Computing an Individual's Tax Under the Income-tax Act, 1961 as Amended by the Finance Act, 2026

This article sets out the building blocks of an individual's tax computation under the Income-tax Act, 1961 as amended by the Finance Act, 2026: the old and new regimes, slab rates for AY 2025-26 and AY 2026-27, special rates, rebate under Section 87A, alternative minimum tax, surcharge and cess.

It matters because the new regime under Section 115BAC is now the default, so each client's regime choice, the loss and deduction consequences of that choice, and the rate that applies to each class of income have to be checked before advance tax and return filing.

Part 1: Situation by Situation

Situation 1: Residential status decides the base

Residential status is one of three: resident; resident but not ordinarily resident; non-resident. A resident is taxable in India on global income. A non-resident is taxable only on income that accrues, arises or is deemed to accrue or arise in India, and on income received or deemed to be received in India. Where income is taxed in India and abroad, foreign tax credit is available.

Situation 2: Heads, clubbing and losses

Income falls under five heads: salary; income from house property; profits and gains of business or profession; capital gains; and income from other sources. Income of other persons may be clubbed with the individual's where the clubbing provisions apply.

Losses are set off first within the head and then against other heads. Some unabsorbed losses are carried forward to later assessment years. In the new regime, a house property loss cannot be set off against income under other heads.

Situation 3: From gross total income to tax

Gross total income less Chapter VI-A deductions gives total income. Total income is split into:

  • normal income, taxed at slab rates, or at the rates under Section 115BAC if the new regime applies; and
  • special income, taxed at special rates.

Tax on normal income arises only above the basic exemption limit.

The sequence from there is as follows:

  1. Take the higher of the normal tax and the alternative minimum tax (AMT).
  2. Deduct tax deferred on the ESOP perquisite of eligible start-ups.
  3. Deduct AMT credit, relief under Section 89 and foreign tax credit under Section 90, Section 90A or Section 91.
  4. Add interest under Section 234A, Section 234B and Section 234C, and the fee under Section 234F.
  5. Deduct TDS, TCS, advance tax and self-assessment tax.

Situation 4: AMT

AMT applies to non-corporate assessees who claim Chapter VI-A Part C deductions (other than Section 80P), or deductions under Section 10AA or Section 35AD. It is payable where adjusted total income exceeds Rs. 20 lakh and the normal tax is less than 18.5% of adjusted total income (9% for a unit in an International Financial Services Centre).

Part 2: Slab Rates