Tax calculations: Taxable income vs gross income vs net income - know how to calculate your actual tax outgo

Tax calculation: In Budget 2025, the Finance Minister announced that no income tax is payable up to an annual income of Rs 12 lakh, providing a tax rebate for individuals earning up to this amount. The tax slabs for different income brackets have been updated, with those earning between Rs 4-7 lakh now required to pay 5% tax, those earning between Rs 8-12 lakh required to pay 10% tax, and those earning between Rs 12-16 lakh required to pay 15% tax.

Amid these changes, discussions on social media are focused on understanding the distinctions between gross income, taxable income, and actual tax liability.

In the realm of income tax in India, it is essential to grasp the distinction between gross income and total income. Here, we offer a brief overview of your gross income and taxable income:

Gross Income: Your total gross income encompasses all earnings from various sources before any deductions or exemptions are applied. Another way to interpret gross income is as the sum of all your earnings from different sources before any adjustments are made. It is essentially the total amount you earn before any taxes are levied.

Possible sources of income may include:

Salary or wages earned through employment
Pension income
Profit from selling assets (capital gains)
Rental payments from tenants
Business earnings
Dividend or investment income
Inheritance or gifts.

Gross salary: Gross salary pertains to the total amount earned by an employee prior to any deductions or taxes being subtracted. This comprises of basic salary, house rent allowance (HRA), additional allowances, and any bonuses. The formula to calculate gross salary is as stated below:

Gross salary = Basic salary + HRA + Other allowances + Additional earnings.

Taxable income: Taxable income is the total gross income of an individual after accounting for any allowable deductions or exemptions for that year. To calculate your taxable income, you need to first determine your gross total income from all sources and then subtract any deductions or exemptions for which you qualify.

The Income Tax Act offers various deductions and exemptions that may vary based on your investments, expenses, and other specific tax regulations.

Calculating income tax on gross salary

The government determines tax rates based on various income brackets. To calculate income tax, use the formula: 

Gross Salary - Deductions = Taxable Income; 
Income Tax = (Taxable Income x Applicable Tax Rate) - Tax Rebate.

For the fiscal year 2024–2025, the exemption threshold for income tax is up to Rs 2.5 lakh for all individuals, Hindu Undivided Families (HUFs), individuals under 60 years of age, and Non-Resident Indians (NRIs).

For the fiscal year 2024–2025, the exemption threshold for income tax is up to Rs.2.5 lakh for all individuals, Hindu Undivided Families (HUFs), individuals under 60 years of age, and Non-Resident Indians (NRIs).

Old Tax Regime vs New Tax Regime

The better option between the two income tax slabs depends on your annual income and the benefits you may receive. It is crucial to thoroughly research before selecting the income tax slab that best suits your financial situation.

Default tax regime

The default tax regime for taxpayers is the new tax regime that was implemented as of FY 2020-21 starting from April 1, 2020. Initially, when the new tax regime was introduced, it was optional for taxpayers who had to make a specific choice to opt for it.

As of April 1, 2023, the new tax regime has become the default option, requiring individuals to consciously choose the old tax regime if they wish to avail of tax exemptions and deductions under that system.