lakh gross income:

• Standard deduction: Rs. 75,000
• Net taxable income: Rs. 19,25,000
• Tax calculation:
  • First Rs. 4 lakh: Nil
  • Rs. 4-8 lakh: Rs. 20,000 (5% of Rs. 4 lakh)
  • Rs. 8-12 lakh: Rs. 40,000 (10% of Rs. 4 lakh)
  • Rs. 12-16 lakh: Rs. 60,000 (15% of Rs. 4 lakh)
  • Rs. 16-19.25 lakh: Rs. 65,000 (20% of Rs. 3.25 lakh)
  • Total tax: Rs. 1,85,000
  • Health & Education Cess (4%): Rs. 7,400
  • Final tax liability: Rs. 1,92,400

Alternatively, under the old regime with all deductions, the tax liability would be Rs. 3,02,016, resulting in savings of Rs. 1,09,616 with the new regime.

Conclusion

Understanding and calculating your taxable income correctly remains essential for effective tax planning and compliance. Throughout this guide, we have walked through the fundamentals of taxable income in India, from its basic definition to the intricacies of various income sources and available deductions.

Most importantly, calculating your taxable income doesn’t need to be overwhelming. The four-step process we’ve outlined simplifies this task considerably – add all income sources, subtract eligible exemptions, apply deductions under Chapter VI-A, and finally arrive at your net taxable income. This methodical approach ensures you don’t miss any opportunity to reduce your tax burden legitimately.

The revised tax regime for FY 2025-26 offers significant benefits, particularly for those earning up to Rs. 12 lakhs who may pay zero tax after the standard deduction. However, your choice between the old and new tax regimes should depend on your specific financial situation and investment patterns.

Additionally, strategic use of deductions under various sections like 80C, 80D, 24(b), 80E, and 80G can substantially reduce your taxable income. These provisions exist to encourage savings, investments, and essential expenditures while providing tax relief.

Remember that tax laws change periodically, therefore staying updated with the latest amendments is crucial. The examples provided for different income levels demonstrate how dramatic the impact of choosing the right tax regime can be on your final tax liability.

Undoubtedly, proper knowledge of taxable income calculation empowers you to make informed financial decisions. Armed with the information from this guide, you can now confidently prepare your tax returns, maximize legitimate deductions, and fulfill your tax obligations accurately for the 2025-26 financial year.

Key Takeaways

Understanding how to calculate your taxable income is crucial for maximizing tax savings and ensuring compliance with Indian tax laws for FY 2025-26.

• Follow the 4-step calculation process: Add all income sources, subtract eligible exemptions, apply Chapter VI-A deductions, then arrive at net taxable income for accurate tax planning.

• Choose your tax regime wisely: New regime offers zero tax for incomes up to Rs. 12 lakhs with standard deduction, while old regime provides extensive deductions for higher earners.

• Maximize strategic deductions: Utilize Section 80C (Rs. 1.5L limit), 80D (health insurance), and 24(b) (home loan interest) to significantly reduce your taxable income.

• Know your income categories: Salary, house property, business profits, capital gains, and other sources each have specific tax treatments and available deductions.

• Standard deduction increased: Claim Rs. 75,000 standard deduction under new regime (vs Rs. 50,000 in old regime) to reduce your tax burden automatically.

The key to effective tax planning lies in understanding which regime works best for your financial situation and leveraging all available legal deductions to minimize your tax liability.

FAQs

Q1. What are the income tax slabs for FY 2025-26 under the new tax regime? Under the new tax regime for FY 2025-26, income up to Rs. 4 lakh is tax-free. The tax rates then increase progressively: 5% for Rs. 4-8 lakh, 10% for Rs. 8-12 lakh, 15% for Rs. 12-16 lakh, 20% for Rs. 16-20 lakh, 25% for Rs. 20-24 lakh, and 30% for income above Rs. 24 lakh.

Q2. How is taxable income calculated in India? Taxable income is calculated by adding all sources of income (salary, rent, business profits, capital gains, and other sources), subtracting eligible exemptions, and then applying deductions under Chapter VI-A. The resulting amount is your net taxable income on which tax is calculated based on the applicable tax slabs.

Q3. What are some common deductions that can reduce taxable income? Common deductions include Section 80C investments (up to Rs. 1.5 lakh), Section 80D for health insurance premiums, Section 24(b) for home loan interest, Section 80E for education loan interest, and Section 80G for charitable donations. These deductions can significantly lower your taxable income, especially under the old tax regime.

Q4. How does the new tax regime differ from the old one for FY 2025-26? The new tax regime offers more tax slabs with lower rates and a higher basic exemption limit of Rs. 4 lakh. It also provides a standard deduction of Rs. 75,000 but eliminates most other deductions and exemptions. The old regime has fewer slabs with higher rates but allows for extensive deductions under various sections of the Income Tax Act.Q5. Is there a minimum taxable income threshold for FY 2025-26? Yes, under the new tax regime for FY 2025-26, income up to Rs. 4 lakh is not taxable. This means individuals earning up to Rs. 4 lakh annually do not have to pay any income tax. However, it’s important to note that this threshold may change based on factors such as age and the chosen tax regime