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

2025-06-24

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One of the biggest reasons why many salaried individuals struggle with income tax calculation is their inability to understand salary components and structure properly. The net CTC offered to you by your employer has several tax-saving components, and to take maximum advantage of these components, you must have a proper understanding of your salary structure.

As tax season is right around the corner, this is the right time to learn how to calculate your income tax liability using your salary component. This will also help you make the right investments in smart tax-saving instruments such as term life insurance, health insurance and unit linked insurance plans (ULIPs).

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

Basic salary: Basic salary is the most important part of your salary slip. 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 HRA deduction from your taxable income if you opt for the old tax regime. The amount of income tax deduction you can get under HRA is based on the following factors:
1. Total HRA mentioned on your salary slip
2. 50% of basic salary + dearness allowance (DA) in metro cities
3. 40% of basic salary + DA in non-metro cities
4. Actual rent paid minus 10% of basic salary + DA

Remember, if you are making rent payments in excess of Rs. 1 lakh in a year, you have to furnish your landlord’s PAN number to claim the deduction.

Leave and travel allowance (LTA): LTA is also a tax-saving component in your salary structure if you opt for the old tax regime. As a salaried employee, you can avail tax deduction for a trip taken only with your spouse, children and dependent parents and siblings within India. The extent of the exemption is equal to the actual expenses incurred on the trip which have to be claimed by submitting original bills. LTA exemption is available for only two journeys within a span of four years.

Contribution to Employees Provident Fund (EPF): The EPF is a Government of India initiative to provide retirement benefits to workers. Under the EPF Act, both employee and employer are required to contribute 12% of the basic salary to the fund every month. EPF contribution from your salary is eligible for tax deductions under Section 80C of the Income Tax Act if you opt for the old tax regime. The employer's contribution is exempt up to 12% of basic salary (+DA if applicable) under both tax regimes, subject to overall limits if contributions to NPS and superannuation fund are also made by the employer.

Did You Know?

Under the new tax regime, there’s no tax on income up to ₹12 lakh, but you still need to file taxes to maintain proper records.

Source: Tax2Win

Example of Salary Components in Your CTC:

CTC
Components	Amount
Basic Salary	Rs 3,00,000
Social allowance	Rs 1,00,000
HRA	Rs 80,000
Medical Insurance	Rs 5,000
PF(12% of Basic)	Rs 36,000
Performance bonus	Rs 75,000
Total CTC	Rs 5,96,000

Standard deduction: For FY 2025-26, the new tax regime is the default option for salaried individuals. Under this regime, as well as if you choose to opt for the old tax regime, employees are now eligible to claim a flat standard deduction of ₹75,000 from your total income. Before the 2018 budget, employees were eligible to claim deductions on conveyance and medical allowances.

For example, if your total annual income is Rs. 5,50,000, your taxable income will be considered as Rs. 5,00,000 after applying the standard deduction, before considering other regime-specific deductions or exemptions.

Deductions on investments available for salaried employees: You can also invest in various tax-saving instruments such as term life insurance, ULIPs and whole life insurance to save taxes if you opt for the old tax regime. By investing in eligible instruments such as a ULIP plan by Canara HSBC Life Insurance, you can save taxes under Section 80C up to Rs. 1.5 lakh, get life insurance protection and secure your retirement through market-linked returns.

Tax deducted at source (TDS) on salary: You must also know that your employer deducts TDS from your salary and pays it to the Income Tax Department. TDS is deducted based on your chosen tax regime (new or old), your salary and the investment declarations (if applicable under the chosen regime) that you made at the beginning of the year to your employer. Therefore, it’s important to make declarations carefully and on time.

During June or July or every 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 16 . If your yearly income only consists constitutes salaried income, you can just use the Form 16 to file your tax return.

However, if you earn rental income, earn interest or dividends on your investments, or have sold securities such as stocks or bonds in the financial year, you also need to mention that in your income tax return filing.

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 component not only helps you save taxes but also you in negotiating for a better salary. If you are not comfortable with these terms, you should ask your HR to explain them in detail.

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Tax Slabs Comparison – New Regime vs. Old Regime

Both tax structures, 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.

Under the old tax regime, taxpayers can benefit from various exemptions and deductions that reduce their overall taxable income, whereas, under the new regime, various exemptions and deductions are reduced. Let’s delve deeper into this.

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, you can take advantage of a range of tax exemptions, deductions, and rebates to reduce your taxable income. Here’s how to do it:

If you're opting for the old tax regime, you can claim a standard deduction of ₹50,000. However, under the new tax regime, this amount is increased to ₹75,000, giving you a higher tax benefit.

Be sure to explore the various deductions available under Section 80C of the Income Tax Act. This section offers a range of opportunities to reduce your taxable income.

You can claim deductions of up to ₹1,50,000 for eligible investments under Section 80C, which includes contributions to instruments like EPF, PPF, NSC, NPS, and others.

Conclusion

The taxation process can often seem overwhelming; however, with the right knowledge of your salary components, tax brackets, exemptions, and deductions, managing your tax liabilities becomes much easier. When deciding between the old and new tax regimes, make sure to plan carefully.

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 employer and employee, earning interest.
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.

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.