Understanding Tax slabs and how they affect your income

What are tax slabs?
Tax slabs are basically income ranges set by the government, where each range has a specific tax rate. Instead of charging one tax rate on all your income, the government charges different rates on different portions of your income. This means you pay a lower tax rate on lower income amounts and higher rates on higher income amounts.

This system is called a progressive tax system because the percentage of tax you pay increases as your income increases.

A simple example to understand
Imagine your income as a cake sliced into pieces: tax from the first slice (which is small or sometimes nil), a bigger piece from the next slice, and the biggest piece from the last slice.
For instance:

Up to 2,50,000 — No tax
2,50,000 to 5,00,000 — 5% tax
5,00,000 to 10,00,000 — 20% tax
Above 10,00,000 — 30% tax

If your income is ₹7,50,000, you don’t pay 20% on the entire ₹7,50,000. Instead, you pay:

• No tax on the first ₹2,50,000
• 5% on the next ₹2,50,000 (₹2,50,000 to ₹5,00,000)
• 20% on the last ₹2,50,000 (₹5,00,000 to ₹7,50,000)

This way, only the income within each slab is taxed at that slab’s rate.

Why are tax slabs used?
Tax slabs make the tax system fairer by ensuring that people who earn less pay less tax, and those who earn more contribute more to the country’s revenue. Without tax slabs, if there were a fixed rate for everyone, people with lower income might face heavy tax burdens they cannot afford.

The progressive nature of tax slabs supports social equality by redistributing wealth and funding important government programmes such as education, healthcare, and infrastructure.

How to calculate tax using slabs
Let’s break down the tax calculation process step-by-step:

1. Calculate your total income: Add all sources of income like salary, interest, rent, etc.
2. Deduct eligible exemptions and deductions: Items like investments in provident funds, insurance premiums, or specific expenses reduce your taxable income.
3. Find your taxable income: This is the amount on which tax will be calculated.
4. Apply the tax slabs: Divide the taxable income across the slabs and apply the respective tax rate to each part.
5. Add applicable surcharge and cess: A surcharge is added for very high incomes, and a health and education cess (usually 4%) is added on the total tax.

Example of calculation
Suppose your taxable income after deductions is ₹9,00,000 and the tax slabs are:
0% to ₹2,50,000 — Nil
₹2,50,001 to ₹5,00,000 — 5%
₹5,00,000 to ₹10,00,000 — 20%

Your tax will be:

• No tax on ₹2,50,000
• 5% of ₹2,50,000 = ₹12,500
• 20% of ₹4,00,000 (₹5,00,000 to ₹9,00,000)

Benefits of the tax slab system

• Fairness: Everyone pays tax according to what they earn.
• Savings: Lower- and middle-income earners benefit from lower or no tax.
• Simplicity: It’s easier to understand your tax responsibility.
• Encourages transparency: You know exactly how your tax is calculated.

Old rules vs new rules
Besides the new regime, India still has an old tax regime with different slabs and allowances for deductions like investments, house rent, etc. Taxpayers can choose which regime suits them best when filing taxes.

Understanding tax slabs helps you see how your income is taxed and plan your finances better. With the new simpler slabs, many taxpayers can save more and have clarity. The old regime has higher tax rates but allows taxpayers to claim various deductions and exemptions on investments, expenses, and savings (such as under Section 80C, 80D, etc.).

Tax slabs under this regime vary based on age categories—with higher exemption limits for senior and super senior citizens.
The tax slabs for individuals below 60 years for FY 2025–2026 are:

• 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 granular slabs but does not permit deductions or exemptions. It simplifies taxation but may not be beneficial if one claims significant deductions under the old regime.
The slabs for FY 2025–2026 under the 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%

Additionally, the standard deduction of ₹75,000 is available under the new regime for salaried employees and pensioners.

How tax slabs affect your income
Understanding how tax slabs affect your income requires looking at how your taxable income is calculated and how tax is applied in a slab-wise manner.

1. Progressive taxation:
   Only the income within each slab is taxed at the rate prescribed for that slab. For example, if your total taxable income is ₹10 lakh under the new regime, here is how tax is calculated:

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

2. Tax savings through deductions (old regime):
   Under the old regime, deductions like investments in provident funds, insurance premium, home loan interest, etc., reduce taxable income and hence tax payable. This can sometimes result in lower tax liability than the new system despite higher tax rates.

Conclusion

Understanding how tax slabs work helps you make smarter financial decisions. Whether you choose the old or new tax regime, knowing how your income is taxed allows you to plan better, reduce your tax burden where possible, and avoid confusion during filing. The key is to evaluate your income, deductions, and long-term financial goals to pick the regime that benefits you the most. With the right approach, India’s slab-based system can help you stay compliant while optimising your savings.