Every year between January and March, salaried Indians scramble to find ways to "save tax." Most end up making last-minute investments they don't fully understand, purely for the tax benefit. This guide will help you plan early and keep more of your income, legally.
One thing changed the whole picture recently. Since FY 2025-26 the new regime has a much wider zero-tax band, so for a large share of salaried people the best tax-saving move is simply to pick the right regime. Deductions only matter if you are on the old regime. Let's work through it.
Old Regime vs New Regime: The Fundamental Choice
Starting FY 2023-24, the New Tax Regime became the default. You can still choose the Old Regime, and for some people it remains cheaper. The choice between them is the single most important tax decision you make each year.
New Tax Regime (FY 2025-26 and FY 2026-27)
The New Regime has lower slab rates but removes most deductions and exemptions. Budget 2026 left these slabs unchanged for FY 2026-27.
| Income Slab | Tax Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 to ₹8,00,000 | 5% |
| ₹8,00,001 to ₹12,00,000 | 10% |
| ₹12,00,001 to ₹16,00,000 | 15% |
| ₹16,00,001 to ₹20,00,000 | 20% |
| ₹20,00,001 to ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Standard Deduction: ₹75,000 for salaried employees and pensioners.
Section 156 (was 87A) rebate: if your taxable income is ₹12,00,000 or less, a rebate of up to ₹60,000 wipes out the tax completely. Add the ₹75,000 standard deduction and a salary of up to ₹12,75,000 pays zero income tax under the new regime. Just above ₹12 lakh, marginal relief caps the tax at the amount by which your income crosses ₹12 lakh. For example, taxable income of ₹12,10,000 pays ₹10,000 (plus cess), not the ₹61,500 the slabs alone would give.
Key limitation: no Section 123 (was 80C), section 126 (was 80D), HRA or LTA deductions. The employer's NPS contribution under Section 124(1) (was 80CCD(2)) is still allowed, up to 14% of salary.
Old Tax Regime
The Old Regime has higher slab rates but allows you to claim all the familiar deductions:
| Income Slab | Tax Rate |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 to ₹5,00,000 | 5% |
| ₹5,00,001 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Standard Deduction: ₹50,000. Section 156 (was 87A) rebate: up to ₹12,500, so taxable income up to ₹5,00,000 pays no tax.
A 4% health and education cess applies on top of the tax in both regimes.
When Does the Old Regime Save More?
Only when your deductions are large. The table below shows how much you would need to claim under the old regime (section 123 (was 80C), section 126 (was 80D), HRA, NPS, home loan interest and so on, on top of the ₹50,000 standard deduction) just to match the new regime. Every figure was computed from the slabs above.
| Gross salary | New regime tax (with cess) | Old-regime deductions needed to break even |
|---|---|---|
| ₹10,00,000 | ₹0 | ₹4,50,000 (the old regime can only tie at zero) |
| ₹12,75,000 | ₹0 | ₹7,25,000 (again, at best a tie) |
| ₹15,00,000 | ₹97,500 | about ₹5,43,750 |
| ₹18,00,000 | ₹1,50,800 | about ₹6,41,700 |
| ₹20,00,000 | ₹1,92,400 | about ₹7,08,300 |
| ₹25,00,000 | ₹3,19,800 | ₹8,00,000 |
If your deductions are below the figure for your salary, the new regime is cheaper. Up to ₹12.75 lakh of salary it is never beaten.
Use our Income Tax Calculator to compare both regimes with your exact salary and deductions. It takes about 30 seconds.
A note on law changes: from 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act and renumbered its sections. This guide gives the new section number first and the old one in brackets, for example section 123 (was 80C), because forms, payslips and most people still use the old names. The limits did not change. The deductions themselves are described as they apply to the years covered here.
Section 123 (was 80C): The ₹1.5 Lakh Foundation (Old Regime Only)
Section 123 (was 80C) is the most widely used deduction. You can claim up to ₹1,50,000 against your taxable income. Here are the most common section 123 (was 80C) instruments:
1. Employee Provident Fund (EPF)
Your employer already deducts 12% of your basic salary toward EPF. This counts toward your section 123 (was 80C) limit automatically. For someone with a ₹50,000 monthly basic salary, EPF alone uses ₹72,000 of the ₹1.5 lakh limit.
2. Public Provident Fund (PPF)
A government-backed scheme. The rate is 7.1% p.a. for the October to December 2026 quarter (the government reviews it every quarter). Lock-in: 15 years. Annual limit: ₹1,50,000. The interest and the maturity amount are tax-free, which makes PPF an EEE (Exempt-Exempt-Exempt) instrument.
Calculate your PPF returns with our PPF Calculator.
3. Equity Linked Savings Scheme (ELSS)
ELSS mutual funds have the shortest lock-in among section 123 (was 80C) options, just 3 years. Returns are market-linked, so they can be negative over short periods and there is no guaranteed rate. Past returns do not predict future ones.
4. Sukanya Samriddhi Yojana (SSY)
If you have a daughter below 10 years of age, SSY pays 8.2% p.a. for the October to December 2026 quarter, with full EEE tax treatment. Maximum annual investment: ₹1,50,000. Check our SSY Calculator to project the maturity value.
5. National Savings Certificate (NSC)
Fixed-income instrument with a 5-year lock-in, paying 7.7% p.a. for the October to December 2026 quarter. The interest is reinvested and qualifies for section 123 (was 80C) each year except the final year. Suited to conservative investors.
6. Life Insurance Premiums
Premium paid for life insurance policies (for self, spouse or children) qualifies under section 123 (was 80C). Avoid buying insurance purely for tax saving. Term insurance is the most cost-effective protection.
7. Home Loan Principal Repayment
The principal component of your home loan EMI qualifies under section 123 (was 80C). For a ₹50 lakh home loan at 9% for 20 years, the first-year principal repayment is roughly ₹1.2 lakh.
8. Children's Tuition Fees
Tuition fees (not donations or development fees) paid for up to 2 children studying in India qualify under section 123 (was 80C).
Section 126 (was 80D): Health Insurance Premiums (Old Regime Only)
Beyond section 123 (was 80C), Section 126 (was 80D) provides additional deductions for health insurance premiums:
| Scenario | Deduction Limit |
|---|---|
| Premium for self, spouse, children (below 60) | ₹25,000 |
| Premium for parents (below 60) | ₹25,000 |
| Premium for parents (above 60 / Senior Citizen) | ₹50,000 |
| Preventive health check-up (included in above limit) | ₹5,000 |
Maximum total section 126 (was 80D) deduction: ₹1,00,000 (if both you and your parents are senior citizens).
Example: If you pay ₹20,000 for your own family's health insurance and ₹30,000 for your senior citizen parents' policy, your total section 126 (was 80D) deduction is ₹50,000.
Since 22 September 2025, individual health and life insurance premiums carry no GST, so the premium you pay is lower than it was before that date.
HRA Exemption: For Salaried Employees Paying Rent (Old Regime Only)
If you receive House Rent Allowance (HRA) and actually pay rent, you can claim an HRA exemption. The exempt amount is the lowest of:
- Actual HRA received from your employer
- 50% of basic salary in the eight cities listed below (four before April 2026), 40% elsewhere
- Actual rent paid minus 10% of basic salary
Worked Example:
- Basic Salary: ₹6,00,000/year
- HRA Received: ₹3,00,000/year
- Actual Rent Paid: ₹2,40,000/year (₹20,000/month)
- City: Bengaluru
Calculation:
- Actual HRA = ₹3,00,000
- 50% of Basic = ₹3,00,000
- Rent - 10% Basic = ₹2,40,000 - ₹60,000 = ₹1,80,000
HRA exemption = ₹1,80,000 (the lowest of the three). From tax year 2026-27 (April 2026) rule 279 of the Income-tax Rules, 2026 gives the 50% limit to eight cities: Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bengaluru, Pune and Ahmedabad. So a Bengaluru resident now gets 50% of basic (₹3,00,000 here). For FY 2025-26 only the first four counted, and Bengaluru was held to 40% (₹2,40,000). Neither limit binds in this example, because the rent test gives a lower figure.
Tip: If you live with your parents, you can pay them rent and claim HRA exemption. They must declare it as rental income, and the arrangement needs genuine payments and a rent agreement. It saves the family tax only if their tax bracket is lower than yours.
Section 124(3) (was 80CCD(1B)): NPS Additional Deduction (Old Regime Only)
The National Pension System (NPS) offers an additional ₹50,000 deduction over and above the ₹1.5 lakh section 123 (was 80C) limit.
- Total section 123 (was 80C) + section 124(3) (was 80CCD(1B)) = ₹2,00,000 deduction
- For someone in the 30% bracket, this saves ₹15,600 in tax (₹50,000 × 31.2% including cess)
- NPS returns depend on the asset mix you choose and are not guaranteed
Caveat: NPS money is largely locked in until retirement, and the exit rules require part of the corpus to be used to buy an annuity. The rules on how much you can take as a lump sum have been revised in recent years, so check PFRDA's current exit rules before you count on a figure.
Home Loan Interest: Section 22 (was 24(b))
If you have a home loan, the interest component of your EMI gets a separate deduction under Section 22 (was 24(b)):
- Self-occupied property: up to ₹2,00,000 a year (old regime only)
- Let-out property: the interest is set off against rental income. This is the one home-loan benefit the new regime also allows, without the option to carry a loss to your salary income.
Section 131 (was 80EEA) allowed an extra ₹1.5 lakh for first-time buyers on loans sanctioned between 1 April 2019 and 31 March 2022. If yours qualified, it continues for the life of that loan under the old regime.
See the exact interest and principal split with our Home Loan EMI Calculator.
Worked Example 1: ₹12 Lakh Salary
Assumptions:
- Gross Salary: ₹12,00,000
- Basic Salary: ₹6,00,000
- HRA: ₹3,00,000
- Rent Paid: ₹20,000/month (₹2,40,000/year)
- EPF (employee share): ₹72,000/year, plus ₹78,000 in PPF to fill section 123 (was 80C)
- Health Insurance (self): ₹20,000
- Health Insurance (parents, senior): ₹30,000
New Regime Tax
- Gross Income: ₹12,00,000
- Standard Deduction: ₹75,000
- Taxable Income: ₹11,25,000
- Slab tax: ₹0 (0 to 4L) + ₹20,000 (4L to 8L) + ₹32,500 (8L to 11.25L) = ₹52,500
- Less section 156 (was 87A) rebate: ₹52,500 (taxable income is below ₹12 lakh)
- Tax payable: ₹0
Old Regime Tax
- Gross Income: ₹12,00,000
- Standard Deduction: ₹50,000
- HRA Exemption: ₹1,80,000
- Section 123 (was 80C) (EPF + PPF): ₹1,50,000
- Section 126 (was 80D): ₹50,000
- Taxable Income: ₹12,00,000 - ₹50,000 - ₹1,80,000 - ₹1,50,000 - ₹50,000 = ₹7,70,000
- Tax: ₹0 (0 to 2.5L) + ₹12,500 (2.5L to 5L) + ₹54,000 (5L to 7.7L) = ₹66,500
- Less section 156 (was 87A) rebate: not available (taxable income above ₹5 lakh)
- Plus 4% cess: ₹69,160
Result: the new regime saves ₹69,160 here. Even with a ₹2 lakh home-loan interest deduction on top, the old regime still costs ₹27,560, so the new regime wins comfortably. All the PPF and insurance you bought "for tax" did nothing for your tax bill in this case. Buy them only if you want the product itself.
Worked Example 2: ₹25 Lakh Salary With Large Deductions
Assumptions: gross ₹25,00,000, basic ₹12,50,000, HRA ₹5,00,000, rent ₹50,000 a month in a metro, full section 123 (was 80C) (₹1,50,000), NPS section 124(3) (was 80CCD(1B)) (₹50,000), section 126 (was 80D) of ₹75,000 (self plus senior parents) and ₹2,00,000 of home-loan interest on a self-occupied house.
- New regime: taxable ₹24,25,000, tax ₹3,07,500, plus cess = ₹3,19,800
- Old regime: HRA exemption ₹4,75,000. Total deductions including the standard deduction come to ₹10,00,000, so taxable income is ₹15,00,000. Tax ₹2,62,500, plus cess = ₹2,73,000
Result: the old regime saves ₹46,800 in this case. That is the profile where deductions still pay: a high salary combined with large, genuine deductions such as rent, a home loan and parents' health insurance.
Use our Income Tax Calculator to run your own comparison.
Common Tax-Saving Mistakes to Avoid
1. Investing Only for Tax Benefits
Never buy a ULIP, endowment plan or a mutual fund just because someone told you to "invest ₹1.5 lakh." On the new regime that investment saves no tax at all. First understand the product, then decide.
2. Ignoring NPS Section 124(3) (was 80CCD(1B)) on the Old Regime
Most people on the old regime max out section 123 (was 80C) and stop. The additional ₹50,000 NPS deduction saves ₹15,600 for someone in the 30% bracket. It saves nothing on the new regime.
3. Not Claiming HRA While Living with Parents
This is legal under the old regime if the rent is genuinely paid and your parents declare it. Many salaried employees miss it.
4. Choosing a Regime Without Calculating
Up to ₹12.75 lakh of salary the new regime cannot be beaten. Above that, run both regimes with your real numbers. The answer depends entirely on how large your deductions are.
5. Last-Minute Rush in March
Plan in April, at the start of the financial year. If you are on the old regime, spread investments across the year instead of dumping ₹1.5 lakh in March.
Tax Planning Timeline for FY 2026-27
| Month | Action |
|---|---|
| April 2026 | Declare your regime to your employer, start any SIPs, pay the health insurance premium |
| May to June | Submit rent receipts and the HRA declaration if you are on the old regime |
| July | File the return for the previous year, claim LTA for travel if applicable |
| October | Mid-year review: is your regime choice still the right one? |
| January 2027 | Submit investment proofs to your employer |
| February | Make any final NPS contribution |
| March | Last chance for remaining old-regime investments |
Summary: Maximum Deductions You Can Claim (Old Regime)
| Section | Deduction | Maximum |
|---|---|---|
| Section 123 (was 80C) | EPF, PPF, ELSS, SSY, NSC, LIC, Tuition | ₹1,50,000 |
| Section 124(3) (was 80CCD(1B)) | NPS additional | ₹50,000 |
| Section 126 (was 80D) | Health insurance (self + parents) | ₹1,00,000 |
| Section 22 (was 24(b)) | Home loan interest (self-occupied) | ₹2,00,000 |
| HRA | Rent exemption | Varies |
| Standard Deduction | Flat | ₹50,000 |
| Total Potential | ₹5,50,000+ |
For a person in the 30% bracket, ₹5.5 lakh of deductions reduces the old-regime tax by about ₹1,71,600 (including 4% cess). Compare that saving with the new regime before deciding. At most salaries the lower new-regime slabs and the ₹12 lakh rebate are worth more.
Disclaimer: Educational article, not tax advice. Figures follow the slabs and limits for FY 2025-26 and FY 2026-27 as of 6 November 2026, which Budget 2026 left unchanged. From 1 April 2026 the Income-tax Act, 2025 applies with renumbered sections. Please consult a qualified chartered accountant for advice specific to your situation.