How to Save Income Tax for a Salaried Person in India (FY 2025-26)
Introduction
Every salaried individual in India wants to maximize take-home salary while minimizing tax liability-and rightly so. The Indian Income Tax Act offers numerous legal and efficient ways to save tax. Whether you are a first-time employee or a senior executive, understanding the available deductions, exemptions, and smart structuring of your income can help you save thousands (even lakhs) every year.
This detailed guide explains how to save income tax for salaried employees in India for FY 2025-26, covering all major sections-80C, 80D, HRA, NPS, LTA, and more.
Step 1: Choose the Right Tax Regime (Old vs New)
Since FY 2023-24, India has two parallel tax regimes:
New Tax Regime (Default)
The new regime offers lower slab rates but fewer deductions. It’s simple and clean-ideal for those who do not have large deductions or investments.
|
Income Slab (₹) |
Tax Rate |
|
Up to ₹3 lakh |
Nil |
|
₹3 lakh - ₹6 lakh |
5% |
|
₹6 lakh - ₹9 lakh |
10% |
|
₹9 lakh - ₹12 lakh |
15% |
|
₹12 lakh - ₹15 lakh |
20% |
|
Above ₹15 lakh |
30% |
Standard Deduction: ₹75,000 (for salaried employees & pensioners).
Who should choose it?
Employees with limited deductions or those who prefer simplicity in filing.
Old Tax Regime
The old regime allows you to claim multiple exemptions and deductions (HRA, 80C, 80D, etc.).
|
Income Slab (₹) |
Tax Rate |
|
Up to ₹2.5 lakh |
Nil |
|
₹2.5 lakh - ₹5 lakh |
5% |
|
₹5 lakh - ₹10 lakh |
20% |
|
Above ₹10 lakh |
30% |
Who should
choose it?
Employees who invest in tax-saving instruments or pay rent, home-loan EMIs, or
insurance premiums.
Pro Tip: Compare both regimes annually using your Form 16 or salary slip before filing ITR.
Step 2: Maximize Section 80C (₹1.5 Lakh Limit)
Section 80C is the cornerstone of tax saving in India. It allows deductions up to ₹1.5 lakh every year.
Popular 80C Instruments:
|
Investment |
Lock-in |
Typical Return |
Risk Level |
|
Employee Provident Fund (EPF) |
Till retirement |
8-8.5% |
Low |
|
Public Provident Fund (PPF) |
15 years |
7-8% |
Very Low |
|
Equity Linked Savings Scheme (ELSS) |
3 years |
Market-linked |
Medium |
|
National Savings Certificate (NSC) |
5 years |
7-7.5% |
Low |
|
Life Insurance Premiums |
5-10 years |
Varies |
Low |
|
Principal repayment of Home Loan |
As per loan |
NA |
NA |
|
Tuition Fees for 2 children |
Annual |
NA |
NA |
Expert Tip:
Diversify within 80C - for example, ₹75,000 in ELSS + ₹50,000 in PPF + ₹25,000
in life insurance ensures growth + safety + compliance.
Step 3: Additional ₹50,000 Deduction under NPS (80CCD 1B)
After exhausting 80C, you can save an extra ₹50,000 via the National Pension System (NPS).
- Section 80CCD(1B) offers additional deduction.
- You can open an NPS account through any bank or NSDL.
- Choose between Active or Auto investment choice in equity, government, or corporate bonds.
- Employer’s contribution (up to 10-14% of basic + DA) is also deductible under Section 80CCD(2).
Why NPS?
It not only reduces your tax today but also helps build a retirement corpus
with compounding growth.
Step 4: Claim HRA (House Rent Allowance) Exemption
If you live in a rented house and receive HRA, claim exemption under Section 10(13A).
Formula for HRA Exemption:
Lowest of the following three:
- Actual HRA received,
- 50% of salary (for metro cities) / 40% (for non-metro),
- Rent paid - 10% of salary.
Required Documents: Rent receipts, landlord’s PAN (if rent > ₹1 lakh/year).
If you don’t get HRA but still pay rent, claim deduction under Section 80GG (max ₹60,000 per year).
Step 5: Save via Health Insurance (Section 80D)
|
Category |
Deduction Limit |
|
Self, Spouse, Children |
₹25,000 |
|
Parents (Below 60 years) |
₹25,000 |
|
Parents (Above 60 years) |
₹50,000 |
Preventive health check-up expenses up to ₹5,000 are included in the above limit.
Tip: Buy family floater plans or top-up policies early to enjoy coverage + tax benefits.
Step 6: Education Loan Interest (Section 80E)
If you’re paying for your own or your children’s higher education, you can claim 100% deduction on interest paid on the education loan (no limit).
- Loan must be from a bank or approved financial institution.
- Deduction available for 8 years from the start of repayment.
Step 7: Home Loan Interest (Section 24(b))
You can claim up to ₹2 lakh per year as a deduction on home loan interest for a self-occupied property.
- If the property is rented, there’s no upper limit, though loss set-off is capped at ₹2 lakh.
- Additional ₹1.5 lakh (u/s 80EEA) for affordable housing loans sanctioned before FY 2024-25.
Documents: Interest certificate from lender, possession certificate, and loan sanction letter.
Step 8: Leave Travel Allowance (LTA)
LTA covers travel expenses (not hotel/food) for vacations within India.
- Exemption allowed twice in a block of 4 years (e.g., 2022-2025).
- Only actual travel tickets are exempt.
Tip: Use LTA smartly by planning one trip every alternate year with your family.
Step 9: Salary Structuring and Allowances
Many companies allow you to customize your CTC.
Common tax-friendly allowances include:
- Meal coupons (up to ₹50 per meal exempt)
- Internet/mobile reimbursement
- Books/periodicals allowance
- Uniform or conveyance allowance
- Children education allowance (₹100 p.m. per child)
Smart move: Replace fully taxable components like “special allowance” with such exempt ones where possible.
Step 10: Donations and Charity (Section 80G)
Donations to eligible funds or charitable institutions are eligible for deduction (50% or 100%).
Examples: PM Relief Fund, CM Relief Fund, National Defence Fund.
Keep receipts showing PAN & registration number of the institution.
Step 11: Tax-Free Perquisites from Employer
Certain perks are non-taxable or partially taxable:
- Employer contribution to EPF (up to 12%)
- Gratuity (within limit)
- Leave encashment (at retirement)
- Food coupons
- Laptop/mobile provided for office work
Optimizing perquisites ensures higher in-hand salary without increasing tax burden.
Step 12: Adjust TDS and File ITR on Time
Before 31 July (or extended date), file your Income Tax Return:
- Reconcile TDS from Form 16, Form 26AS, and AIS.
- Declare all income (salary, interest, capital gains).
- Choose correct regime & claim deductions.
Avoid late filing-it incurs ₹5,000 penalty and delays refund.
Step 13: Avoid Common Mistakes
- Forgetting to declare interest income from savings accounts or FDs (taxable under “Income from Other Sources”).
- Missing rent receipts or failing to submit landlord’s PAN.
- Not informing employer about deductions-leading to higher TDS.
- Investing in wrong products just for tax saving (without evaluating returns).
- Failing to choose the correct tax regime in time.
Example: Tax Saving Calculation
|
Particulars |
Amount (₹) |
Section |
|
PPF + ELSS + LIC |
1,50,000 |
80C |
|
NPS (Additional) |
50,000 |
80CCD(1B) |
|
Health Insurance |
25,000 |
80D |
|
Home Loan Interest |
2,00,000 |
24(b) |
|
HRA Exemption |
1,20,000 |
10(13A) |
|
Total Tax-Saving |
₹5,45,000 |
With this strategy, a salaried employee earning ₹12 lakh annually can save ₹1 lakh+ in tax legally.
Step 14: Plan Investments alongside Financial Goals
Tax saving should never be random. Link it to your financial objectives:
|
Goal |
Suggested Investment |
Tax Section |
|
Long-term wealth |
ELSS, NPS, PPF |
80C / 80CCD |
|
Child’s education |
Sukanya Samriddhi, PPF |
80C |
|
Retirement corpus |
NPS, EPF |
80C / 80CCD |
|
Emergency cover |
Health Insurance |
80D |
This way, your tax planning also builds your future.
Step 15: Salary Restructuring Example
Before:
Basic ₹60,000 + Special Allowance ₹40,000 = ₹1 lakh/month
After Structuring:
|
Component |
Monthly (₹) |
Tax Impact |
|
Basic Salary |
45,000 |
Taxable |
|
HRA |
25,000 |
Partly Exempt |
|
Meal Coupons |
3,000 |
Exempt |
|
Mobile/Internet |
2,000 |
Exempt |
|
Education Allowance |
400 |
Partly Exempt |
|
Special Allowance |
24,600 |
Taxable |
|
Total |
1,00,000 |
Lower Effective Tax |
Result: Improved take-home pay without changing gross salary.
Step 16: For High-Income Earners
For individuals with income above ₹15 lakh:
- Invest in ELSS + NPS + Health Insurance + Home Loan.
- Consider tax-free bonds or ULIPs for diversification.
- Review your Form 16 quarterly and re-invest if employer-deducted TDS exceeds actual liability.
Step 17: Keep Proofs and Plan Early
Maintain soft copies of:
- Investment proofs (PPF, LIC, ELSS statements)
- Rent receipts & lease agreements
- Insurance premium payment receipts
- Loan interest certificates
- Donation receipts (80G)
Submit them to your employer before TDS finalisation in January-February.
Conclusion
Saving income tax is not just about cutting liabilities-it’s about financial discipline, foresight, and smart planning. By optimally using deductions under Sections 80C, 80D, 24(b), 10(13A), and 80CCD, structuring your salary wisely, and planning investments early, every salaried person in India can significantly reduce tax outgo while growing long-term wealth.
Whether you earn ₹5 lakh or ₹25 lakh annually, the key lies in knowing the rules and using them strategically. Consult a qualified Chartered Accountant if your income includes multiple sources or foreign assets.