Introduction

To ensure optimal savings and compliance with the Income Tax Act, 2025, salaried employees in India must engage in strategic income tax planning. Tax outflow planning is encouraged for those receiving salaries given the changed tax structure and the number of available deductions.

This blog discusses actionable and legally permissible income tax-saving methods for FY 25-26 that will reduce your income tax burden in India.

Choose the Right Tax Regime

The most effective tax strategy is to understand whether you are a suitable candidate for the old tax regime or the new tax regime.

• Several deductions and exemptions are allowed in the old regime. (There is no tax on salaries up to INR 5,00,000).
• The new tax regime has a reduced tax rate but fewer deductions. No tax on salary up to INR 12,00,000.
  Comparing both based on your income and investments is recommended for effective tax planning for salaried employees in India.

Maximize Section 123 of the Income Tax Act, 2025 Deductions

Under Section 123 of the Income Tax Act, 2025 (up to INR 1,50,000), salaried employees can invest in:

• Provident Fund (PF/VPF)
• Public Provident Fund (PPF)
• Equity Linked Savings Scheme (ELSS)
• Life Insurance Premiums
• Repayment of the principal of a home loan

Utilize Section 126 of Income Tax Act, 2025, for Health Insurance

Tax deduction for medical insurance premium:

• Rs 25,000 (self and family members)
  
• An additional Rs 25,000 or Rs 50,000 for parents

In addition to a significant reduction in income tax, health insurance coverage provides financial security in times of need.

Claim House Rent Allowance (HRA)

Salaried employees in India, living in rented accommodation, have the option to claim the HRA exemption, provided that proper receipts and documentation are maintained.
The deductible amount is provided under Section 11 of the Income Tax Act, 2025. The exemption amount will be the minimum out of the following:

• The actual HRA amount received from your employer.
• 50% of basic salary plus DA for metro cities (New Delhi, Mumbai, Chennai or Kolkata) or 40% if you live in a non-metro city.
• The actual rent paid minus 10% of the basic salary + DA.

Deduction on Home Loan (Section 22 and 130/131 of Income Tax Act, 2025)

• An interest deduction of up to Rs 2 lakh is allowed under Section 22 of the Income Tax Act, 2025.
• Additional benefits under Sections 130/131, subject to conditions.

Owning a house can significantly reduce the amount of taxable income.

Invest in National Pension System (NPS)

• An additional deduction of Rs 50,000 under Section 124 read with Schedule XV of the Income Tax Act, 2025, is allowed.
• It also facilitates long-term wealth creation in terms of retirement planning. For Indian salaried employees, NPS is a very popular method for income tax planning.

Benefit from Standard Deduction

Salaried people are entitled to a standard deduction without the requirement of any paperwork. The standard deduction is Rs 75,000 under the new regime and Rs 50,000 under the old tax regime.

Structure salary in an efficient manner

 Optimize elements of salary such as:

• LTA (leave travel allowance)
• Meal coupons
• Telephone reimbursement

A tax-efficient salary structure helps in reducing the tax liability for the employee.

Claim deductions for education loan under Section 129 of the Income Tax Act, 2025

The interest paid on an education loan is fully deductible, without any upper limit for a certain period of time.

Conclusion

Smart income tax planning by salaried individuals in India is necessary for reduced tax liability and compliance. A combination of deductions, exemptions, and smart investment choices can greatly help an individual reduce their income tax liability, thereby increasing wealth accumulation.

Frequently Asked Questions

Q: What is the best way that a salaried employee in India may use to reduce their income tax liability?

The best method is to choose the correct tax regime, along with the deductions under Sections 123, 124 and 126 read with Schedule XV.

Q: Which tax regime would be more suitable for FY 2025-2026?

The amount of tax savings is dependent on your income and investments. If you can claim larger deductions, then you may opt for the old regime, but in the absence of the same, the new regime will be more effective.

Q3: How can I save tax beyond ₹ 1.5 lakh using Section 80C?

Yes, you can claim additional deductions through health insurance (126), home loan interest (Section 22) and NPS (₹50,000).

Q4: If I stay with my parents, am I eligible for HRA?

You can claim HRA, even when you live with parents, if you pay them rent, with appropriate documentation.

Q5: What kind of documentation is required for tax-saving claims?

Generally, you may be asked to present the tax receipts from your insurance policies, loan statements, rent receipts, and investment documents or documents related to your pay structure.

Written by
Prashant & Anjali
Articled Clerk