15 Legal Ways to Save Income Tax on Salary Income (AY 2025-26)

The broadest tax-saving bucket. PPF offers sovereign guarantee with 7.1% interest (tax-free on maturity). ELSS mutual funds have the shortest 3-year lock-in among 80C options and offer market-linked returns. EPF contributions by employees automatically qualify. Life insurance premiums (for policies up to 10x the annual premium) also qualify. NSC, 5-year bank FDs, ULIP, tuition fees for two children, and home loan principal repayment all count towards this Rs 1.5L ceiling.

The National Pension System Tier I account allows an exclusive additional deduction of Rs 50,000 per year under Section 80CCD(1B), completely over and above the Rs 1.5L Section 80C limit. Combined with 80C, this means you can claim Rs 2 lakh in deductions. NPS offers equity, corporate bonds, and government securities allocation choices. On retirement at 60, 60% of the corpus is tax-free; 40% must be annuitised.

Unlike most deductions, employer NPS contribution under Section 80CCD(2) is available in both old and new tax regimes — making it particularly valuable for new-regime taxpayers. Private sector employees can claim up to 10% of basic salary + DA; government employees get 14%. This deduction is over and above the Rs 1.5L 80C and Rs 50K 80CCD(1B) limits. Negotiate with your employer to restructure CTC to include NPS contribution.

Premiums paid for health insurance covering yourself, spouse, and dependent children qualify for up to Rs 25,000 deduction. An additional Rs 25,000 (or Rs 50,000 if parents are above 60) applies for your parents' coverage. Preventive health check-up expenses up to Rs 5,000 are included within these limits. In the 30% tax bracket with senior-citizen parents, the full Rs 75,000 deduction (Rs 25K self + Rs 50K parents) can save Rs 23,400 in taxes.

House Rent Allowance exemption is calculated as the minimum of: (1) actual HRA received, (2) actual rent paid minus 10% of basic salary, and (3) 50% of basic salary for metro cities (40% for non-metros). For a person with Rs 7.5L basic salary and Rs 24,000/month rent in Delhi, the exemption works out to Rs 1,35,000. This is one of the most powerful deductions for salaried individuals in cities.

Interest paid on a home loan for a self-occupied residential property qualifies for deduction up to Rs 2,00,000 per year under Section 24(b). For let-out property, there is no ceiling — you can deduct the full interest paid. In the first years of a home loan, the interest component is high, making this deduction especially valuable. Combined with the 80C principal repayment deduction, a home loan provides tax benefits from two separate sections.

If you have taken an education loan for higher education — for yourself, your spouse, children, or a student you are the legal guardian of — the entire interest paid qualifies as a deduction under Section 80E. There is no upper limit on this deduction, and it applies for up to 8 consecutive years from the year repayment begins. Only interest qualifies (not principal). This can be particularly impactful in early years of repayment when interest constitutes the bulk of EMIs.

LTA exempts actual travel fare for the shortest route for travel within India during leave — for the employee and family (spouse, two children, dependent parents/siblings). It covers air travel (economy class), rail (first-class AC), or bus fare. The exemption can be claimed twice in the current 4-year block (2022–2025). Only transport costs qualify — accommodation and food are not covered. Ensure actual journey is undertaken and tickets are preserved.

Maturity proceeds from life insurance policies are exempt from tax under Section 10(10D) if the annual premium does not exceed 10% of the sum assured (15% for policies issued before April 2012 for specified conditions). This makes traditional endowment plans and term maturity payouts entirely tax-free. ULIP maturity is exempt provided premiums did not exceed Rs 2.5L per year. Death benefit is always tax-free.

Gratuity received on retirement, resignation, or death is exempt up to Rs 20 lakh for private sector employees covered under the Payment of Gratuity Act. For government employees, the entire gratuity is tax-free. Formula: 15 days' salary for each completed year of service. Employees not covered under the Gratuity Act still get a reduced but significant exemption calculated under the lower of formula-based or half-month salary method.

Leave encashment received at the time of retirement or superannuation is tax-exempt up to Rs 25 lakh for private sector employees (revised in FY 2023-24 from the earlier Rs 3 lakh). Government employees enjoy full exemption with no ceiling. Leave encashment during service (without retirement) is fully taxable. This revised limit makes leave encashment a meaningful tax-free benefit, especially for senior employees with accumulated leaves.

If you do not receive HRA as part of your salary (or are self-employed), you can still claim rent deduction under Section 80GG provided you don't own any residential property. The deduction is the minimum of Rs 5,000 per month, 25% of your adjusted total income, or actual rent paid minus 10% of adjusted total income. File Form 10BA before claiming this deduction.

Donations to specified funds and institutions under Section 80G qualify for deduction of either 50% or 100% of the donated amount. PM Relief Fund, National Defence Fund, and similar funds allow 100% deduction without any ceiling. Donations to approved hospitals, educational institutions, and religious trusts allow 50% deduction, subject to a qualifying limit of 10% of adjusted gross total income. Always obtain Form 10BE from the receiving institution.

Interest earned on savings bank accounts is deductible up to Rs 10,000 per year under Section 80TTA for individuals below 60 years. Senior citizens (60+) can claim up to Rs 50,000 under Section 80TTB, which covers interest from savings accounts, fixed deposits, and recurring deposits. These deductions can be claimed in addition to all other 80C-group deductions.

Professional tax deducted by your employer is fully deductible under Section 16(iii) before arriving at your net salary income. Most states charge Rs 200 per month (Rs 2,400 per year). While small, it reduces your gross taxable salary directly. Your employer typically reflects this in Form 16 Part B. Professional tax is a state levy — its actual amount varies by state and income slab.