Tax Planning Tips for Salaried Employees
Understanding Taxable Income & Income Tax Slabs
- Taxable Income: Taxable income is the portion of your total income that the government taxes. It's calculated by subtracting all the eligible deductions and exemptions from your gross income, which includes your salary, wages, interest income, rental income, and other earnings. Deductions and exemptions are essentially categories of income that you're allowed to subtract from your gross income before calculating your tax liability.
- Tax Slabs: Tax slabs are spans of taxable income that are taxed at different rates. The concept is to form an adequate system where people with higher incomes pay a larger portion of their earnings in taxes. The income tax slabs and rates are revised periodically, generally during the annual budget announcement. There are two main tax regimes to choose from: the old tax regime and the new tax regime. Each regime has its own set of tax slabs and rates.
Income Tax Slab FY 2024-25 (AY 2025-26)
New Regime (FY 2024-25)
| Range of Income (Rs.) |
Tax Rate |
| Up to 3,00,000 |
NIL |
| 3,00,000-7,00,000 |
5% |
| 7,00,000-10,00,000 |
10% |
| 10,00,000-12,00,000 |
15% |
| 12,00,000-15,00,000 |
20% |
| Above 15,00,000 |
30% |
Old Regime (FY 2024-25)
| Range of Income (Rs.) |
Tax Rate |
| Up to 2,50,000 |
Nil |
| 2,50,000-5,00,000 |
5% |
| 5,00,000-10,00,000 |
20% |
| Above 10,00,000 |
30% |
Income Tax Slab Under New Regime for FY 2025-26 (AY 2026-27)
Given below is a table that shows the revised income tax slabs as per Budget 2025 under the new regime -
| Income (in lakhs) |
Tax Rate |
| ₹0 – ₹4 lakh |
Nil |
| ₹4 – ₹8 lakh |
5% |
| ₹8 – ₹12 lakh |
10% |
| ₹12 – ₹16 lakh |
15% |
| ₹16 – ₹20 lakh |
20% |
| ₹20 – ₹24 lakh |
25% |
| Above ₹24 lakh |
30% |
Note: The increased slab rates are only applicable under the new regime and will come into effect for ITR filing for FY 25-26 (AY 26-27).
Want to calculate your income tax for FY 25-26 (AY 26-27)? Calculate your tax liability using our Income Tax Calculator - FY 25-26 for free.
Claim House Rent Allowance (HRA)
HRA, or House Rent Allowance, is a component of your salary that helps reduce your taxable income. You can claim exemption on HRA if you meet the following eligibility criteria:
- This benefit is applicable to salaried individuals only.
- You must be paying rent for a qualified residential accommodation. Paying rent to a close relative (like parents, spouse's parents, siblings, etc.) generally doesn't qualify.
- You need to have rent receipts mentioning your name, landlord's name, PAN (if rent exceeds Rs. 1 lakh annually), address, and rent amount for the financial year.
HRA Exemption Calculation:
There are three factors that determine the amount of HRA you can exempt:
- HRA amount in your salary slip: This is the amount your employer provides as HRA.
- 50 or 40% of your basic salary + DA: DA stands for Dearness Allowance. (For metro cities, it’s 50% of your basic salary plus DA, and for non-metro cities, it’s 40%.)
- Actual rent paid minus 10% of your basic salary + DA: This is the minimum amount you should be paying as rent to claim the full HRA exemption.
The least of these three amounts is the HRA exemption you can claim.
Utilise Section 80C Deductions
Under Section 80C of the Income Tax Act, you can reduce your taxable income by claiming deductions for various investments and expenses. For the fiscal year 2023–2024, the maximum deduction allowed is ₹1,50,000 (subject to future changes). Here are some popular Section 80C investment options:
- Employee Provident Fund (EPF): A retirement fund contributed to by both the employee and the employer, ensuring long-term savings.
- Public Provident Fund (PPF): A government-backed savings scheme offering attractive tax benefits and competitive interest rates.
- Unit Linked Insurance Plans (ULIPs): Combines insurance with investment, though it may have higher associated costs.
- Equity-Linked Savings Schemes (ELSS): Stock-focused mutual funds with high growth potential but subject to market risks.
- National Pension System (NPS): A voluntary retirement savings plan with market-linked returns and tax advantages.
- Life Insurance Premiums: Payments up to ₹1.5 lakh annually qualify for tax deductions while ensuring financial security for your loved ones. Benefits on maturity and death are also tax-exempt under Section 10(10D), subject to specific conditions.
Deductions Above HRA and 80C
Besides HRA and Section 80C, here are some other common deductions you can claim while filing your income tax return:
- Health Insurance Premiums (Section 80D): Premiums paid for health insurance for yourself, spouse, dependent parents, and children.
- Interest on Education Loan (Section 80E): Interest paid on education loan taken for higher education of yourself, spouse, children, or a legal ward.
- Home Loan Repayments (Section 24): Interest paid on a home loan for a self-occupied property. There's a limit on the deductible amount.
Optimize Your NPS Contributions (Section 80CCD)
The National Pension System (NPS) is a smart retirement planning tool that also helps you save taxes:
- Section 80CCD(1): Deduction up to ₹1,50,000 (included in the 80C limit).
- Section 80CCD(1B): Additional deduction up to ₹50,000 for self-contributions.
Note: These benefits apply only under the old tax regime.
Benefit from Standard Deduction
A flat standard deduction is available for salaried individuals and pensioners:
- Old Tax Regime: ₹50,000
- New Tax Regime: ₹75,000
Claim Leave Travel Allowance (LTA)
If you travel within India, you can claim an exemption on your travel expenses through LTA, applicable for two trips in a block of four calendar years. The exemption covers travel by rail, air, or public transport.
Note: LTA is only available under the old regime.
Leverage Tax-Free Reimbursements & Perks
Certain employer-provided benefits are tax-free or partially taxable, including:
- Meal coupons or food allowances
- Telephone and internet reimbursements
- Uniform allowances
These benefits apply only under the old tax regime.
File Your ITR on Time to Avoid Penalties!
Filing your ITR before the due date helps you:
- Avoid late fees and penalties
- Claim tax refunds faster
- Maintain a clean tax record
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Why is Tax Planning in Advance Essential?
Many people scramble to make tax-saving investments near the end of the financial year. This often leads to rushed decisions and missed opportunities. Here's why you should embrace advance tax planning:
- Spreading Out Investments: Tax-saving investments throughout the year can help with budgeting and potentially benefit from rupee-cost averaging (investing a fixed amount regularly). This approach averages out the cost per unit you purchase over time, which can be beneficial in volatile markets.
- Informed Decisions: By planning ahead, you have ample time to research different investment options under Section 80C and other relevant sections. You can compare features, risks, and returns to choose investments that match your financial goals and risk tolerance.
- Discipline and Habit Building: Regular tax planning instills financial discipline and helps you build the habit of consistent investing.
There are multiple ways to plan taxes for salaried employees. Getting the right mix of investments can help you maximize your tax savings. However, choosing the best investment options can be challenging for non-experts. If you are also confused how to plan your taxes, you can simply book an eCA at Tax2win.
