Individual Income Tax Computation: A Complete Guide to Rules, Rates & New Regime Slabs for AY 2026-27

This guide incorporates provisions of the Income-tax Act, 1961, as amended by the Finance Act, 2026, and covers the full framework for computing individual tax liability including slab rates, special rates, rebates, surcharge, and AMT applicability.

Residential Status: The Starting Point of Tax Computation

Before computing any tax liability, it is essential to determine the residential status of an individual, since it directly governs the scope of income that becomes chargeable to tax in India.

Under the Income-tax Act, 1961, an individual may fall into any one of the following three categories during a previous year:

• Resident in India
• Resident but Not-Ordinarily Resident (RNOR)
• Non-Resident in India (NRI)

A Resident individual is liable to pay income tax on his worldwide income, regardless of where it is earned or received. In contrast, a Non-Resident is taxed only on income that accrues, arises, or is deemed to accrue or arise in India, as well as income received or deemed to be received within Indian territory.

Where income becomes taxable both in India and in another country, the assessee may claim foreign tax credit under the applicable provisions of the Income-tax Act, 1961, or the relevant Double Taxation Avoidance Agreement (DTAA).

Step-by-Step Computation of Total Income

The foundation of tax computation lies in correctly determining the Total Income of an individual. This is done through a structured sequence of steps as outlined below:

Step 1: Compute Income Under Five Heads

All income earned by an individual is classified and computed under the following five heads as prescribed under the Income-tax Act, 1961:

1. Salary
2. House Property
3. Profits and Gains from Business or Profession
4. Capital Gains
5. Income from Other Sources

Each head carries its own set of rules for computing taxable income, allowable deductions, and exemptions.

Step 2: Apply Clubbing Provisions

Although an individual is generally taxed on income earned personally, certain provisions of the Income-tax Act, 1961 require that income belonging to or arising in the name of a spouse, minor child, or other specified persons be clubbed into the individual's own income. Where such clubbing provisions are applicable, the income of the other person must be added to the assessee's income before arriving at the total.

Step 3: Set-Off and Carry Forward of Losses

Where the assessee has suffered losses under any head, adjustments may be made in the following manner:

• Intra-head set-off: Losses from one source under a particular head may be adjusted against income from another source falling under the same head.
• Inter-head set-off: Losses under one head may, subject to restrictions, be set off against income computed under a different head.

If the losses cannot be fully absorbed in the current year due to insufficient income, eligible losses may be carried forward to subsequent assessment years in accordance with the provisions of the Act.

Step 4: Deductions Under Chapter VI-A

After completing the above adjustments, the resulting figure is termed Gross Total Income (GTI). From the GTI, various deductions available under Chapter VI-A of the Income-tax Act, 1961 are allowed in respect of specified investments, contributions, and expenditures made by the assessee.

Step 5: Arrive at Total Income

The amount remaining after deducting Chapter VI-A deductions from GTI is referred to as Total Income. This figure is then bifurcated into:

• Normal Income — taxed at applicable slab rates
• Special Income — taxed at prescribed special rates under specific sections of the Act

Tax Computation Framework

Normal Income vs. Special Income

When computing the final tax liability, the assessee's total income is first separated into normal income and special income. Normal income is chargeable at slab rates applicable for the relevant previous year, while special income attracts flat rates as specifically prescribed under various sections of the Income-tax Act, 1961.

An individual becomes liable to pay tax on normal income only when it exceeds the maximum exemption limit applicable to his or her category.

Where the assessee opts for the New Tax Regime under Section 115BAC, the slab rates under that section apply to normal income in place of the regular rates.

Tax Rates for Individuals

Old Tax Regime — Normal Slab Rates

Under the old (existing) regime, the following income tax slabs are applicable as prescribed under the First Schedule to the Finance Act:

Note: A Super Senior Citizen is an individual aged 80 years or more at any time during the relevant previous year. A Senior Citizen is one who is 60 years or more but below 80 years on the last day of the previous year.

New Tax Regime — Section 115BAC Slab Rates

Section 115BAC of the Income-tax Act, 1961 provides an alternative tax regime with lower slab rates. However, opting for this regime requires the assessee to forgo a range of specified exemptions and deductions.

For Assessment Year 2025-26: