Salary-Based Tax Deductions

Salary-Based Tax Deductions You Should Be Aware of

Explore the most effective tax deductions available for salaried employees. Learn how to save tax on salary and reduce your income tax liability.

Written by : Knowledge Centre Team

2026-04-28

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7 minutes read

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Every month, when your salary is credited to your bank account, income tax is automatically deducted as part of a structured system that supports public services and national development. For working professionals across India, this is a routine process, but with the right financial planning, it also presents an opportunity to optimise savings and make the most of available tax benefits.

Understanding how to save tax on salary is not just about last-minute investments; it is about recognising every component of your salary and aligning it with available deductions under the Income Tax Act. With evolving tax regimes in India, knowing where you stand and what you can claim has become more important than ever.

This blog breaks down the most important tax deductions for salaried employees, helping you optimise your tax outgo while staying fully compliant with the laws of the land.

Key Takeaways

  • The new tax regime offers a ₹75,000 standard deduction for salaried employees and makes income up to ₹12.75 lakh effectively tax-free.

  • Under the old tax regime, you can collectively claim up to ₹2 lakh via Section 80C and 80CCD(1B) .

  • Section 80D allows you to claim up to ₹1 lakh per year when you cover health insurance premiums for both your family and a senior citizen.

  • HRA exemption, Section 24(b) on home loan interest (up to ₹2 lakh), and LTA can substantially reduce your taxable salary.

  • Employer's NPS contribution under Section 80CCD(2) is deductible under both tax regimes, making it one of the most powerful tax-saving tools available.

Key Tax Deductions Every Salaried Individual Should Know

Understanding the right deductions can significantly reduce your tax burden. Here are the key ones every salaried individual should be aware of.

  • Standard Deduction: The standard deduction is a flat reduction in taxable income available to all salaried individuals and pensioners without any conditions. For FY 2025-26, it is ₹50,000 under the old regime and ₹75,000 under the new regime. It is automatically applied by employers, making it the easiest way to reduce taxable income.

    This deduction applies uniformly to all salaried taxpayers and directly lowers taxable income before tax rates are applied.

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  • Section 123 (Previously Sec 80C of Income Tax Act 1961): Section 123 of the Income Tax Act 2025 allows deductions of up to ₹1.5 lakh annually for eligible investments and expenses under the old tax regime. Popular options include EPF, PPF, ELSS, life insurance premiums, and home loan principal repayment. It helps combine tax savings with long-term financial planning. Choosing the right mix of instruments can help balance risk, returns, and liquidity.

    Do note that different instruments come with varying lock-in periods and risk levels, so selection should align with your financial goals.
  • NPS Contributions: The National Pension System (NPS) offers additional deductions beyond Section 123 of the Income Tax Act 2025 (previously Sec 80C under the Income Tax Act 1961). Under Section 124(3) (previously known as Section 80CCD(1B)), you can claim an extra ₹50,000 (old regime), while Section 80CCD(2) allows deductions on employer contributions in both regimes. This makes NPS a powerful retirement and tax-saving tool.

    It also provides flexibility in asset allocation, allowing you to balance equity and debt exposure based on your risk appetite.
  • House Rent Allowance (HRA): HRA helps reduce taxable income for those living in rented accommodation under the old regime. The exemption depends on salary, rent paid, and city of residence. If HRA is not part of your salary, Section 80GG provides limited relief for rent expenses.

    To claim this benefit, maintaining proper documentation such as rent receipts and landlord details is essential.
  • Section 126 (Previously section 80D of the Income Tax Act, 1961): ection 126 allows deductions on health insurance premiums for self, family, and parents under the old regime. The deduction ranges from ₹25,000 to ₹1,00,000 depending on age and coverage. It also includes preventive health check-ups within the overall limit.

    This deduction not only reduces tax liability but also encourages individuals to stay financially prepared for medical contingencies.
  • Section 24(b): Interest paid on a home loan can be claimed as a deduction under Section 24(b). For self-occupied property, the limit is ₹2 lakh per year. When combined with Section 80C principal repayment, it offers significant tax savings for homeowners.

    This makes home loans a dual advantage, supporting asset creation while also reducing taxable income.
  • Other Important Deductions to Consider: Additional deductions can further reduce tax liability under the old regime. These include LTA for domestic travel, Section 80E for education loan interest, and Section 80TTA/80TTB for savings interest. While smaller individually, they collectively enhance overall tax efficiency.

    Being aware of these provisions ensures that no eligible deduction is missed while planning your taxes.
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Did You Know?

88% of individual taxpayers in India shifted to the new tax regime, reflecting a growing preference for simplified taxation


Source: TOI

Cut Tax Stress 46,800

Common Mistakes Salaried Individuals Make While Saving Tax

Many salaried individuals end up paying more tax than necessary due to avoidable mistakes. A lack of awareness and last-minute planning are often the biggest reasons behind missed savings opportunities.

  • Last-minute investments: Rushing in March often leads to poor financial choices that don’t align with long-term goals

  • Ignoring HRA rules: Not maintaining rent receipts or missing eligibility criteria can result in lost exemptions

  • Not comparing tax regimes: Choosing a regime without calculation may lead to higher tax liability

  • Missing eligible deductions: Sections like 80D, 80E, and 80TTA are often overlooked

  • Incorrect declarations to the employer: Inaccurate investment proofs can lead to higher TDS deductions

Planning early and reviewing your tax-saving options periodically can help avoid these mistakes and maximise benefits.

Tax Saving Tips for Salaried Employees

Saving tax effectively requires a mix of planning, awareness, and smart use of available benefits. Instead of relying on last-minute actions, a structured approach can help maximise your savings.

  • Start early in the financial year: Plan your investments from April to avoid rushed decisions in March.

  • Choose the right tax regime: Compare both regimes annually based on your deductions and income.

  • Maximise employer-provided benefits: Fully utilise components like HRA, LTA, and employer NPS contributions.

  • Use deductions strategically: Combine Section 80C, 80D, and NPS to optimise overall tax savings.

  • Align tax savings with financial goals: Invest in options that support long-term goals like retirement or wealth creation.

  • Track and review regularly: Monitor your investments and declarations to ensure accuracy and avoid surprises.

A proactive and well-informed approach not only reduces your tax burden but also strengthens your overall financial planning.

Conclusion

Tax planning is not just a last-minute task; it’s something you should manage throughout the year. For salaried individuals, the Income Tax Act offers several ways to reduce tax while encouraging savings, insurance, and long-term financial planning.

From the standard deduction to benefits under Sections 80C, 80D, 80CCD, HRA, and home loans, there are multiple opportunities to lower your taxable income. Review your salary structure, make use of the available deductions, and plan in advance. A well-informed approach to tax planning helps you keep more of your earnings and build stronger financial security over time.

Glossary

  1. LTA: An employer-provided allowance exempt from domestic travel costs for two journeys in a block of four years
  2. Section 24(b): A provision allowing deduction on home loan interest, up to ₹2 lakh for self-occupied property
  3. TDS: Tax deducted by the employer from salary before payment, based on declared income and investments
  4. New Tax Regime: A tax system with lower slab rates, offering a ₹75,000 standard deduction for salaried individuals
  5. FY: A 12-month period (April to March) during which income is earned and calculated for tax purposes
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FAQs

Yes, salaried individuals can switch between tax regimes every financial year while filing returns. This flexibility is available if there is no business or professional income. Those with business income can switch only once, subject to conditions.

HRA exemption is the lowest of actual HRA received, rent minus 10% of salary, or 40-50% of salary. The percentage depends on whether you live in a metro or non-metro city. If HRA is not received, Section 80GG offers limited relief under the old regime.

The maximum deduction allowed under Section 80C is ₹1.5 lakh per year. This limit includes all eligible investments like EPF, PPF, ELSS, and insurance premiums. An additional ₹50,000 can be claimed through NPS under Section 80CCD(1B).

The new tax regime offers limited deductions to keep taxation simple. Key benefits include the standard deduction and the employer’s NPS contribution. Most deductions like 80C, 80D, HRA, and LTA are not available.

You need rent receipts with landlord details and payment information. If annual rent exceeds ₹1 lakh, the landlord’s PAN is mandatory. These documents must be submitted to your employer within the specified deadline.

Yes, if both are co-owners and co-borrowers of the property. Each can claim deductions on principal and interest separately. This significantly increases the total tax benefit for the couple.

 

You can claim an additional deduction for premiums paid for your parents. The limit is ₹25,000 (below 60 years) or ₹50,000 (senior citizens). This benefit is over and above your own family’s insurance deduction.

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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