How Income Tax Slabs Work in India: A Step-by-Step Guide for FY 2025-26
India does not tax your entire income at one rate — understanding how slabs work could change how you read your pay slip.
Income tax in India follows a progressive slab system — the more you earn, the higher the rate on the incremental income. But a critical misconception trips up many first-time taxpayers: if you cross into a higher slab, only the income above the threshold is taxed at the higher rate, not your entire income. Understanding this distinction is the foundation of any tax plan.
How Progressive Taxation Works
Think of your taxable income as filling up buckets:
₹0 – ₹3,00,000: 0% tax → Tax = ₹0
₹3,00,001 – ₹7,00,000: 5% tax → Tax on ₹4,00,000 = ₹20,000
₹7,00,001 – ₹10,00,000:10% tax → Tax on ₹3,00,000 = ₹30,000
₹10,00,001 – ₹12,00,000:15% tax→ Tax on ₹2,00,000 = ₹30,000
₹12,00,001 – ₹15,00,000:20% tax→ Tax on ₹3,00,000 = ₹60,000
Above ₹15,00,000: 30% tax → Tax on remaining income
Example: Taxable income = ₹14,00,000 (New Regime)
Total tax before cess = ₹0 + ₹20,000 + ₹30,000 + ₹30,000 + ₹40,000 = ₹1,20,000
Add 4% Health & Education Cess: ₹4,800
Total tax payable = ₹1,24,800
New Tax Regime Slabs for FY 2025-26
| Income Slab (₹) | Tax Rate |
|---|---|
| 0 – 4,00,000 | Nil |
| 4,00,001 – 8,00,000 | 5% |
| 8,00,001 – 12,00,000 | 10% |
| 12,00,001 – 16,00,000 | 15% |
| 16,00,001 – 20,00,000 | 20% |
| 20,00,001 – 24,00,000 | 25% |
| Above 24,00,000 | 30% |
Note: The new regime slabs were updated in Union Budget 2025 (effective FY 2025-26). Income up to ₹12 lakh is effectively tax-free due to the enhanced Section 87A rebate of ₹60,000 under the new regime.
Old Tax Regime Slabs for FY 2025-26
| Income Slab (₹) | Tax Rate |
|---|---|
| 0 – 2,50,000 | Nil |
| 2,50,001 – 5,00,000 | 5% |
| 5,00,001 – 10,00,000 | 20% |
| Above 10,00,000 | 30% |
The old regime provides access to deductions under 80C, 80D, HRA, etc. The 87A rebate under the old regime applies for income up to ₹5 lakh, making the effective tax nil.
Surcharge: When High Earners Pay More
Beyond the slab rates, a surcharge applies to individuals with higher incomes:
| Net Income | Surcharge Rate |
|---|---|
| ₹50 lakh – ₹1 crore | 10% of income tax |
| ₹1 crore – ₹2 crore | 15% of income tax |
| ₹2 crore – ₹5 crore | 25% of income tax (old regime) |
| Above ₹5 crore | 37% of income tax (old regime) / 25% (new regime) |
Marginal Relief
When income crosses a slab threshold by a small amount, the additional tax payable could theoretically exceed the additional income earned. Marginal relief ensures this does not happen. For example, if your income crosses ₹50 lakh by ₹1 lakh, the surcharge is limited so that your net tax increase does not exceed ₹1 lakh.
Health and Education Cess
A flat 4% cess is applied on the income tax plus surcharge for every taxpayer. This funds government health and education initiatives. It is not a deduction and cannot be avoided.
Full calculation for ₹20 lakh income, New Regime, FY 2025-26:
Standard deduction: ₹75,000
Taxable income: ₹19,25,000
Slab tax:
0–4L: ₹0
4L–8L: ₹20,000
8L–12L: ₹40,000
12L–16L: ₹60,000
16L–19.25L: ₹65,000
Subtotal: ₹1,85,000
No surcharge (income < ₹50L)
Cess @ 4%: ₹7,400
Total tax payable: ₹1,92,400
Effective Tax Rate vs Marginal Tax Rate
The marginal rate is the rate on your last rupee of income (e.g., 30%). The effective rate is your total tax divided by total income — always lower than the marginal rate in a progressive system. For ₹20 lakh income in the example above, the effective rate is ₹1,92,400 ÷ ₹20,00,000 = 9.6%, not 30%.
Use the Income Tax Calculator to compute your exact slab-wise tax breakdown for any income level.
These figures are estimates for educational purposes. Consult a SEBI-registered advisor for personalised advice.
Frequently asked questions
What are the income tax slab rates for FY 2025-26 under the new regime?+
The new regime slabs (post-Budget 2025) are: Nil up to ₹4L, 5% (₹4L–₹8L), 10% (₹8L–₹12L), 15% (₹12L–₹16L), 20% (₹16L–₹20L), 25% (₹20L–₹24L), and 30% above ₹24L. Income up to ₹12L is effectively tax-free due to the 87A rebate.
Does crossing into a higher tax slab mean all my income is taxed at that rate?+
No. Only the income above the threshold is taxed at the higher rate. Income in lower slabs continues to be taxed at the lower rate. This is the essence of progressive taxation.
What is the health and education cess in India?+
A 4% cess is levied on your total income tax (plus surcharge if applicable). It funds government health and education schemes and is mandatory for all taxpayers.
What is surcharge and who pays it?+
Surcharge is an additional levy on income tax for those earning above ₹50 lakh per year. The rate ranges from 10% to 37% of the computed income tax, depending on income level.
What is the effective tax rate vs the marginal tax rate?+
The marginal rate is the rate applied to your last rupee of income. The effective rate is your total tax divided by total income — always lower. Someone in the 30% bracket may have an effective rate of just 12–15%.
Try the calculators
Keep reading
- Old vs New Tax Regime India: Which Should You Choose?
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- How TDS Works in India: A Plain-English Guide to Tax Deducted at Source
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- How to Save Tax in India: A Complete Checklist for FY 2025-26
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Elena writes about taxes and the money side of running a small business. She’s on a mission to make VAT, margins, and break-even points feel a lot less scary.