Taxes in India: A Beginner Guide for Salaried People
Your first salary hits your account and it’s less than what HR told you. CTC said ₹8 lakh. In-hand is ₹48,000 a month. Where did the rest go?
Taxes! PF! Professional tax! Deductions you didn’t ask for.
Most salaried Indians never learn how their salary is taxed. They see “TDS deducted” on the payslip and move on. Some panic in January when HR asks for “investment proofs.” They buy random insurance policies at the last minute, usually ULIPs or endowment plans that benefit the agent more than them.
This article covers the basics: what taxes are, how the system works, what your payslip actually means. Once you understand this, How to Save Tax as a Salaried Indian will show you how to legally keep more of what you earn.
What is tax and why do you pay it?
Tax is money the government collects from citizens and businesses to fund public services. Roads, railways, defence, schools, hospitals, subsidies, government salaries, all of it runs on tax revenue. No taxes, no infrastructure.
India collected over ₹34 lakh crore in taxes in FY 2024-25. Whether you like how it’s spent or not, paying taxes is a legal obligation. Tax planning is about making sure you pay exactly what you owe, not a rupee more or less.
Types of taxes in India
You pay taxes to two governments: Central and State. Here’s how they split:
Taxes by the Central Government
| Tax | What it is | Who pays |
|---|---|---|
| Income Tax | Tax on your salary, business income, investment gains | Individuals, businesses |
| GST (Central share) | Tax on goods and services (CGST) | Everyone who buys anything |
| Corporate Tax | Tax on company profits | Companies |
| Customs Duty | Tax on imported goods | Importers (passed to consumers) |
Taxes by the State Government
| Tax | What it is | Who pays |
|---|---|---|
| GST (State share) | Tax on goods and services (SGST) | Everyone who buys anything |
| Stamp Duty | Tax on property registration | Property buyers |
| Professional Tax | Tax on employment (₹200/month in most states) | Salaried employees |
| Road Tax | Tax on vehicles | Vehicle owners |
GST replaced a mess. Before 2017, there were separate VAT, service tax, excise duty, and other indirect taxes at state and central levels. GST merged most of them into one tax split between centre and state. When you buy something and see “18% GST” on the bill, 9% goes to the centre (CGST) and 9% to the state (SGST).
As a salaried person, the tax that matters most to you is income tax. That’s what this article focuses on.
Direct tax vs Indirect tax
Direct tax: You pay it directly to the government. Income tax is a direct tax. You earn money, you pay tax on it. The burden falls on you.
Indirect tax: Built into the price of things you buy. GST is an indirect tax. You pay it when you buy petrol, order food on Swiggy, or buy a phone. The seller collects it and sends it to the government.
Even if your income is below the tax-free limit and you pay zero income tax, you still pay indirect taxes every day. That ₹300 meal on Zomato includes 5% GST. Your ₹50,000 phone includes 18% GST. Everyone pays taxes. Income tax is just the one you can plan around.
How income tax works: tax slabs
India uses a slab-based system. You don’t pay one flat rate on your entire salary. Different portions of your income are taxed at different rates. The more you earn, the higher the rate on the top portion.
The two tax regimes
India currently has two income tax systems running in parallel. You choose one each financial year:
New Tax Regime (default): Lower tax rates, but almost no deductions or exemptions. Simple and straightforward.
Old Tax Regime: Higher tax rates, but you can claim deductions (80C, 80D, HRA, home loan interest, etc.) to reduce your taxable income.
Here are the slabs for both:
| Income slab | New Regime (FY 2026-27) | Old Regime |
|---|---|---|
| Up to ₹4 lakh | Nil | Nil (up to ₹2.5L) |
| ₹4L to ₹8L | 5% | 5% (₹2.5L-₹5L), 20% (₹5L-₹10L) |
| ₹8L to ₹12L | 10% | 20% (₹5L-₹10L), 30% (above ₹10L) |
| ₹12L to ₹16L | 15% | 30% |
| ₹16L to ₹20L | 20% | 30% |
| ₹20L to ₹24L | 25% | 30% |
| Above ₹24L | 30% | 30% |
| New Regime | Old Regime | |
|---|---|---|
| Standard deduction | ₹75,000 | ₹50,000 |
| Section 87A rebate | Taxable income up to ₹12L = zero tax | Up to ₹5L only |
| Sec 80C, 80D, HRA etc. | Not allowed (mostly) | Allowed |
| Default? | Yes | No (must opt in) |
Example (New Regime): If your taxable income is ₹14 lakh:
- First ₹4 lakh: ₹0
- Next ₹4 lakh (₹4L to ₹8L): ₹20,000
- Next ₹4 lakh (₹8L to ₹12L): ₹40,000
- Remaining ₹2 lakh (₹12L to ₹14L): ₹30,000
- Total tax: ₹90,000 (plus 4% cess)
You don’t pay 15% on the full ₹14 lakh. You pay different rates on different slices. This is how slabs work.
Big bonus: If your taxable income is ₹12 lakh or less under the new regime, you pay zero tax thanks to the Section 87A rebate. With the ₹75,000 standard deduction, that covers gross salaries up to roughly ₹12.75 lakh.
Which regime should you pick? For most salaried people, the new regime is cheaper. The old regime only wins if your total deductions (80C, HRA, home loan interest, etc.) cross ₹5 lakh or more and your salary is above ₹15 lakh. For a detailed comparison with real numbers, read New vs Old Tax Regime.
CTC vs In-hand: where your money actually goes
Your CTC (Cost to Company) is not your salary. It includes everything your company spends on you. Here’s a typical breakup for someone with ₹12 lakh CTC:
| Component | Annual | Monthly |
|---|---|---|
| Basic salary | ₹6,00,000 | ₹50,000 |
| HRA | ₹3,00,000 | ₹25,000 |
| Special allowance | ₹1,44,000 | ₹12,000 |
| Employer PF contribution | ₹21,600 | ₹1,800 |
| Insurance (company policy) | ₹15,000 | ₹1,250 |
| Gratuity provision | ₹19,400 | ₹1,617 |
| CTC | ₹12,00,000 | ₹1,00,000 |
But your take-home is less because of deductions:
- Employee PF: ₹1,800/month
- Professional tax: ₹200/month (varies by state)
- TDS (income tax): depends on your tax slab
Your actual in-hand might be around ₹55,000-60,000 on a ₹12 lakh CTC. The gap between CTC and in-hand surprises everyone in their first job.
TDS: tax deducted before you see it
Your company doesn’t hand you the full salary and ask you to pay tax later. They estimate your annual tax and deduct it monthly. This is TDS (Tax Deducted at Source).
At the start of the financial year (April), your company estimates your total income, applies the tax slabs, and divides the annual tax by 12. That amount is deducted from your salary every month.
Example: Your annual taxable income is ₹14 lakh. Tax comes to about ₹93,600 for the year (including cess). Your company deducts roughly ₹7,800 from your salary every month as TDS. You never see that money in your bank account. TDS is not an extra tax. It’s just advance payment of your regular income tax.
TDS isn’t just on salary. Banks deduct TDS on FD interest above ₹40,000/year. When you sell property, the buyer deducts TDS. Freelancers get TDS deducted by their clients. The idea is the same everywhere: tax is collected at the source of income, not later.
This is also why HR asks for “investment proofs” in January-February. If you’ve made tax-saving investments under the old regime, your taxable income is lower, so your TDS should be lower too. If you don’t submit proofs, the company deducts tax assuming you have no deductions. You’ll get the excess back as a refund when you file your ITR, but that means your money was stuck with the government for months earning nothing.
The bottom line
What’s next?
If you’ve been following the beginner series from the start, you now have the full foundation: why personal finance matters, building an emergency fund, getting health and term insurance, budgeting, the power of compounding, where to invest, how stocks work, mutual fund basics, and now taxes.
That’s 10 articles covering everything a beginner needs to protect their money, grow it, and understand the system around it. You know more than most Indians ever learn about personal finance.
From here, it’s about going deeper into the areas that matter to you. How to actually save tax using Sec 80C, 80D, and HRA. Which mutual fund type suits your goals. Direct vs regular plans. SIP vs lump sum. New vs old tax regime with real calculations. Those articles are continuously being added and updated, organized by category so you can pick what’s relevant to you.
The foundation is set. Now build on it.
Got questions, feedback, or a topic you want covered? Write to me at paisapath.feedback@gmail.com.