How Your Salary Is Taxed in India: CTC vs In-Hand, Explained

Your in-hand salary is what remains after your employer deducts provident fund, professional tax and income tax from your gross pay. In FY 2026-27, a salaried person pays zero income tax up to ₹12.75 lakh under the new tax regime (₹12 lakh rebate + ₹75,000 standard deduction). Your CTC also includes employer costs — PF, gratuity, insurance — that never reach you.

Your offer letter says ₹10,00,000. Your bank account receives about ₹76,700 a month. Where did the rest go? This question confuses almost every first jobber in India, and the answer sits at the intersection of three things: what your CTC actually contains, how income tax is calculated on salary, and what gets deducted before the money reaches you. Let us walk the entire journey, line by line, using FY 2026-27 rules.

The journey of your salary: CTC → Gross → Net

Think of your salary as a river with three checkpoints: (1) CTC (Cost to Company): everything your employer spends on you — the headline number on the offer letter. (2) Gross salary: what you have actually earned before deductions — CTC minus the employer's costs. (3) Net or in-hand salary: what lands in your bank account — gross salary minus your deductions and tax. Most people only watch the first and the last number. The money "disappears" in the two gaps between them. Both gaps are perfectly legal, and once you can name each line, your payslip stops being a mystery.

What's inside your CTC (and what never reaches you)

CTC is your employer's total bill, not your income. Alongside the parts you receive — basic salary, HRA, special allowance, bonuses — it contains components paid to someone other than you: Employer PF contribution: 12% of your basic salary, deposited into your EPF account. It is your money eventually, but it never touches your hand today. Gratuity accrual: about 4.81% of your basic salary, set aside each month. This is only paid out after you complete five years of continuous service with the same employer — leave earlier and you never see it. EDLI and PF admin charges: small statutory charges on the employer's side. Group insurance premiums: health and life cover bought in your name by the company. These typically add up to 5–12% of CTC. So a ₹10 lakh CTC usually starts with a gross salary closer to ₹9.4–9.5 lakh before a single deduction from your side. None of this is a scam — but nobody explains it at offer-letter time.

The four deductions between gross salary and your hand

Once gross salary is fixed, four deductions apply: (1) Employee PF (12% of basic): your own retirement contribution, deducted every month. Tax-free on the way in and mostly tax-free on exit. (2) Professional tax: a state-level tax on salaried individuals. It is not levied in every state, but where it applies it is typically capped around ₹2,500 a year. (3) Income tax (TDS): withheld monthly by your employer based on your projected annual income and the tax regime you declared. (4) Other employer-specific deductions: voluntary NPS contributions, meal-card recoveries, or labour welfare fund in some states. Your in-hand is simply: gross salary minus all of these. Now the big question — how is the income-tax part actually computed?

How income tax is calculated on your salary in FY 2026-27

India gives every salaried taxpayer two tax regimes. The new regime is the default unless you actively opt for the old one, and the Union Budget 2026 changed neither regime's slabs for FY 2026-27. New regime slabs (FY 2026-27), same for everyone: Up to ₹4,00,000 — Nil ₹4,00,001 to ₹8,00,000 — 5% ₹8,00,001 to ₹12,00,000 — 10% ₹12,00,001 to ₹16,00,000 — 15% ₹16,00,001 to ₹20,00,000 — 20% ₹20,00,001 to ₹24,00,000 — 25% Above ₹24,00,000 — 30% Then two reliefs apply, in this order. First, the standard deduction of ₹75,000 for salaried individuals reduces your taxable salary. Second, the Section 87A rebate of up to ₹60,000 wipes out the entire tax bill if your taxable income is ₹12 lakh or less. The result: a salaried person earning up to ₹12,75,000 pays zero income tax. Add the 4% health and education cess only if tax is payable. The old regime is unchanged too — basic exemption ₹2.5 lakh for those below 60 (₹3 lakh for 60–80, ₹5 lakh above 80), a smaller standard deduction of ₹50,000, and its own 87A rebate that ends at ₹5 lakh of income with a hard cliff (no smoothing). Our old-vs-new-regime guide covers the break-even math in detail.

The ₹12.75 lakh zero-tax rule, worked step by step

Watch how the numbers flow for a ₹12,75,000 annual salary under the new regime: Gross salary: ₹12,75,000. Less standard deduction: ₹75,000 → taxable income: ₹12,00,000. Slab tax on ₹12,00,000: ₹60,000. Less 87A rebate: ₹60,000 → tax payable: Nil. This is not an exemption on the first ₹12.75 lakh — it is a salary figure that lands exactly on the rebate threshold after the standard deduction. If your salary is ₹12,76,000, you do not suddenly owe ₹60,000. Marginal relief caps the tax at the amount by which your income exceeds ₹12 lakh, so the bill rises gradually and only becomes the normal slab calculation around ₹12.75 lakh of taxable income.

The awkward salary: what ₹13 lakh actually pays

The most misunderstood salary in India right now is ₹13 lakh, because it sits just above the zero-tax line. A worked illustration published this September (Tax Garden's FY 2026-27 analysis) shows the mechanics: Taxable income after the ₹75,000 standard deduction: ₹12,25,000. Normal slab tax: ₹63,750. Marginal relief caps it at the excess over ₹12 lakh: ₹25,000. Plus 4% cess: ₹26,000 total. So ₹13 lakh pays ₹26,000 — slightly more than the ₹25,000 by which it exceeds the zero-tax salary. And here is the fix worth knowing: employer NPS contributions (up to 14% of basic, tax-free even in the new regime) reduce taxable income directly. Routing ₹25,000 of pay into employer NPS would take this salary back to zero tax. Figures are illustrative — your exact number depends on your basic pay and regime declaration.

TDS vs actual tax: what Form 16 really tells you

Three documents, three different jobs: Your monthly payslip shows TDS — tax your employer withholds as an advance estimate based on your declared regime. Form 16 (issued around May–June) is your employer's annual certificate: salary paid, regime used, tax deducted. It is the starting point for your return, not the final word. Your ITR computes the actual tax. If TDS deducted exceeds your real liability, the difference comes back as a refund. This is also why the regime declaration matters: if you never told your employer which regime to use, TDS runs on the default new regime. Declare your choice (and investment declarations under the old regime) at the start of the financial year, or the first payslip of April will already be wrong.

One worked payslip: the ₹10 lakh CTC, end to end

An illustrative walkthrough, rounded for clarity: Annual CTC: ₹10,00,000. Less employer PF (12% of the ₹15,000 wage ceiling × 12): ₹21,600. Less gratuity accrual (4.81% of a ₹5 lakh basic): ₹24,050. Less group insurance: ₹10,000. Gross salary: ≈ ₹9,44,350. Less employee PF: ₹21,600; less professional tax: ₹2,500. Income tax (new regime): nil — taxable salary after the ₹75,000 standard deduction is below ₹12 lakh. In-hand: ≈ ₹9,20,250 a year, or about ₹76,700 a month. Notice the two big leaks: employer costs before you, and your own PF after you. Both are savings in disguise — the EPF earns interest and is largely tax-free — but they are the reason "₹10 lakh" never meant "₹83,000 a month".

This article is for educational purposes only and is not financial advice. Please consult a SEBI-registered investment adviser for personalized guidance. Investments are subject to market risk.