How to Save Tax on Your Salary in India (FY 2025-26)

If your employer is deducting more TDS than you expected, or your tax refund is consistently smaller than it should be, the problem is almost certainly not your salary — it is the deductions you are not claiming. Salaried employees in India have access to a wide set of legal tax-saving instruments, but most people either do not know they exist or assume they are too complicated to use. This guide walks through every major lever available for FY 2025-26, under both tax regimes.

Old regime or new regime — decide this first

Since FY 2020-21, the Income Tax Department has offered two parallel tax systems. The new tax regime has lower slab rates and a higher basic exemption — under Budget 2025 rules, income up to ₹12 lakh attracts zero tax after the Section 87A rebate, which is a meaningful benefit for lower-to-mid income earners. The trade-off is that most deductions (80C, HRA, 80D, LTA) are unavailable in the new regime.

The old tax regime keeps all deductions intact and generally favours employees who can claim ₹3.75 lakh or more in combined deductions each year — typically those with home loans, rent payments, active insurance policies, and systematic investments in ELSS or PPF. If your deductions are modest, the new regime's lower rates often work out better even without those deductions.

Section 80C — claim up to ₹1.5 lakh in deductions (old regime)

Section 80C is the single largest deduction bucket available to salaried individuals under the old regime. You can claim deductions of up to ₹1.5 lakh per year on qualifying investments and expenses combined. Most salaried employees partially fill this limit through EPF contributions automatically, but few exhaust it deliberately with additional instruments.

• ELSS mutual funds — Tax-saving mutual funds with a 3-year lock-in. The shortest lock-in period among 80C instruments, with market-linked returns.
• PPF (Public Provident Fund) — Government-backed, 15-year tenor, currently 7.1% interest. Contributions, interest, and maturity proceeds are all tax-free.
• EPF employee contribution — Already deducted automatically by your employer for most salaried employees. Counts toward the ₹1.5 lakh limit.
• NSC (National Savings Certificate) — Fixed 5-year instrument from India Post, currently 7.7% interest.
• Life insurance premiums — Premiums for qualifying life insurance policies count under 80C, subject to premium-to-sum-assured ratio rules.
• Home loan principal repayment — The principal portion of your EMI (not the interest) is deductible under 80C.
• Children's school tuition fees — Full-time education tuition fees paid to schools, colleges, or universities for up to two children qualify.
• 5-year bank tax-saving FD — Fixed deposits with a 5-year lock-in at scheduled banks qualify under 80C.

ELSS is the only 80C instrument that offers market upside. If you are in your 30s or early 40s with a reasonable risk tolerance and no immediate liquidity need, ELSS is often more efficient than PPF or NSC over a 10-year horizon — in both absolute returns and in the tax you save on the way in.

HRA exemption if you pay rent

House Rent Allowance (HRA) is a component of most salaried packages, and the exemption is one of the most underused deductions in India. The exempt portion is the lowest of three amounts: (a) actual HRA received from your employer, (b) actual rent paid minus 10% of your basic salary, or (c) 50% of basic salary if you live in a metro city (Mumbai, Delhi, Kolkata, Chennai) or 40% otherwise. You calculate this month by month using whichever amount is lowest for each month.

Many employees leave significant exemption on the table simply by not submitting rent receipts and the landlord's PAN to their employer before the February proof-submission deadline. If your annual rent payments exceed ₹1 lakh, the landlord's PAN is mandatory — without it, your employer cannot credit the exemption.

Paying rent to your parents counts — with conditions

You can claim HRA exemption by paying rent to your parents, provided the payment is genuine and regular, your parents include it as rental income in their own ITR, and a formal rent agreement exists. You cannot claim HRA on rent paid to a spouse. This arrangement is entirely legal, used by millions of employees, and particularly efficient when your parents are in a lower tax bracket than you.

Section 80D — deduct your health insurance premium

Health insurance premiums paid for yourself, your spouse, and your children are deductible under Section 80D. The limits stack separately for self-and-family and for parents:

• ₹25,000 — Self, spouse, and dependent children (all below age 60).
• ₹50,000 — If you or your spouse is a senior citizen (age 60+).
• Additional ₹25,000 — For premiums paid for your parents if they are below 60.
• Additional ₹50,000 — For premiums paid for your parents if they are senior citizens.
• Maximum combined: ₹1 lakh — when both you and your parents are senior citizens.

Preventive health check-ups are also deductible under 80D up to ₹5,000 within the overall ceiling. Keep all premium receipts. Cash payments above ₹2,000 are ineligible.

Other deductions salaried employees routinely miss

• Section 80CCD(1B) — Additional NPS contribution: You can claim an extra ₹50,000 deduction for voluntary contributions to the National Pension System, completely outside the ₹1.5 lakh 80C ceiling. This stacks on top of 80C, giving you up to ₹2 lakh in combined deductions from these two sections alone.
• Section 80E — Education loan interest: If you took a loan for higher education — for yourself, your spouse, or your children — the entire interest paid is deductible with no upper cap, for up to 8 years from the year repayment begins.
• Section 80TTA — Savings account interest: Interest earned in a savings bank account up to ₹10,000 per year is deductible. Senior citizens get ₹50,000 under 80TTB, which also covers FD interest.
• Leave Travel Allowance (LTA): If your employer provides an LTA component, actual domestic travel costs (air, rail, or bus — shortest route only, not hotels or food) are exempt twice per 4-year block.
• Standard deduction: ₹75,000 is automatically deducted from gross salary in the new regime, ₹50,000 in the old regime. No documentation required.

Home loan interest under Section 24(b)

If you have a home loan on a self-occupied property, you can deduct up to ₹2 lakh per year on home loan interest under Section 24(b) — completely separate from the 80C deduction on principal repayment. Together, a home loan gives you up to ₹3.5 lakh in annual deductions (₹1.5 lakh principal under 80C plus ₹2 lakh interest under 24(b)), which by itself often tips the comparison in favour of the old regime for home loan borrowers.

For a let-out property there is no cap on interest deduction, but losses from house property are capped at ₹2 lakh for set-off against salary income in a given year. If you own multiple properties, the interaction between rental income, notional rent, and interest deductions gets complex quickly — a chartered accountant can optimise this for your specific portfolio.

Declare your investments to HR before the February deadline

Your employer deducts TDS on salary throughout the year based on a projected tax liability. In January or February, most companies ask you to submit your actual investment proofs — premium receipts, rent receipts, home loan interest certificates — so TDS can be recalibrated for the remaining months of the year. If you miss this window, your employer deducts at higher projected rates and you are left claiming a refund through your ITR, which delays your money by months.

Even if you miss the employer deadline, every legitimate deduction can still be claimed directly in your ITR. The ITR is the authoritative document — the employer's investment declaration is only a mechanism to smooth your monthly take-home. But being proactive with declarations is always better than waiting for a refund that arrives six months later. If you are unsure what you can claim, a chartered accountant can review your Form 16 and salary structure in a single short call.