How Income Tax Is Calculated in India: New vs Old Regime Explained

Every payslip has a number on it that most people never actually verify — the tax deducted. It feels like a black box, but it’s not: Indian income tax under the new regime follows a completely mechanical process, and once you’ve walked through it once, you can calculate it for yourself in under a minute.

The new regime, in one paragraph

Since FY 2023-24, the new tax regime is the default for every taxpayer in India. It offers lower slab rates than the old regime but strips out most deductions and exemptions — no 80C, no HRA exemption, no home loan interest deduction. In exchange, everyone gets a flat ₹75,000 standard deduction, and — this is the part that changed the game most recently — anyone with taxable income up to ₹12 lakh pays zero tax, thanks to an enhanced Section 87A rebate.

The exact calculation, step by step

Let’s work through a real example: a gross annual income of ₹18,00,000.

1. Subtract the standard deduction: ₹18,00,000 − ₹75,000 = ₹17,25,000 taxable income.
2. Apply the slab rates to that taxable income, slab by slab (not your whole income at one rate — this is the detail most people get wrong):
   • ₹0 – ₹4,00,000: 0%
   • ₹4,00,000 – ₹8,00,000: 5% → ₹20,000
   • ₹8,00,000 – ₹12,00,000: 10% → ₹40,000
   • ₹12,00,000 – ₹16,00,000: 15% → ₹60,000
   • ₹16,00,000 – ₹17,25,000: 20% → ₹25,000
   Total slab tax: ₹1,45,000.
3. Add 4% health & education cess on the tax amount: ₹1,45,000 × 4% = ₹5,800.
4. Total tax payable: ₹1,50,800 — an effective rate of about 8.4% on your gross income.

The ₹12L rebate — and why it’s not a cliff edge

Here’s where it gets interesting for anyone earning close to ₹12 lakh. Taxable income up to ₹12,00,000 is entirely rebated to zero. But without a safeguard, someone earning ₹12,10,000 would suddenly owe tax calculated on the full slab structure — potentially more than the ₹10,000 they earned over the threshold. That’s where marginal relief comes in: it caps your tax at exactly (your income minus ₹12,00,000), so crossing the threshold by a small amount never costs you more than that amount. The relief tapers off as income rises further, until normal slab taxation takes over completely.

When the old regime still wins

The new regime isn’t automatically the better choice for everyone — if you have significant 80C investments, health insurance premiums, or home loan interest, the old regime’s higher rates can still work out cheaper once those deductions are factored in. We cover exactly where that crossover point sits in our old vs new regime comparison.

Common mistakes people make

The most common error is applying one slab rate to your entire income instead of calculating it slab by slab — this consistently overstates the tax owed. The second is forgetting the standard deduction entirely, which for salaried employees always applies before slabs are calculated. And the third is not realizing marginal relief exists, leading people to think a small raise near ₹12L will cost them far more in tax than it actually does.