Reviewed on 9 October 2026 against the text of the Income-tax Act, 2025, the Union Budget 2025-26 speech and the Income Tax Department's e-filing portal. This is general information, not tax advice. Figures ignore surcharge, which applies only above ₹50 lakh of income.
Your offer letter shows a CTC, your payslip shows a net amount, and somewhere between the two your employer deducts income tax. Understanding how that tax is worked out helps you choose the right regime, avoid a surprise demand when you file your return and check that your employer has deducted the right amount.
This guide explains how salary is taxed in India, which law applies to which year, how the two tax regimes compare and how tax deducted at source (TDS) on salary works. It ends with a worked comparison and a checklist.
First, check which law covers your income
The Income-tax Act, 2025 came into force on 1 April 2026, replacing the Income-tax Act, 1961. The government's release says the new Act simplifies language and structure "without altering the underlying tax policy". The supporting Income-tax Rules, 2026 were notified on 20 March 2026.
What matters for you is when the salary was earned:
| Salary earned | Law that applies | How the year is described | Salary TDS provision |
|---|---|---|---|
| 1 April 2025 to 31 March 2026 | Income-tax Act, 1961 | Financial year 2025-26, assessment year 2026-27 | Section 192 |
| 1 April 2026 to 31 March 2027 | Income-tax Act, 2025 | Tax year 2026-27 | Section 392 |
The new Act drops the "previous year" and "assessment year" pair and uses a single tax year. Many familiar section numbers have changed too. For example, the deduction you knew as section 80C is now in section 123, and the new tax regime is in section 202. When you read older articles, check which Act and year they describe.
The annual salary TDS certificate for FY 2025-26 is still Form 16. For tax year 2026-27, the certificate is issued in the new form prescribed under the 2026 Rules. The Income Tax Department's FAQs on the new forms list Form No. 130 as the counterpart of Form 16 for tax years from 2026-27. Ask your payroll team which form you will receive.
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Under section 15 of the Income-tax Act, 2025, salary is taxed when it is due from your employer, even if it has not been paid yet. Advance salary and arrears are also covered. Section 16 lists what "salary" includes:
- wages, pension and gratuity
- fees, commission and perquisites
- leave encashment
- your employer's contribution to your National Pension System (NPS) account
CTC and taxable salary are not the same thing. Some parts of CTC, such as your employer's provident fund contribution within the legal limits, are not taxed when paid. Others are taxed as perquisites. One limit is worth knowing: if your employer's combined contributions to your recognised provident fund, NPS and approved superannuation fund exceed ₹7,50,000 in a tax year, the excess is taxed as a perquisite under section 17(1)(h).
The two regimes at a glance
Every salaried individual is taxed under the new regime unless they opt out. If you have no business or professional income, section 202(4)(b) lets you choose the old regime each year when you file your return.
New regime (default)
These slabs appear in section 202(1) of the 2025 Act. They match the rates announced in the Budget 2025-26 speech and listed for AY 2026-27 on the e-filing portal.
| Total income | Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 to ₹8,00,000 | 5% |
| ₹8,00,001 to ₹12,00,000 | 10% |
| ₹12,00,001 to ₹16,00,000 | 15% |
| ₹16,00,001 to ₹20,00,000 | 20% |
| ₹20,00,001 to ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Three more rules decide what you actually pay:
- Standard deduction: ₹75,000 for salary under the new regime (section 19).
- Rebate: a resident individual whose total income does not exceed ₹12 lakh gets a rebate of up to ₹60,000, which brings tax to zero (section 156(2)). Marginal relief applies just above ₹12 lakh. As the Budget speech explains, this means a salaried person earning up to ₹12.75 lakh pays no tax. The speech is explicit that this applies to normal income, not special-rate income such as capital gains.
- Cess: health and education cess of 4% is added to any tax payable.
Most exemptions and deductions are not available under the new regime. These include house rent allowance (HRA), leave travel concession, professional tax and the deductions for life insurance, PF, ELSS and health insurance premiums. One important deduction does survive: your employer's NPS contribution, up to 14% of basic pay plus DA.
Old regime (opt-in)
For AY 2026-27, the e-filing portal lists these rates for individuals below 60:
| Total income | Rate |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 to ₹5,00,000 | 5% |
| ₹5,00,001 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Under the old regime:
- The standard deduction is ₹50,000.
- The rebate is limited to ₹12,500 for total income up to ₹5 lakh.
- You can claim HRA and leave travel exemptions within the rules.
- You can claim the ₹1,50,000 investment deduction (old 80C, new section 123), an additional ₹50,000 for your own NPS contributions, and health insurance premiums.
Your employer's NPS contribution is deductible up to 10% of salary, or 14% if your employer is a government.
The PIB summary of Union Budget 2026-27 does not list any change to personal income-tax slabs. Even so, confirm the rates for tax year 2026-27 on the e-filing portal before you file in 2027.
How your employer deducts TDS
Section 392(1) requires your employer to deduct tax every time it pays your salary. The deduction is worked out at the average rate on your estimated salary for the whole year, which is why TDS can jump in the last quarter if a bonus is added or proofs are missing.
You can help payroll get it right:
- Changed jobs mid-year? Declare the salary and TDS from your previous employer. If you don't, both employers may apply the lower slabs and you will owe tax when you file.
- Have a housing loan and use the old regime? Under section 392(4), payroll may count a loss under "income from house property" when it calculates your TDS. Under the new regime, section 202(2) does not allow that loss to be set off against salary. Other income you report can increase the deduction.
- Using the old regime? Submit rent receipts, investment proofs and insurance receipts by your payroll's deadline, or the employer will deduct tax as though you made no claims.
Before you file, compare the TDS in your certificate with the TDS credits shown in your Form 26AS or Annual Information Statement on the e-filing portal. Ask your employer to correct any mismatch first.
Worked example: new or old regime?
Illustrative figures, using the FY 2025-26 rates above. Asha's gross taxable salary is ₹15,00,000. Under the old regime she could claim an HRA exemption of ₹1,20,000 (as calculated by her payroll), ₹1,50,000 of section 80C investments, a ₹25,000 health insurance premium and ₹2,500 of professional tax.
| Step | New regime | Old regime |
|---|---|---|
| Gross salary | ₹15,00,000 | ₹15,00,000 |
| Standard deduction | ₹75,000 | ₹50,000 |
| HRA, professional tax, 80C, 80D | Not allowed | ₹2,97,500 |
| Taxable income | ₹14,25,000 | ₹11,52,500 |
| Tax before cess | ₹93,750 | ₹1,58,250 |
| Tax with 4% cess | ₹97,500 | ₹1,64,580 |
How the figures are worked out:
- New regime: ₹20,000 on the ₹4 to 8 lakh band, ₹40,000 on the ₹8 to 12 lakh band, plus 15% of ₹2,25,000 (₹33,750). The total is ₹93,750. Income is above ₹12 lakh, so no rebate applies.
- Old regime: ₹12,500 on the ₹2.5 to 5 lakh band, ₹1,00,000 on the ₹5 to 10 lakh band, plus 30% of ₹1,52,500 (₹45,750). The total is ₹1,58,250.
At this salary the old regime only matches the new one when taxable income falls to ₹9,06,250. That needs total deductions and exemptions, including the ₹50,000 standard deduction, of about ₹5,94,000. That is a high bar for most salary structures, so run your own numbers rather than following a colleague's choice.
Year-round checklist
- April: tell payroll which regime you expect to use and ask how they record that choice.
- When you join or leave a job: share the previous employer's salary and TDS figures.
- Before the proof deadline (old regime): submit rent, investment and insurance documents.
- When you get your TDS certificate: check it against Form 26AS or the Annual Information Statement (AIS).
- At filing time: choose your regime in the return, report every source of income and file by the due date shown on the e-filing portal.
For the wider picture of what a package is worth before tax, see our guide to evaluating salary versus benefits. For investing the money you keep, see retirement planning from salary.
Common mistakes
- Treating "no tax up to ₹12 lakh" as a gross-salary rule. It refers to total income after the standard deduction, and it does not cover special-rate income such as capital gains.
- Claiming HRA or 80C deductions in a new-regime return. The new regime does not allow them.
- Ignoring perquisites. Employer-provided benefits can be taxable even though no cash reaches you.
- Relying on an old section number. For tax year 2026-27, cite the 2025 Act or ask a chartered accountant.