Standard Deduction and Cess Calculations: FY 2025-26

Calculating taxable income in India requires a structured subtraction of allowed deductions followed by the application of tax slabs, surcharges, and statutory cesses. For salaried taxpayers and pensioners, the standard deduction and the 4% Health & Education Cess are two of the most universal tax factors. This article provides a technical guide on how the standard deduction is applied under both the New and Old Tax Regimes, how the 4% cess is calculated, and how these parameters interact across different income slabs for the Assessment Year (AY) 2026-27.

1. What is the Standard Deduction?

The standard deduction is a flat deduction allowed from the gross salary income of an employee or pensioner. It is designed to offset expenses incurred during employment (such as commuting, office attire, and books) and is granted without requiring proof of expenses or bills.

Standard Deduction Limits for FY 2025-26 (AY 2026-27)

The value of the standard deduction depends on the tax regime chosen:

• New Tax Regime (Section 115BAC): The standard deduction is INR 75,000 (increased from INR 50,000 in recent budget updates).
• Old Tax Regime: The standard deduction remains INR 50,000.

Standard Deduction on Family Pension

For family pensioners (dependents receiving pension after the death of an employee):

• New Tax Regime: The deduction is capped at INR 25,000 (or 1/3rd of the pension, whichever is lower).
• Old Tax Regime: The deduction remains capped at INR 15,000 (or 1/3rd of the pension, whichever is lower).

2. The 4% Health & Education Cess

The Health & Education Cess was introduced to raise funds for government health and education initiatives. Unlike standard tax rates, which are applied directly to your taxable income, the cess is applied to the computed income tax plus surcharge (if any).

• Rate of Cess: 4%
• Calculation Formula:

Total Tax Liability = (Base Income Tax + Surcharge) * 1.04

• The cess is mandatory and applies to all tax categories (slab-rate income, capital gains, and presumptive taxation profits) under both the New and Old Regimes.

3. Step-by-Step Calculation Walkthrough

To see how these deductions and cesses work in practice, let’s calculate the tax liability for a salaried employee with a gross salary of INR 10,00,000.

Calculation under the New Tax Regime

• Gross Salary: INR 10,00,000

2. Less: Standard Deduction: INR 75,000

3. Net Taxable Income: INR 9,25,000

4. Apply New Regime Slabs:

• Up to INR 4,00,000: Nil (0%)
• INR 4,00,001 to 8,00,000: 5% of 4,00,000 = INR 20,000
• INR 8,00,001 to 9,25,000: 10% of 1,25,000 = INR 12,500

5. Base Income Tax: INR 32,500

6. Add Surcharge: Nil (Income is below INR 50 Lakhs)

7. Calculate 4% Cess: 4% of INR 32,500 = INR 1,300

8. Total Tax Payable: INR 33,800

Calculation under the Old Tax Regime

Assume the employee has no other tax deductions except the standard deduction.

• Gross Salary: INR 10,00,000

2. Less: Standard Deduction: INR 50,000

3. Net Taxable Income: INR 9,50,000

4. Apply Old Regime Slabs:

• Up to INR 2,50,000: Nil (0%)
• INR 2,50,001 to 5,00,000: 5% of 2,50,000 = INR 12,500
• INR 5,00,001 to 9,50,000: 20% of 4,50,000 = INR 90,000

5. Base Income Tax: INR 1,02,500

6. Add Surcharge: Nil

7. Calculate 4% Cess: 4% of INR 1,02,500 = INR 4,100

8. Total Tax Payable: INR 1,06,600

Under this comparison, opting for the New Tax Regime reduces the tax liability from INR 1,06,600 to INR 33,800, saving the employee INR 72,800.

4. Summary Table of Comparative Incomes

The table below demonstrates the tax payable across various gross income brackets, assuming the standard deduction is the only benefit claimed.

*Note: For the New Regime, income up to INR 7 Lakhs (taxable) receives a rebate under Section 87A, meaning a gross salary of up to INR 7.75 Lakhs is effectively tax-free due to the standard deduction.*