How progressive tax works
India’s income tax is a progressive system — different slices of your income are taxed at different rates. You do not pay the top rate on all of your income.
Under the old regime for FY 2025-26, an individual with ₹10 lakh gross income pays:
| Slab | Rate | Income in slab | Tax |
|---|---|---|---|
| Up to ₹2.5L | 0% | ₹2,50,000 | ₹0 |
| ₹2.5L – ₹5L | 5% | ₹2,50,000 | ₹12,500 |
| ₹5L – ₹10L | 20% | ₹5,00,000 | ₹1,00,000 |
| Total | ₹10,00,000 | ₹1,12,500 |
Effective rate = ₹1,12,500 ÷ ₹10,00,000 = 11.25%, even though the marginal rate is 20%.
Marginal vs effective rate
The marginal rate answers: “If I earn one more rupee, how much tax do I pay on it?” For someone at ₹10L, the answer is 20%.
The effective rate answers: “What fraction of my total income goes to tax?” It is always lower than the marginal rate in a progressive system.
Confusing the two is the most common tax misunderstanding. When people say “I’m in the 30% bracket,” they mean their marginal rate — they are not paying 30% on everything.
Common deductions (old regime)
| Deduction | Limit | Instrument |
|---|---|---|
| 80C | ₹1,50,000 | PPF, ELSS, LIC, EPF, housing principal |
| 80D | ₹25,000 (₹50,000 for seniors) | Health insurance premium |
| HRA | Actual / 40-50% of basic / rent − 10% basic | Rent paid |
| NPS (80CCD(1B)) | ₹50,000 | National Pension Scheme over 80C limit |
| Home loan interest (24b) | ₹2,00,000 | Self-occupied property |
Stack these deductions and you can significantly reduce taxable income.
New vs old regime (FY 2025-26)
The new regime has lower slabs (0% up to ₹3L, 5% up to ₹7L, 10% up to ₹10L, 15% up to ₹12L, 20% up to ₹15L, 30% above) but no deductions (except 80CCD employer contribution and standard deduction of ₹75,000).
General rule: if total deductions > ~₹4-5 lakh, old regime wins. Below that, new regime is better. The Tax Calculator lets you compare both.
Surcharge and cess
After computing basic tax, add:
- Surcharge: 10% if income > ₹50L; 15% if > ₹1Cr; 25% if > ₹2Cr; 37% if > ₹5Cr (old regime)
- Cess: 4% of (basic tax + surcharge) — mandatory for everyone
TDS vs self-assessment
Tax Deducted at Source (TDS) is collected by your employer or payer throughout the year. At year-end, your actual tax liability is computed; if TDS was less than your liability, you pay the difference as advance tax or self-assessment tax. Use the TDS Calculator to estimate withholding.