Income tax in India 2025: How much tax is deducted from salary; All details

Taxation can be complex, but understanding how it affects your salary is crucial for financial planning. In India, the amount of tax deducted from your salary is influenced by your earnings, tax slab, and the tax regime you choose. This guide will break down the process of tax calculation, the components of your salary, and strategies to reduce your tax liability effectively.

1. Income Tax Slabs in India

India follows a progressive tax system where higher-income earners pay a higher tax rate. Taxpayers can choose between two regimes: the old tax regime, which offers exemptions and deductions, and the new tax regime, which features lower tax rates but fewer exemptions.

Old Tax Regime (with exemptions and deductions):

Up to ₹2.5 lakh: No tax
₹2,50,001 to ₹5 lakh: 5%
₹5,00,001 to ₹10 lakh: 20%
Above ₹10 lakh: 30%

New Tax Regime (without exemptions and deductions):

Up to ₹2.5 lakh: No tax
₹2,50,001 to ₹5 lakh: 5%
₹5,00,001 to ₹7.5 lakh: 10%
₹7,50,001 to ₹10 lakh: 15%
₹10,00,001 to ₹12.5 lakh: 20%
₹12,50,001 to ₹15 lakh: 25%
Above ₹15 lakh: 30%

Taxpayers can select the regime that offers the most benefit based on their financial situation.

2. Components of Salary Income

Your salary is composed of various components, some of which are taxable while others may be exempt. Understanding these components is essential for accurate tax calculation.

Basic Salary: Fully taxable.
House Rent Allowance (HRA): Can be partially or fully exempt depending on rent paid and the city you live in.
Special Allowances: Generally taxable unless specific exemptions apply (like travel reimbursements).
Bonuses and Incentives: Fully taxable.
Provident Fund (PF) Contributions: Employee contributions are exempt up to ₹1.5 lakh under Section 80C; employer contributions may be taxable if they exceed certain limits.

3. How Is Tax Calculated on Salary?

Calculating tax on your salary involves several steps:

Step 1: Gross Salary

Start with your total income, including basic salary, allowances, bonuses, and any other earnings.

Step 2: Deductions and Exemptions

Subtract eligible exemptions like HRA and leave travel allowance (LTA).

Step 3: Deductions under Chapter VI-A

This includes various deductions:

Section 80C: Up to ₹1.5 lakh for investments in ELSS, PPF, etc.
Section 80D: Health insurance premium deductions.
Section 80E: Interest on education loans.

Step 4: Taxable Income

The remaining amount after exemptions and deductions is your taxable income.

Step 5: Apply Tax Slabs

Calculate your tax liability based on your taxable income and the chosen regime.

Step 6: TDS Deduction

Your employer deducts TDS (Tax Deducted at Source) from your monthly salary based on your estimated annual tax liability. This TDS is deposited with the Income Tax Department.

4. How Much TDS Is Deducted?

TDS is deducted from your salary every month according to your income tax slab. Employers estimate the annual tax liability and deduct the corresponding amount in equal instalments. You can view TDS deductions on Form 16, which your employer provides at the end of the financial year. This form is crucial for filing your income tax return (ITR).

5. Legal Ways to Reduce Tax Liability

There are several strategies to minimize your tax liability legally:

Section 80C Investments: Save up to ₹1.5 lakh by investing in EPF, PPF, NSC, ELSS, and life insurance premiums.
House Rent Allowance (HRA): Claim HRA exemption if you live in rented accommodation.
Health Insurance: Deduct premiums paid for health insurance under Section 80D.
Home Loan Interest: Deduct interest paid on a home loan under Section 24(b).
NPS Contributions: Save an additional ₹50,000 by contributing to the National Pension Scheme (NPS) under Section 80CCD(1B).

6. Tax Filing and Refunds

At the end of the financial year, you must file your income tax return (ITR) to reconcile your total tax liability. If you’ve paid more tax than your actual liability, you can claim a refund when filing your ITR.