What Is Income Tax?
Income tax is a direct tax the Central Government of India levies on the income a person or entity earns during a financial year, governed by the Income Tax Act, 1961. It applies to salaried employees, business owners, freelancers, and professionals. Under the new regime for FY 2025-26, income up to Rs.12 lakh is tax-free for individuals (Rs.12,75,000 for salaried after standard deduction).
For salaried employees, Section 192 requires every employer to estimate annual tax, deduct TDS from monthly salary, and deposit it by the 7th of the following month. The employer files Form 24Q each quarter and issues Form 16 by 15 June.
How Is Income Tax Calculated on Salary?
Start with gross salary (basic + HRA + allowances + bonuses). Subtract the standard deduction (Rs.75,000 new regime, Rs.50,000 old). If old regime, subtract tax exemptions under Section 10 and Chapter VI-A deductions. Apply slab rates. Add 4% cess.
Budget 2025 slabs for the new regime:
| Income Slab (FY 2025-26) | Tax Rate |
|---|---|
| Up to Rs.4,00,000 | Nil |
| Rs.4,00,001 to Rs.8,00,000 | 5% |
| Rs.8,00,001 to Rs.12,00,000 | 10% |
| Rs.12,00,001 to Rs.16,00,000 | 15% |
| Rs.16,00,001 to Rs.20,00,000 | 20% |
| Rs.20,00,001 to Rs.24,00,000 | 25% |
| Above Rs.24,00,000 | 30% |
Section 87A rebate under the new regime is up to Rs.60,000, which is why net salary structures up to Rs.12,75,000 result in zero tax.
What Does an Income Tax Calculation Look Like?
Illustrative example, not a real case.
A shift supervisor at a restaurant chain in Madhapur, Hyderabad. Annual package under the new regime (FY 2025-26):
| Component | Annual Amount |
|---|---|
| Basic salary | Rs.4,80,000 |
| HRA | Rs.1,92,000 |
| Special allowance | Rs.1,68,000 |
| Gross salary | Rs.8,40,000 |
| Less: Standard deduction | (Rs.75,000) |
| Taxable income | Rs.7,65,000 |
No HRA or Chapter VI-A deductions apply under the new regime. Tax on slab rates:
| Slab | Taxable Portion | Tax |
|---|---|---|
| Up to Rs.4,00,000 | Rs.4,00,000 | Nil |
| Rs.4,00,001 to Rs.7,65,000 | Rs.3,65,000 | Rs.18,250 (at 5%) |
| Total tax + 4% cess | Rs.18,980 | |
| Monthly TDS | Rs.1,582 |
The employer deducts Rs.1,582 monthly under Section 192. Use the CTC salary structure template to model this for your own team.
Why Does Income Tax Compliance Matter for Indian Businesses?
Miss a deadline and penalties stack: Rs.200/day for late Form 24Q under Section 234E, Rs.500/day for late Form 16 under Section 272A(2)(g). The more common problem, frankly, is wrong TDS amounts. An employer who underdeducts becomes an “assessee in default” under Section 201, liable for the shortfall plus 1% interest per month.
At Petpooja we see this most often when a mid-year salary revision doesn’t flow back into the TDS estimate. Getting payroll calculations right from April is the smarter approach. Check with your CA if you’re unsure about projected versus actual TDS reconciliation.
How Attendo (formerly Petpooja Payroll) Handles Income Tax
Attendo picks up each employee’s regime choice, salary structure, and declared investments, then computes monthly TDS as part of the payroll run. When someone submits a PPF receipt in November or a rent agreement in January, the system recalculates projected tax for remaining months without anyone rebuilding formulas.
Across 30,000+ businesses, clients like Jalpooree and Haldirams run this for staff across multiple states. Form 16 data stays structured at each month-end, so the June deadline is a download, not a scramble. Use the free salary calculator or CTC calculator to model take-home pay, and review common payroll mistakes before they become compliance notices.
Frequently Asked Questions
No. Income tax is the annual liability on total income. TDS is how employers collect that liability at source throughout the year. Excess TDS comes back as a refund after filing ITR.
Section 201 makes the employer an “assessee in default.” Interest at 1% per month on the undeducted amount (1.5% if deducted but not deposited). Prosecution under Section 276B can follow for repeated non-compliance.
Yes, once per financial year. Employees with no business income can switch at the time of filing their ITR. If you have business income, the switch is allowed only once in a lifetime, so talk to your CA before deciding.
31 July of the assessment year. For FY 2025-26, that means 31 July 2026. Filing after the deadline attracts a late fee of Rs.5,000 under Section 234F (Rs.1,000 if total income is below Rs.5 lakh).
For salaried individuals, effectively up to Rs.12,75,000. The Rs.75,000 standard deduction brings taxable income to Rs.12 lakh, and the Section 87A rebate of Rs.60,000 wipes tax to zero. Cross Rs.12,75,001 and the rebate vanishes entirely; no phased withdrawal.
