Tax Slabs: Understanding how your income tax is calculated

The next time someone mentions tax slabs in the Budget, you’ll know exactly why they matter.

What are tax slabs, and how do they work?
Tax slabs are the brackets under which your income is taxed at increasing rates as you earn more. With the introduction of the new tax regime, these slabs have become more liberal compared to the old regime, but the new regime does not allow for deductions like Section 80C. The term "slab" refers to a progressive tax system where those earning lower incomes are taxed at a lower rate, while higher income earners fall under a higher tax rate.

In India, the government defines these tax slabs in the Union Budget. These slabs apply to individuals, Hindu Undivided Families (HUFs), and associations, and are updated periodically to reflect changing economic realities or provide relief to taxpayers. Taxpayers need to weigh the benefits of the new regime’s lower tax rates against the old regime’s deductions and exemptions to decide which suits their financial profile better.

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How do tax slabs impact your salary?

Determines your tax liability:
Let’s say your annual income is Rs 12 lakh. Under the tax slab system, only a portion of your income is taxed at higher rates. For example:
The first Rs 2.5 lakh is tax-free.
The next Rs 2.5 lakh (up to Rs 5 lakh) is taxed at 5 percent.
The remaining income is taxed progressively at 10 percent, 20 percent, or 30 percent based on the slabs for that year.
Note: This is just an example to explain how tax slabs work. The actual tax slabs may vary, so it is essential to check the latest updates in the Union Budget.

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Affects tax-saving strategies:
Knowing which slab you fall into helps you plan investments in tax-saving schemes such as the Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), or Section 80C deductions under the old tax regime. The new tax regime, while offering more liberal slabs, does not allow most deductions. This could influence your choice of regime, as tax-saving schemes can reduce your taxable income and maximise your take-home pay in the old regime.

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Why are tax slabs important?

Tax slabs reflect a progressive tax system, meaning those who earn more contribute more in taxes. Under the old tax regime, this progression was accompanied by various deductions and exemptions, offering opportunities for tax savings. However, the new tax regime introduces more liberal slabs with lower rates but eliminates most deductions, requiring taxpayers to carefully evaluate which system benefits them more. This approach aims to reduce income inequality and generate resources for public welfare schemes. For individuals, the tax slab system ensures that lower-income earners don’t bear a disproportionate tax burden, while higher earners contribute their fair share.

How often do tax slabs change?
Tax slabs are usually revised during the Union Budget presentation, based on the government’s economic objectives. For instance, in some years, tax rebates or new slabs are introduced to ease the burden on middle-class taxpayers or incentivise spending. Keeping an eye on these changes ensures you’re always aligned with current tax policies.

What to check in the next Budget?
Pay attention to updates in tax slabs, rebates for lower-income groups, or changes in the surcharge for high earners. Also, assess whether the new tax regime, with its more liberal slabs but lack of deductions, or the old regime, with deductions, suits your financial profile better. These updates can directly affect your take-home pay and tax-planning strategy.
Understanding tax slabs helps you navigate your finances smarter, ensuring you pay the right amount of tax while optimising your savings. The next time someone mentions tax slabs in the Budget, you’ll know exactly why they matter.