How to Save Tax Using Legal Methods in India for Salaried Individuals

Let's face it - tax season is usually a time filled with dread and confusion for salaried workers. But what if we told you that, with a bit of planning, you, too, could legally slash a relatively large percentage of your tax bill? This guide will teach you the strategies to help reduce tax liability in every legal way possible, by using government-approved tools and exemptions to minimise taxable earnings.

Know What You're Earning and Where It's Taxed

Before we jump into how to save tax, let's understand what you're being taxed on. Salaried individuals are taxed based on income from:

Basic salary

Allowances (like HRA, LTA)

Bonuses and commissions

Perquisites (benefits from the employer)

Income from other sources (like interest or rent)

Your total taxable income is calculated by subtracting eligible deductions and exemptions from your gross income. The final amount is then taxed as per the applicable tax slabs.

Before jumping into tax free investments or deduction tricks, get a grip on where you stand. India's tax system has two regimes - the Old and the New. Each comes with its own tax slabs and rules. Here's what they currently look like (for FY 2025-26):

The New Tax Regime for FY 2025-26 (AY 2026-27) under (Section 115BAC)

To Note: The income tax rebate was enhanced from Rs. 25000 in the previous financial year to Rs. 60000. This means you have nil tax liability up to an income of Rs. 12.00 lakhs after deducting standard deduction of Rs 75,000 for New tax Regime

If your income is below seven lakhs after deducting standard deduction of Rs 50,000, you're eligible for a full tax rebate up to twenty-five thousand.

Legal and Smart Ways to Save Tax

Let's break down the real, practical methods you can use - each one approved by the Income Tax Department and easy to implement.

Claim House Rent Allowance (HRA)

If you live in a rented home and get HRA as part of your salary:

You can claim HRA exemption under Section 10(13A).

The exempt amount is the lowest of:

Actual HRA received

50% of salary (in metro cities) / 40% (non-metros)

Rent paid - 10% of salary

To Note: HRA exemption is only available under the old tax regime.

Don't receive by individual HRA?

Section 80GG offers a deduction up to follower of following if you're paying rent but not getting HRA.

• Rs 5,000 P.M.
• 25% of his total income before allowing deduction for any expenditure under this section
• Rent Paid less 10% of before allowing deduction for any expenditure under this section

To Note: This exemption is only available under the old tax regime.

Leave Travel Allowance (LTA)

Who says vacations can't be tax-saving?

• LTA covers the cost of travel (not lodging, food, etc.) for you and your family within India.
• Exempt for 2 trips in a block of 4 years.
• Submit proof of travel to your employer.

To Note: LTA exemption is only available under the old tax regime.

Children's Education Allowance

• You can claim up to ₹100/month per child, for a maximum of 2 children.
• Exemption also applies to hostel expenses: ₹300 per month per child Maximum upto to 2Child. Not a huge amount, but every bit helps!

To Note: Children's Eduction Allowance exemption is only available under the old tax regime.

Deduction on Home Loan Interest (Section 24 & 80EE)

Section 24(b): Deduction up to two lakhs on interest paid on a home loan for self-occupied property.

Section 80EE: An additional fifty thousand deduction for first-time homebuyers, subject to conditions as prescribed like:

Property value upto ₹50 lakh

Loan amount upto ₹35 lakh

Loan has been sanctioned by the financial institution during the period beginning on the 1st day of April, 2016 and ending on the 31st day of March, 2017

Assessee does not own any residential house property on the date of sanction of loan

To Note: This deduction is only available under the old tax regime.

Education Loan Deduction (Section 80E)

Deduction is permissible on account of entire interest paid on an education loan—no threshold limit is applicable

Applies to self, spouse, and children or any other students for whom assessee is a legal guardian.

Available for 8 years or till loan repayment, whichever is earlier.

To Note: This deduction is only available under the old tax regime.

Retirement Planning with NPS (National Pension Scheme)

Section 80CCD(1):

Deduction up to ₹1.5 lakh included in the 80C limit.

Section 80CCD(1B):

Additional ₹50,000 deduction for self-contribution to NPS over and above 80C limit.

Section 80CCD(2):

Employer's contribution is deductible over and above ₹1.5 lakh.

The below table gives a summary of deduction under Section 80CCD(2) under the old tax regime and new tax regime

Tax-Free Investments under Section 80C (and more)

Want to know the single best way to reduce taxes legally? Meet the holy trinity:

As per Section 80CCE limits the maximum deduction under sections 80C, 80CCC, and section 80CCD(1) to Rs 1.5 lakhs per financial year

An additional ₹50,000 deduction is available under Section 80CCD(1B) for NPS

Other Tax-Saving Avenues

• Standard Deduction: ₹50,000 under the old tax regime, and ₹75,000 under the new tax regime.
• Section 80G: Donations to certain funds, charitable institutions, account for deductions up to 50%/100% depending upon the charitable organizations in old tax regime this deduction is not available in new tax regime.
• Section 80CCCAs per Section 80CCE limits the maximum deduction under sections 80C, 80CCC, and section 80CCD(1) to Rs 1.5 lakhs per financial year

Choosing Between Old and New Tax Regimes

Here's the golden question: Which regime is better for you? If you claim lots of deductions (like HRA, 80C, home loan interest), the old regime is likely more beneficial. If your income structure is simple and you don't invest much in tax-saving instruments, the new regime might save more.

Pro tip: Use online calculators or consult a CA to see which regime leads to lower tax liability.

Don't Forget the Basics: File on Time

Even if you're due a refund, file your ITR before the deadline (usually July 31st). Filing late can cost you interest, penalties, and missed refunds.

Wrapping It Up

Saving tax legally in India isn't rocket science; it just takes a little awareness and a pinch of planning. Whether you're investing in tax-free instruments, claiming home loan benefits, or choosing the right tax regime, your money can stretch a lot further than you think.

Use your salary to build wealth, not just pay taxes. And remember, every rupee saved in tax is a rupee earned (without extra work)! So feel free to let your money work smarter, not harder.

FAQs

1. What is the maximum limit under Section 80C?

You can avail up to ₹1.5 lakh deduction per year under the 80C section, which includes PPF, ELSS, life insurance premiums, home loan principal and children's school fees and so on.

2. Is the standard deduction available under the new tax regime?

Yes! Starting FY 2025-26, the standard deduction of ₹75,000 is available under the new regime for salaried and pensioned individuals.

3. Are investments under Section 80C locked for a period?*

Yes, most 80C instruments have lock-in periods. For example:

ELSS: 3 years

PPF: 15 years

Tax-saving FDs: 5 years

Life Insurance: 2 years minimum

Always check before investing!