How income tax slabs actually work in India (with simple examples)

One of the most common misunderstandings about income tax in India is the idea that crossing into a higher 'slab' suddenly taxes your entire income at that higher rate. It does not. India uses a progressive slab system, where each layer of your income is taxed only at the rate for that layer. Understanding this one idea removes most of the fear around a pay rise or a bonus.

What a 'slab' really means

Think of your taxable income as water filling a set of buckets stacked on top of each other. The first bucket is taxed at 0%, the next at a low rate, and so on. Only the money that spills into a higher bucket is taxed at that higher rate — never the money already sitting in the lower buckets.

New regime slabs for FY 2025-26 (AY 2026-27)

The new tax regime is the default from FY 2023-24 onwards. For FY 2025-26 the slabs were revised in the Union Budget 2025:

A 4% Health and Education Cess applies on top of the tax. A standard deduction of ₹75,000 is available to salaried individuals under the new regime.

A worked example: ₹16 lakh salary, new regime

Suppose your gross salary is ₹16,00,000. Subtract the ₹75,000 standard deduction to get a taxable income of ₹15,25,000. The tax is built up slab by slab:

1. First ₹4,00,000 → 0% → ₹0
2. Next ₹4,00,000 (₹4L–₹8L) → 5% → ₹20,000
3. Next ₹4,00,000 (₹8L–₹12L) → 10% → ₹40,000
4. Next ₹3,25,000 (₹12L–₹15.25L) → 15% → ₹48,750
5. Total before cess → ₹1,08,750
6. Add 4% cess → ₹1,13,100 (approximate total tax)

Notice that even though you are 'in the 15% slab', your effective tax rate on ₹15.25 lakh is far below 15%. The slab you reach is a ceiling on your top rupee, not a rate on every rupee.

Why the ₹12 lakh figure is talked about so much

For FY 2025-26, a resident individual with net taxable income up to ₹12,00,000 pays effectively no tax under the new regime, because the Section 87A rebate (up to ₹60,000) wipes out the computed tax. For a salaried person, the ₹75,000 standard deduction pushes the effective zero-tax salary to roughly ₹12.75 lakh. Above that, tax applies normally on the excess.

A higher slab never reduces your take-home pay below what it was at a lower income. You always keep more after a raise — you simply keep a little less of the portion above each threshold.

Key takeaways

• Slabs are progressive: each layer of income is taxed at its own rate.
• Your 'tax bracket' is the rate on your last rupee, not your whole income.
• For FY 2025-26, income up to ₹12 lakh is effectively tax-free under the new regime thanks to the Section 87A rebate.
• Always add the 4% cess, and apply the standard deduction if you are salaried.

Official sources

This explainer is based on official and primary sources. Always confirm figures and dates on these before acting:

• Income Tax Department — incometax.gov.in
• Central Board of Direct Taxes (CBDT), Department of Revenue
• Union Budget — indiabudget.gov.in

Reviewed: October 2026. Tax rules change — verify the current financial year and assessment year before you rely on any figure.

This is general educational information for Indian taxpayers, not personalised tax, legal or financial advice. Union of Taxpayers is an independent platform and not a government body. Consider a qualified professional for your specific situation.