How CTC Is Taxed: A Step-by-Step Guide to Calculating Tax on Your CTC (FY 2025-26)
Your Cost to Company (CTC) is the number your employer quotes — but it is not the number you're taxed on, and it's certainly not what lands in your bank account. Between CTC and your final tax bill sit employer contributions, exemptions, the standard deduction, tax slabs, the Section 87A rebate, and TDS. This guide walks through exactly how CTC is taxed, step by step, for FY 2025-26 (AY 2026-27), with a fully-worked example so you can follow the same arithmetic on your own salary. To skip the maths, run your numbers through our CTC calculator.
Quick note: Figures below use the new tax regime (the default under Section 115BAC) unless stated. The Union Budget 2026 made no changes to these slabs or the rebate, so this also applies to FY 2026-27.
Key Takeaways
- Your entire CTC is not taxable. Employer PF, gratuity, and eligible exemptions/deductions are stripped out before tax is computed.
- The chain is always the same: CTC → gross salary → taxable income → tax on slabs → rebate → cess → TDS.
- In the new regime, the ₹75,000 standard deduction plus the ₹60,000 Section 87A rebate make salaried income up to ₹12.75 lakh completely tax-free.
- The old regime (unchanged) lets you subtract HRA, 80C, 80D and home-loan interest, but has a lower ₹50,000 standard deduction and a ₹2.5 lakh exemption.
- Your computed tax is collected monthly by your employer as TDS under Section 192 — reflected in Form 16.
- The only reliable way to get your exact figure is to run your CTC through a calculator.
Step 1 — Understand What in Your CTC Is Actually Taxable
CTC is the total cost your employer bears. Several parts never reach your taxable salary:
| CTC component | Treatment |
|---|---|
| Basic salary | Fully taxable |
| Dearness allowance (DA) | Fully taxable |
| HRA | Partially exempt (old regime) under Section 10(13A); fully taxable in new regime |
| Special / other allowances | Fully taxable |
| Employer EPF contribution (12% of basic, ₹15k wage ceiling) | Not taxed on receipt (within limits) |
| Gratuity provision | Not currently taxable |
| Employer NPS 80CCD(2) | Deductible in both regimes (up to 14% of basic, new regime) |
New Labour Codes update (21 Nov 2025): basic + DA must now be at least 50% of CTC. Because basic and DA are fully taxable, a higher basic generally raises your taxable salary while also increasing your EPF and gratuity.
For a deeper breakdown of every CTC element, see our Understanding CTC: components explained guide.
Step 2 — Get From CTC to Gross Salary
Subtract the employer's own contributions (they're a cost to the company, not income in your hand):
Gross salary = CTC − employer EPF − gratuity provision − any other employer-only costs.
Gross salary is what appears on your payslip before deductions. For the full CTC-to-hand journey, read our CTC to in-hand salary guide.
Step 3 — Arrive at Taxable Income
From gross salary, subtract the deductions your chosen regime allows:
- New regime: subtract the ₹75,000 standard deduction (Section 16) and employer NPS (80CCD(2)). That's essentially it — no HRA, no 80C.
- Old regime: subtract the ₹50,000 standard deduction, HRA exemption, professional tax (max ₹2,500/yr), 80C (up to ₹1.5 lakh), 80D, home-loan interest (up to ₹2 lakh), and more. See our Section 80C, 80D & other deductions guide.
The result is your taxable income — the figure the slabs actually apply to.
Step 4 — Apply the FY 2025-26 Tax Slabs
New Tax Regime (default — Section 115BAC)
| Taxable income | Tax rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Old Tax Regime (unchanged)
| Taxable income | Tax rate |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 – ₹5,00,000 | 5% |
| ₹5,00,001 – ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Not sure which slabs apply to you? Compare both side by side with our regime tax calculator or view the tax comparison chart.
Step 5 — Apply the Section 87A Rebate, Then Add Cess
- New regime: if taxable income is ≤ ₹12 lakh, a Section 87A rebate of up to ₹60,000 cancels the tax entirely — you pay ₹0.
- Old regime: the ₹12,500 rebate makes income up to ₹5 lakh tax-free.
- On whatever tax remains, add 4% health & education cess.
- Just above ₹12 lakh, marginal relief ensures your extra tax never exceeds your extra income — there's no sudden cliff.
Step 6 — Your Employer Collects It as TDS
Your final annual tax isn't paid in one lump. Under Section 192, your employer estimates it, divides by 12, and deducts TDS from each month's salary. This is why your monthly take-home is lower than (gross ÷ 12), and it's all reconciled in your Form 16. To see your monthly figure, use the in-hand salary calculator or read Calculate in-hand salary from CTC.
Worked Example: How a ₹15,00,000 CTC Is Taxed (New Regime, FY 2025-26)
Assume basic + DA = 50% of CTC (per the new Labour Codes), HRA and special allowance make up the rest, and the employer contributes 12% of basic to EPF.
| Step | Component | Amount (₹) |
|---|---|---|
| CTC | Total cost to company | 15,00,000 |
| − | Employer EPF (12% of ₹7,50,000 basic) | 90,000 |
| = | Gross salary | 14,10,000 |
| − | Standard deduction (Section 16) | 75,000 |
| = | Taxable income | 13,35,000 |
| Tax on slabs: | ||
| ₹0–4L @ Nil | 0 | |
| ₹4L–8L @ 5% | 20,000 | |
| ₹8L–12L @ 10% | 40,000 | |
| ₹12L–13.35L @ 15% (on ₹1,35,000) | 20,250 | |
| = | Tax before rebate | 80,250 |
| − | Section 87A rebate (income > ₹12L → not eligible) | 0 |
| + | Health & education cess @ 4% | 3,210 |
| = | Total annual tax | ₹83,460 |
| Monthly TDS (÷ 12) | ≈ ₹6,955 | |
Note the leap from a ₹12.75 lakh salary (₹0 tax) to a ₹15 lakh CTC (₹83,460): once taxable income crosses ₹12 lakh, the rebate is lost and the 15% band kicks in. This is exactly why the CTC → taxable-income step matters so much.
Common Mistakes to Avoid
- Treating the entire CTC as taxable — employer EPF, gratuity, and exemptions come out first.
- Using the ₹50,000 standard deduction in the new regime — it's now ₹75,000 there.
- Claiming 80C or HRA in the new regime — those deductions simply don't exist in it.
- Forgetting the Section 87A rebate and over-estimating tax below ₹12 lakh.
- Ignoring the 4% cess — it applies on top of the computed tax.
- Assuming take-home = gross ÷ 12 — TDS and your own EPF share reduce it further.
Expert Tips
- If your salary is at or below ₹12.75 lakh and you're salaried, stay on the new regime and take the zero tax — no 80C gymnastics needed.
- A higher basic (now ≥50% of CTC under the Labour Codes) means more EPF and gratuity — good for retirement, but it also lifts your taxable salary. Model both.
- Employer NPS (80CCD(2)) is deductible in both regimes — a rare way to cut taxable income even on the new regime.
- If you have a home loan plus high rent, compute the old regime too; its deductions may still win. Explore your options with our tax planning tools.
- Always finish by running your actual CTC through a calculator before trusting any manual estimate.
Frequently Asked Questions
Is my entire CTC taxable?
No. Employer contributions (EPF, gratuity) and eligible exemptions and deductions are removed first. You're taxed only on your taxable income, which is typically well below your CTC.
How is tax calculated on CTC step by step?
CTC → subtract employer contributions to get gross salary → subtract the standard deduction and any exemptions/deductions to get taxable income → apply the slabs → apply the Section 87A rebate → add 4% cess → the result is collected monthly as TDS.
How much CTC is tax-free in FY 2025-26?
For a salaried person on the new regime, up to about ₹12.75 lakh of salary can be tax-free — the ₹75,000 standard deduction brings taxable income to ₹12 lakh, and the ₹60,000 Section 87A rebate wipes out the tax.
What is the standard deduction for FY 2025-26?
₹75,000 in the new regime and ₹50,000 in the old regime, available to salaried individuals and pensioners under Section 16.
Why is my take-home less than my CTC divided by 12?
Because CTC includes employer costs (EPF, gratuity) you never receive as cash, and your monthly salary is further reduced by your own EPF contribution and TDS (Section 192).
Which regime should I use to calculate tax on my CTC?
The new regime is the default. It usually wins for modest deductions; the old regime pulls ahead only with large deductions (home loan + high rent + maxed 80C/80D). Compute both to be sure — see our old vs new tax regime comparison.
How is TDS on salary decided?
Your employer estimates your annual tax under your chosen regime, divides it across the remaining months, and deducts it as TDS under Section 192 — reconciled in your Form 16.
Summary
Your CTC is a headline number, not a tax base. The tax you actually pay comes from a clear chain — CTC → gross → taxable income → slab tax → rebate → cess → TDS. For FY 2025-26, the new regime's ₹75,000 standard deduction and ₹60,000 rebate make salaried income up to ₹12.75 lakh tax-free, while the old regime still rewards those with big deductions. Don't estimate blindly: run your CTC through the calculator to see your exact taxable income, tax, and take-home.
Ready to see your number? Use our free tools to compute your tax and take-home pay from CTC in seconds.
Figures are for FY 2025-26 (AY 2026-27) and reflect rules in effect as of July 2026. Tax outcomes vary by individual circumstances — verify with a qualified tax professional before acting.