What is the 4% cess on income tax?

A Health & Education Cess of 4% is added to the income tax amount (after surcharge) for all taxpayers. It is not a deduction — it adds to your total tax liability. For example, if income tax is ₹50,000, cess = ₹2,000, making total tax ₹52,000.

What is surcharge on income tax in India?

Surcharge is an additional tax levied on high-income earners. Under New Regime: 10% surcharge if income is ₹50L–₹1Cr; 15% if ₹1Cr–₹2Cr; 25% if above ₹2Cr. Old Regime: 10% if ₹50L–₹1Cr; 15% if ₹1Cr–₹2Cr; 25% if ₹2Cr–₹5Cr; 37% if above ₹5Cr (capped at 25% for capital gains).

When is Section 87A rebate applicable?

Section 87A rebate of up to ₹25,000 is available if your total taxable income does not exceed ₹7,00,000 under the New Tax Regime (AY 2026-27). Under the Old Regime, the rebate is ₹12,500 for income up to ₹5,00,000. The rebate makes income up to these limits completely tax-free.

How Income Tax is Calculated in India 2026

Q: How is income tax calculated in India?

Income tax in India = (Tax on taxable income as per applicable slab rates) + Surcharge (if income > ₹50 lakh) − Rebate u/s 87A (if applicable) + Health & Education Cess at 4%. Taxable income = Gross income minus exemptions and deductions.

Q: What are the income tax slab rates for FY 2025-26?

New Tax Regime slabs for FY 2025-26: Up to ₹3L = NIL; ₹3L–₹7L = 5%; ₹7L–₹10L = 10%; ₹10L–₹12L = 15%; ₹12L–₹15L = 20%; Above ₹15L = 30%. Full rebate u/s 87A makes income up to ₹7L tax-free. Old Regime: Up to ₹2.5L = NIL; ₹2.5L–₹5L = 5%; ₹5L–₹10L = 20%; Above ₹10L = 30%.

Basic Formula for Calculating Income Tax

Income tax in India is calculated in a structured sequence. The final tax payable is not simply a flat rate on your salary — it is computed after multiple adjustments:

Step 1 Compute Total Income from all 5 heads (Salary, House Property, Business, Capital Gains, Other Sources)

Step 2 Subtract Deductions (80C, 80D, etc. under Old Regime; only standard deduction under New Regime)

Step 3 = Taxable Income. Apply slab rates to compute Basic Tax

Step 4 Add Surcharge (only if income exceeds ₹50 lakh)

Step 5 Deduct Rebate u/s 87A (if taxable income ≤ ₹7L under New Regime or ≤ ₹5L under Old Regime)

Step 6 Add 4% Health & Education Cess on (Basic Tax + Surcharge − Rebate)
= Total Income Tax Payable

Income Tax Slab Rates AY 2026-27 (FY 2025-26)

New Tax Regime (Default) Up to ₹3,00,000 → NIL
₹3,00,001 – ₹7,00,000 → 5%
₹7,00,001 – ₹10,00,000 → 10%
₹10,00,001 – ₹12,00,000 → 15%
₹12,00,001 – ₹15,00,000 → 20%
Above ₹15,00,000 → 30%
Full tax-free up to ₹7L after 87A rebate

Old Tax Regime Up to ₹2,50,000 → NIL
₹2,50,001 – ₹5,00,000 → 5%
₹5,00,001 – ₹10,00,000 → 20%
Above ₹10,00,000 → 30%

Senior Citizens (60–80): NIL up to ₹3L
Super Senior (80+): NIL up to ₹5L

New Regime is now the DEFAULT: From AY 2024-25 onwards, the New Tax Regime is automatically applied if you do not actively opt for the Old Regime in your ITR. You must explicitly select Old Regime in Form 10-IEA if you want deductions like 80C, HRA, LTA etc.

Surcharge & Cess on Income Tax

Surcharge (New Regime) ₹50L – ₹1Cr: +10% on tax
₹1Cr – ₹2Cr: +15% on tax
Above ₹2Cr: +25% on tax
(capped at 15% for LTCG on equity & STCG u/s 111A)

Surcharge (Old Regime) ₹50L – ₹1Cr: +10%
₹1Cr – ₹2Cr: +15%
₹2Cr – ₹5Cr: +25%
Above ₹5Cr: +37% (highest in India)

Health & Education Cess 4% on (Income Tax + Surcharge)
Applicable to ALL taxpayers regardless of income
Example: Tax = ₹1,00,000 → Cess = ₹4,000 → Total = ₹1,04,000

Marginal Relief To prevent situations where tax exceeds income above the threshold, marginal relief is available. For instance, if income is ₹51 lakh, the surcharge cannot exceed the additional ₹1 lakh over ₹50 lakh

Section 87A Rebate Tax-Free Income Limit

New Regime Rebate up to ₹25,000 if taxable income ≤ ₹7,00,000
Effective tax = NIL for income up to ₹7 lakh

Old Regime Rebate up to ₹12,500 if taxable income ≤ ₹5,00,000
Effective tax = NIL for income up to ₹5 lakh (with 80C deductions)

Important The 87A rebate is on income tax before cess. Capital gains taxed at special rates (LTCG on equity at 12.5%, STCG at 20%) may NOT qualify for 87A rebate in certain cases as per recent court rulings

Worked Examples FY 2025-26

Frequently Asked Questions

How is income tax calculated in India?

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Income tax = Basic tax on taxable income (as per slab rates) + Surcharge (if income > ₹50L) − Section 87A rebate + 4% Health & Education Cess. Taxable income is computed by subtracting exemptions and deductions from gross total income across all 5 heads of income.

What are the income tax slab rates for FY 2025-26?

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New Regime (Default): NIL up to ₹3L; 5% on ₹3L–₹7L; 10% on ₹7L–₹10L; 15% on ₹10L–₹12L; 20% on ₹12L–₹15L; 30% above ₹15L. Old Regime: NIL up to ₹2.5L; 5% on ₹2.5L–₹5L; 20% on ₹5L–₹10L; 30% above ₹10L.

Is income up to ₹12 lakh tax-free in 2026?

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As per Budget 2025 announcements, the government proposed making income up to ₹12 lakh effectively tax-free under the New Regime through enhanced rebate and slab adjustments effective from AY 2026-27. The standard deduction of ₹75,000 means salaried individuals earning up to ₹12.75 lakh would pay zero tax. However, please verify the final enacted provisions as the implementation details may vary.

How to reduce income tax legally in India?

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Under the Old Regime: invest ₹1.5L in 80C instruments (PPF, ELSS, LIC); buy health insurance for 80D; contribute to NPS for extra ₹50,000 under 80CCD(1B); claim HRA and LTA exemptions; deduct home loan interest. Under the New Regime: maximize standard deduction and NPS employer contribution u/s 80CCD(2). Consider opting for the old regime if your total deductions exceed ₹3.75 lakh.

What is the last date to file ITR for AY 2026-27?

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For individuals (non-audit cases), the due date to file ITR for AY 2026-27 (FY 2025-26) is 31 July 2026. For audit cases, it is 31 October 2026. Late filing after the due date attracts a penalty of ₹5,000 (₹1,000 if income is below ₹5 lakh). Belated returns can be filed up to 31 December 2026.

How Is Income Tax Calculated in India? AY 2026-27