Tax Planning for Salaried Employees in India: Save Income Tax Under New and Old Regime (AY 2026-27)

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Every salaried employee in India pays income tax, but not every salaried employee pays the right amount. The difference between a well-planned and an unplanned tax return can be Rs 50,000 to Rs 1.5 lakh per year, depending on your salary and the deductions you claim. This guide walks you through a step-by-step tax planning strategy for AY 2026-27, covering both the new and old regimes, every major deduction, salary restructuring, and a worked example so you can see the numbers.

If you earn a salary between Rs 5 lakh and Rs 25 lakh, this guide is for you.

Step 1: Know Your Tax Regime

The new tax regime under Section 115BAC is the default for AY 2026-27. You do not need to opt in. If you want the old regime and you have business or profession income, you must file Form 10-IEA before the ITR due date. Salaried employees without business income can simply select their preferred regime while filing.

New Regime Slabs (AY 2026-27)

Tax Rate Chart

New Tax Regime Slab Rates (Section 115BAC)

Default regime for AY 2026-27. Standard deduction Rs 75,000.

Up to Rs 4 lakh

No tax on first Rs 4 lakh of taxable income.

Nil

Rs 4 to 8 lakh

Rs 20,000 maximum tax in this slab.

5%

Rs 8 to 12 lakh

Rs 40,000 maximum tax in this slab.

10%

Rs 12 to 16 lakh

Rs 60,000 maximum tax in this slab.

15%

Rs 16 to 20 lakh

Rs 80,000 maximum tax in this slab.

20%

Rs 20 to 24 lakh

Rs 1,00,000 maximum tax in this slab.

25%

Above Rs 24 lakh

Highest slab rate. Plus 4% cess.

30%

Source: Finance Act 2025; incometax.gov.in

Section 87A rebate: If your taxable income is up to Rs 12 lakh under the new regime, the entire tax liability is rebated to zero. For salaried employees, the Rs 75,000 standard deduction means a gross salary of up to Rs 12,75,000 results in zero tax.

Old Regime Slabs (Below 60 Years)

Tax Rate Chart

Old Tax Regime Slab Rates (Individuals Below 60)

Available on opt-in. Standard deduction Rs 50,000.

Up to Rs 2.5 lakh

Basic exemption limit.

Nil

Rs 2.5 to 5 lakh

Section 87A rebate zeroes this if income up to Rs 5 lakh.

5%

Rs 5 to 10 lakh

Rs 1,00,000 maximum tax in this slab.

20%

Above Rs 10 lakh

Highest slab. Plus 4% cess.

30%

Source: Income Tax Act 1961; incometax.gov.in

Quick Decision Rule

If your total deductions and exemptions (80C, 80D, HRA, home loan interest, NPS, 80E) exceed Rs 3.75 to Rs 4 lakh, the old regime likely saves more tax. Below that, the new regime wins. For a detailed comparison with worked scenarios, see our old vs new regime guide.

Step 2: Maximize Deductions Under the Old Regime

If you choose the old regime, these are the deductions available to you in order of impact.

Section 80C: Rs 1.5 Lakh (The Foundation)

Section 80C allows a deduction of up to Rs 1,50,000 for specified investments and expenses. This is the single largest deduction for most salaried employees.

Best 80C instruments ranked by liquidity and returns:

Important: EPF contributions deducted from your salary already count toward the Rs 1.5 lakh limit. Check your payslip before investing separately. If your EPF contribution is Rs 21,600 per year (12% of Rs 15,000 basic), you need only Rs 1,28,400 more to exhaust 80C.

For the complete list of eligible investments, read our Section 80C deductions guide.

Section 80CCD(1B): Rs 50,000 Additional NPS

This deduction is over and above the Rs 1.5 lakh under 80C. If you invest Rs 50,000 in NPS Tier I, your total Chapter VI-A deduction reaches Rs 2 lakh. At the 30% slab, this saves Rs 15,600 (including cess).

See our detailed NPS tax benefits guide for how employer and employee contributions interact.

Section 80D: Health Insurance Premiums

Maximum possible 80D deduction: Rs 1,00,000 (if both you and your parents are senior citizens). Most salaried employees claim Rs 25,000 to Rs 50,000 here.

For eligibility details and claim process, see our Section 80D guide.

HRA Exemption: Section 10(13A)

If you live in rented accommodation and receive HRA as part of your salary, you can claim an exemption. The exempt amount is the lowest of:

1. Actual HRA received
2. 50% of Basic + DA (metro cities) or 40% (non-metro)
3. Rent paid minus 10% of Basic + DA

For a salaried employee with Rs 30,000 monthly basic in a metro city paying Rs 20,000 rent, the HRA exemption can be Rs 1.5 to Rs 2 lakh per year. This deduction alone often tips the scale toward the old regime.

Full calculation with examples: HRA exemption guide.

Section 24(b): Home Loan Interest

If you have a home loan for a self-occupied property, you can deduct up to Rs 2,00,000 of interest paid in a financial year. This is available only in the old regime for self-occupied property.

For let-out property, the full interest is deductible against rental income in both regimes (no Rs 2 lakh cap). Read the complete home loan tax benefits guide for details on Section 24(b) and 80C principal deduction.

Section 80E: Education Loan Interest

Interest paid on a loan taken for higher education (self, spouse, or children) is fully deductible with no upper limit. The deduction is available for 8 years from the year you start repaying. This is relevant if you or your children have taken an education loan for a degree or professional course.

Section 80G: Donations

Donations to specified funds and charitable institutions qualify for 50% or 100% deduction. Keep the receipt and ensure the institution has a valid 80G registration.

Step 3: Tax-Saving Strategies Under the New Regime

The new regime strips out most deductions, but a few still apply:

What you keep in the new regime:

• Standard deduction: Rs 75,000 (automatic for salaried employees)
• Employer NPS contribution, Section 80CCD(2): Up to 14% of Basic + DA. This is the most overlooked tax-saving opportunity in the new regime
• Interest on home loan for let-out property (against rental income only)
• Transport allowance for disabled employees
• Conveyance allowance for expenditure on conveyance in the performance of duties

What you lose in the new regime:

Section 80C, 80CCD(1B), 80D, 80E, 80G, HRA exemption, LTA exemption, Section 24(b) for self-occupied property, professional tax deduction.

The NPS Advantage in the New Regime

If your employer offers NPS as part of the salary package, negotiate for maximum employer contribution. Here is what the numbers look like:

This deduction applies on top of the standard deduction and requires no separate investment from the employee. The employer redirects part of the CTC into NPS, and the entire contribution becomes tax-free.

Step 4: Salary Restructuring

Salary restructuring does not change your total CTC. It reallocates it into components that are either exempt or deductible. This works best under the old regime.

Components you can restructure (discuss with your HR):

For a detailed guide on flexible benefit plans, read our salary restructuring guide.

Warning: Restructuring reduces your Basic salary, which in turn reduces EPF contribution, gratuity, and leave encashment. A lower Basic means lower retirement benefits. Find the right balance.

Step 5: Worked Example, Rs 15 Lakh CTC

Let us compare both regimes for a salaried employee in Hyderabad earning Rs 15 lakh CTC.

Assumptions:

• Basic: Rs 6,00,000 | HRA: Rs 3,00,000 | Special Allowance: Rs 4,28,400
• EPF employer: Rs 21,600 | EPF employee: Rs 21,600 | Gratuity: Rs 28,846
• Rent paid: Rs 18,000/month (Rs 2,16,000/year)
• Investments: Rs 1,50,000 (80C), Rs 50,000 (NPS 80CCD(1B)), Rs 25,000 (80D)
• No home loan

New Regime Calculation

New regime tax on Rs 14,25,000:

• 0 to 4,00,000: Nil
• 4,00,001 to 8,00,000: 5% = Rs 20,000
• 8,00,001 to 12,00,000: 10% = Rs 40,000
• 12,00,001 to 14,25,000: 15% = Rs 33,750
• Total tax: Rs 93,750
• Cess (4%): Rs 3,750
• Tax payable: Rs 97,500

Old Regime Calculation

HRA exemption: Least of (a) Rs 3,00,000 actual HRA, (b) 40% of Basic = Rs 2,40,000 (Hyderabad is non-metro), (c) Rent minus 10% of Basic = Rs 2,16,000 minus Rs 60,000 = Rs 1,56,000. Exempt amount = Rs 1,56,000.

Old regime tax on Rs 10,66,500:

• 0 to 2,50,000: Nil
• 2,50,001 to 5,00,000: 5% = Rs 12,500
• 5,00,001 to 10,00,000: 20% = Rs 1,00,000
• 10,00,001 to 10,66,500: 30% = Rs 19,950
• Total tax: Rs 1,32,450
• Cess (4%): Rs 5,298
• Tax payable: Rs 1,37,748

Comparison

In this scenario, the new regime saves Rs 40,248 because total old-regime deductions (Rs 3,83,500) fall short of the Rs 4 lakh breakeven point. The lower slab rates in the new regime more than compensate.

When would old regime win here? If this employee had a home loan with Rs 2 lakh interest (Section 24b), old-regime taxable income drops to Rs 8,66,500, and tax to Rs 85,098. Old regime would then save Rs 12,402 over new regime.

Common Mistakes to Avoid

1. Not checking the breakeven. Many employees default to the old regime out of habit without computing both sides. Rs 4 lakh in deductions is a high bar if you do not have HRA or a home loan.

2. Ignoring employer NPS. Section 80CCD(2) works in both regimes. If your employer offers NPS but you have not enrolled, you are leaving tax-free income on the table.

3. Investing in insurance for tax saving. ULIPs and endowment plans are poor investments disguised as 80C instruments. ELSS or PPF deliver better returns with the same tax benefit.

4. Missing the proof submission deadline. If you declare investments at the start of the year but do not submit proofs by your employer's deadline (usually February or March), the employer deducts higher TDS. You get it back as a refund, but your cash flow suffers for months.

5. Confusing rent receipts with a rental agreement. For HRA claims above Rs 1 lakh per year, the landlord's PAN is required. Without it, the deduction will be disallowed during processing.

6. Not claiming the full 80D. If you pay for your parents' health insurance separately, that is an additional Rs 25,000 (or Rs 50,000 if they are senior citizens) on top of your own Rs 25,000. Many employees miss the parent component.

7. Forgetting Section 80E. Education loan interest has no upper limit. If you are repaying an education loan, this deduction can be substantial and is available for 8 consecutive years.

For a one-page summary of all deductions, see our tax deductions checklist for AY 2026-27.

Month-by-Month Tax Planning Calendar

• April: Choose your regime. Declare planned investments to employer via Form 12BB
• May to June: Start SIPs in ELSS or PPF instalments. Renew health insurance
• July to September: Claim LTA if travelling. Check EPF balance against 80C limit
• October to December: Review and top up if deductions are falling short
• January to March: Submit investment proofs to employer. Make final 80C and NPS investments before March 31
• April to July (next FY): File ITR. Claim any deductions missed in employer proof submission

Starting early avoids the March rush, when employees scramble to buy insurance policies or make lump-sum PPF deposits just to save tax.

Sources

• Income Tax Act 1961, Sections 80C, 80CCD, 80D, 80E, 10(13A), 24(b), 115BAC, 87A
• Finance Act 2025 (new regime slab rates and standard deduction)
• CBDT Circular on Section 115BAC default applicability
• incometax.gov.in, AY 2026-27 slab rates and ITR filing guidelines

Frequently Asked Questions

Can I switch between old and new regime every year?

Yes. Salaried employees without business or profession income can switch between old and new regime every financial year at the time of filing their ITR. No form or prior intimation is needed. You simply select your preferred regime while filing. The choice is locked for that AY once the return is filed.

Is employer NPS contribution under Section 80CCD(2) available in the new regime?

Yes. It is one of the few deductions allowed in both regimes. Under the new regime, employer contribution to your NPS account is deductible up to 14% of basic salary plus DA for all employees. Under the old regime the limit is 10% for private sector employees and 14% for government employees. Total employer contributions to PF, NPS and superannuation above Rs 7.5 lakh a year are taxable.

What is the maximum tax I can save with Section 80C?

The maximum deduction under Section 80C is Rs 1,50,000 per year. For someone in the 30% tax bracket under the old regime, this translates to a tax saving of Rs 46,800 (Rs 1,50,000 x 30% plus 4% cess). Section 80C covers PPF, ELSS, EPF, life insurance premiums, tuition fees, and home loan principal repayment.

Do I need to submit investment proofs to my employer?

Yes. Most employers require investment proof submission between January and March. If you do not submit proofs, the employer deducts TDS based on declared investments at the start of the year minus unproven amounts. You can still claim the deductions while filing your ITR, but you will need to wait for a refund.

What is the breakeven point between old and new regime?

For most salary levels, if your total deductions and exemptions (80C, 80D, HRA, home loan interest, NPS) exceed roughly Rs 3.75 to Rs 4 lakh, the old regime saves more tax. Below that threshold, the new regime wins due to lower slab rates, higher standard deduction of Rs 75,000, and the Rs 12 lakh Section 87A rebate.

Can salaried employees claim Section 80C without investing?

Partly. Some 80C-eligible payments happen automatically or as part of regular expenses: EPF contribution deducted from salary, tuition fees for up to two children, and home loan principal repayment. These count toward the Rs 1.5 lakh limit without any separate investment. However, if these do not exhaust the limit, you need to invest in PPF, ELSS, or other instruments to claim the full deduction.

How does salary restructuring reduce tax?

Salary restructuring shifts part of your taxable CTC into tax-exempt or tax-deductible components like HRA, LTA, food coupons (up to Rs 2,200 per month), and NPS employer contribution. This reduces your taxable salary without reducing your total compensation. It works best under the old regime where HRA and LTA exemptions are available.