Tax Deduction on Salary: How to Deductions to Salary Components?

Written by : Knowledge Centre Team

2026-07-29

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5 minutes read

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Calculating income tax in India involves understanding your total income, applicable tax slabs, exemptions, and deductions. Depending on whether you opt for the old or new tax regime, your tax liability may vary. By knowing how taxable income is calculated and which deductions are available, you can estimate your taxes accurately and make informed financial decisions.

One important part of this process is understanding your salary structure. Components such as basic salary, HRA, EPF, and allowances can affect your taxable income and the tax you pay.

Let’s begin by understanding the important components in your salary structure and how they help you calculate and save taxes.

Key Takeaways

Understanding your salary components is crucial when filing taxes, as it allows you to optimise your tax savings effectively.
You can claim LTA exemption only for two journeys within four years.
Income tax in India is based on tax slabs, with your total income, exemptions, and deductions affecting your final tax. Understanding the old and new tax regimes is important to make the best choice for your situation.
The old tax regime offers deductions and exemptions to reduce taxable income, while the new tax regime has lower tax rates but has removed various deductions and exemptions.
Tax planning should not be an afterthought. Plan ahead, be proactive, and keep an eye on any new updates in the taxing structures to avoid paying more taxes than necessary.

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Understanding Salary Components in Your Pay Slip

Your salary slip includes multiple components, each of which is treated differently for tax purposes. Understanding these components is the first step towards accurately calculating your taxable income.

Basic salary: Basic salary forms the core component of your salary structure and serves as the basis for calculating several allowances and benefits.

Other key tax-saving components, such as House Rent Allowance (HRA) and Employee Provident Fund (EPF) contribution, are calculated on the basis of your basic salary.
House Rent Allowance (HRA): If you live in a rented house, you can claim an HRA deduction from your taxable income if you opt for the old tax regime. The HRA exemption available under the old tax regime is calculated based on the following factors:
- Total HRA mentioned on your salary slip
- 50% of basic salary + Dearness Allowance (DA) in metro cities
- 40% of basic salary + DA in non-metro cities
- Actual rent paid minus 10% of basic salary + DA (Dearness Allowance)
  
  Remember, if your annual rent exceeds ₹1 lakh, you may be required to provide your landlord’s PAN details while claiming the HRA exemption.
Leave Travel Allowance (LTA): LTA is a tax-saving component available under the old tax regime. As a salaried employee, you can claim LTA exemption for travel expenses incurred on journeys undertaken within India for yourself and eligible family members, subject to the conditions specified in Section 10(5) of the Income Tax Act, 1961. The exemption is limited to eligible travel expenses actually incurred during the journey and may require supporting documents as per your employer's policy. LTA exemption can be claimed for a maximum of two journeys in a block of four calendar years.
Contribution to Employees' Provident Fund (EPF): The Employee Provident Fund (EPF) is a government-backed retirement savings scheme designed to help employees accumulate a retirement corpus through regular contributions from both the employee and employer.

Under the EPF scheme, both the employee and employer generally contribute 12% of the employee's basic salary and dearness allowance (DA), if applicable, to the fund every month.

EPF contribution from your salary is eligible for tax deductions under Section 123 (previously known as Section 80C) of the Income Tax Act, 2025, if you opt for the old tax regime.

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Resident individuals can claim the Section 87A rebate, reducing tax to zero if income is within the limit

Source: Incometax.gov

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Example of Salary Components in Your CTC: The following illustration is for explanatory purposes only. Actual salary structures may vary depending on the employer, industry, and employee benefits offered.

CTC
Components	Amount
Basic Salary	₹ 300,000
Social Allowance	₹ 100,000
HRA	₹80,000
Medical Insurance	₹5,000
PF(12% of basic)	₹36,000
Performance Bonus	₹75,000
Total CTC	₹5,96,000

Understanding Standard Deduction and TDS on Salary

After understanding the components of your salary, it's equally important to know how deductions and tax deductions at source (TDS) influence your taxable income and overall tax liability.

Standard Deduction: The new tax regime is the default option for salaried individuals. Under the new tax regime, salaried employees can claim a standard deduction of ₹75,000 from their salary income. Those opting for the old tax regime can claim a standard deduction of ₹50,000. This deduction reduces taxable income and helps lower the overall tax liability.

For example, if your annual salary income is ₹5,50,000 and you opt for the old tax regime, your taxable income will be ₹5,00,000 after claiming the standard deduction of ₹50,000, before considering any other deductions or exemptions.

Deductions on Investments Available for Salaried Employees: If you opt for the old tax regime, you can claim various tax deductions for salary income through eligible investments under Section 123.

Eligible investments under Section 123 also include instruments such as the Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificate (NSC), Equity Linked Savings Schemes (ELSS), and tax-saving fixed deposits.

Tax Deducted at Source (TDS) on salary: Employers deduct TDS from your salary and deposit it with the Income Tax Department on your behalf. The amount of tax deduction on salary depends on your taxable income, tax regime, and eligible deductions declared to your employer.

Generally, by June or July each year , your employer will provide you with a TDS certificate with details of tax deducted and submitted to the tax department. This certificate is known as Form 130. If your yearly income only constitutes salary income, you can just use the Form 130 to file your tax return.

However, if you earn rental income, interest, dividends, capital gains from the sale of assets such as stocks or bonds, you must disclose these incomes while filing your income tax return.

The ability to decode your salary structure or CTC is a skill that will help you in your financial and professional life. Understanding your salary components not only helps you save taxes but also enables you to negotiate a better compensation package and make informed financial decisions. If you are not comfortable with these terms, you should ask your HR to explain them in detail.

Tax Slabs Comparison: New Regime vs. Old Regime

Both the old and the new tax regimes, aim to simplify taxation; however, they differ significantly in how income is taxed and the benefits they offer to taxpayers.

Given below are the applicable tax slab rates. The amount of tax deduction and final tax liability may vary depending on the tax regime selected, eligible exemptions, and deductions claimed by the taxpayer.

Old Tax Regime		New Tax Regime
Income Range	Tax Rate	Income Range	Tax Rate
Up to ₹2.5 Lakh	Nil	₹0-4 Lakh	Nil
₹2.5-₹5 Lakh	5%	₹4-8 Lakh	5%
₹5-₹10 Lakh	20%	₹8-12 Lakh	10%
Above ₹10 Lakh	30%	₹12-16 Lakh	15%
		₹16-20 Lakh	20%
		₹20-24 Lakh	25%
		Above ₹24 Lakh	30%

Tax Exemptions & Deductions to Reduce Your Taxable Income

Under the Income Tax Act, taxpayers can avail themselves of various exemptions, deductions, and rebates to reduce their taxable income and lower their overall tax liability. Understanding these tax deductions and exemptions can help you make informed financial decisions and maximise your tax savings.

If you're opting for the old tax regime, you can claim a standard deduction of ₹50,000 from your salary income. However, under the new tax regime, this amount is increased to ₹75,000. The standard deduction is a fixed amount that is deducted from your salary income without requiring any proof of expenses, thereby reducing your taxable income and overall tax liability.

Be sure to explore the various deductions available under Section 123 of the Income Tax Act. This section offers a range of opportunities to reduce your taxable income.

Under the old tax regime, you can claim tax deductions up to ₹1.5 lakh for eligible investments and expenses covered under Section 123 and related provisions. These include contributions to EPF, PPF, NSC, life insurance premiums, tuition fees, and certain NPS contributions, subject to the conditions prescribed under the Income Tax Act.

Conclusion

Calculating income tax in India becomes easier when you clearly understand how taxable income is derived using salary components, exemptions, deductions, and applicable tax slabs. By comparing the old and new tax regimes, taxpayers can choose the option that results in lower tax liability. Using the correct tax deductions on salary and planning investments wisely can further reduce your overall tax burden and help you estimate your income tax more accurately.

Glossary

Deductions: Deductions are certain expenses or investments that reduce your total income, helping you pay less tax
EPF: Employee Provident Fund is a retirement savings scheme with contributions from both the employer and the employee
PPF: Public Provident Fund is a long-term, tax-free, government-backed savings scheme with a 15-year lock-in period
NSC: National Savings Certificate is a government-backed, fixed-income investment offering tax benefits with a tenure of 5 or 10 years
NPS: National Pension System is a voluntary retirement savings scheme providing tax benefits and investment options

FAQs

The amount of tax deducted from salary in India depends on your total taxable income, applicable tax slabs, and whether you choose the old or new tax regime. Employers deduct TDS based on the estimated annual income after considering exemptions and deductions like EPF, HRA, and standard deduction.

The tax deductions available on salary income mainly include Section 123 deductions such as EPF, PPF, NSC, and NPS. Under the old tax regime, you can also claim the standard deduction, HRA exemption, and LTA benefits to reduce taxable income.

TDS on salary is deducted monthly by your employer based on your estimated annual income. Employers calculate total tax liability after considering declarations and eligible deductions, then deduct and deposit TDS with the Income Tax Department and issue Form 130 at year-end.

Tax is calculated on taxable income, not gross or net salary. Taxable income is derived after subtracting exemptions such as HRA and deductions such as EPF, Section 123 investments, and the standard deduction from gross salary.

EPF is mandatory for eligible salaried employees as per government rules. It also helps save tax, as employee contributions are eligible for deduction under Section 123 in the old tax regime, while employer contributions are tax-exempt up to prescribed limits.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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Understanding Salary Components in Your Pay Slip

Did You Know?

Understanding Standard Deduction and TDS on Salary

Tax Slabs Comparison: New Regime vs. Old Regime