Understanding Tax slabs and how they affect your income

What are tax slabs?

Tax slabs are basically the income ranges set by the government, where each slab has a different tax rate. Based on the income of an individual, the government charges different rates on different parts or portions of the income.  This means one pays a lower tax rate on lower income amounts and higher rates on higher income amounts.

This system is also called a progressive tax system, as the percentage of tax you owe the government increases as your income increases.

Why are tax slabs used?

The major role of tax slabs is to create a fair and transparent environment by making sure that people with less income pay less tax, and those with higher incomes contribute more to the country’s tax revenue. If tax slabs did not exist and if there were a fixed tax rate for everyone, people with lower income might face heavy tax burdens which they would not be able to afford.

By redistributing wealth and funding important government initiatives like  education, healthcare, and infrastructure, the progressive nature of tax slabs is created in a way that it supports social equality. 

How to calculate tax using slabs?

Understanding how to calculate tax using slabs is important, as it helps you plan better for the financial year-end.

1. Calculate your total income: This includes all sources of income, like salary, interest, and rent.
2. Deduct eligible exemptions and deductions: You can reduce your taxable income by deducting the eligible amount from items like investments in provident funds, insurance premiums, or other specific expenses.
3. Find your taxable income: This is the amount on which tax will be calculated or levied.
4. Apply the tax slabs: The next step is to divide the taxable income across the slabs and apply the respective tax rate to each portion separately.
5. Add applicable surcharge and cess: Health and education cess (usually 4%) is added on the total tax. This is called a surcharge and is added for individuals with very high incomes.

Benefits of the tax slab system

• Fairness: The tax is based on individuals' total income.
• Savings: Lower- and middle-income earners get the benefit of lower or no tax.
• Encourages transparency: This system helps the people to get clarity on the tax owed to the government.

Old tax rules vs new tax rules

India has an old tax regime with different slabs and allowances for deductions like investments, house rent, etc., along with the new tax regime. When filing taxes, an individual can choose which regime they would want to opt for based on what suits them best.

It is important to plan your finances and understand how your income is taxed based on the tax slabs. The new tax regime is comparatively simpler and can help one save more tax while having better clarity of their finances. However, while the old regime has higher tax rates, one is allowed to claim various deductions and exemptions on their investments, expenses, and savings (such as under Section 80C, 80D, etc.).This regime differentiates tax amounts based on age, giving higher exemption limits for senior and super-senior citizens.

As per FY 2025–2026 the tax slabs for individuals below 60 years are as follows:

• Up to ₹2,50,000 — Nil
• ₹2,50,000 to ₹5,00,000 — 5%
• ₹5,00,000 to ₹10,00,000 — 20%
• Above ₹10,00,000 — 30%

New tax regime:

The new regime has lowered tax rates with more slabs. In spite of lower tax rates, it does not permit deductions or exemptions. This might not be beneficial for an individual who would claim deductions under the old tax regime.

As per FY 2025–2026, the tax slabs for new regime are:

• Up to ₹4,00,000 — Nil
• ₹4,00,000 to ₹8,00,000 — 5%
• ₹8,00,000 to ₹12,00,000 — 10%
• ₹12,00,000 to ₹16,00,000 — 20%
• ₹16,00,000 to ₹20,00,000 — 25%
• Above ₹24,00,000 — 30%

In addition to the above slabs, a salaried employee or pensioner can avail a standard deduction of ₹75,000 under the new regime.

How do tax slabs affect your income?

To understand the effect of tax on income, one needs to calculate taxable income and its application on each slab.

Progressive taxation:

The income falling within each slab is taxed at a specific tax rate. Only the income that falls within each slab is taxed at the rate prescribed for that slab.

1. First ₹4,00,000 — Nil
2. Next ₹4,00,000 (4,00,000 to 8,00,000) — 5% = 20,000
3. Next ₹2,00,000 (8,00,000 to 10,00,000) — 10% = 20,000
4. Total tax = 40,000
   

Tax savings through deductions (old regime):

In the old regime, one could claim deductions against investments in provident funds, insurance premiums, home loan interest, etc. This helped individuals or taxpayers to reduce taxable income. This enabled taxpayers to reduce their taxable income. As a result, even though the old regime carried higher tax rates, it could lead to a lower effective tax liability.

Conclusion

To reduce the tax burden in both the old and new regimes, it is important to ger clarity on how your income is taxed. This also helps to reduce confusions and errors while filing the form. The key is to calculate your total income, deductions, and consider your financial goals to pick the regime that is most advantageous for you.