How Employees Can Save Tax on Salary in 2025–26

When your appraisal is around the corner, your thoughts naturally move to new goals and the income tax that will come with a higher salary. 

Every salaried person wants to protect their earnings and understand how to save tax on salary legally. 

This guide explains the new rules for 2025–26 and shows you where you can still save taxes.

Budget 2025 Highlights: What Changed for Salaried Employees?

The Union Budget 2025 introduced major changes for salaried individuals. The government made the new tax regime the default from 1 April 2025. This means employers will calculate your TDS under the new slabs unless you inform them otherwise.

New Tax Regime Slab Rates: 2025 Updates

Here’s what to expect:

Zero Tax on Salary Up to ₹12.75 Lakh

The biggest relief is the new 87A rebate. If your taxable income (after deductions allowed under the new regime) is up to ₹12.75 lakh, your tax will be zero.

Example

• Gross Income: ₹13,00,000
• Less Standard Deduction: ₹75,000
• Taxable Income: ₹12,25,000
• Tax Payable: Nil (rebate applies)

This helps first-time taxpayers and individuals whose income has just entered higher slabs after appraisal. 

Exclusive Benefits Under The New Tax Regime

The new regime removes most exemptions but increases a few benefits:

1. Higher Standard Deduction

The deduction of ₹75,000 is available to every salaried person, including pensioners.
You do not need to submit any bills or documents for this deduction.

2. Higher Basic Exemption Limit

Your income up to ₹4 lakh remains tax-free. This higher basic exemption supports young earners and provides space for growth before tax applies at higher levels. But there is no extra slab for senior citizens as in the old regime.

3. Lower Surcharge for Very High Income

For incomes above ₹5 crore, the surcharge reduces from 37% to 25%. This matters mainly for senior executives and CXO-level earners. 

4. Simplified Filing

The new system removes the need for multiple proof submissions. No more paperwork for HRA, LTA, or investment proofs unless you choose the old regime.

5. Exemptions For Specific Groups

Family pensioners receive a standard deduction of ₹25,000. Employees with disabilities continue to receive exemptions up to ₹3,200 per month for conveyance. Perquisites such as mobile reimbursement, accident insurance, and gifts up to ₹50,000 also remain exempt.

Benefits Available Under Both Regimes

Some deductions exist in both regimes, although the list is shorter in the new regime. 

So, if your deductions are mostly via employer contributions or let-out property, you still benefit regardless.

Planning Before Your Appraisal — A Smart Approach

When your appraisal increases your salary, your tax may also rise. Here are steps that help you stay prepared:

1. Review Your Salary Structure

Check components such as basic pay, bonus, higher NPS employer share, allowances, employer-paid health insurance premium, official phone reimbursement, meal allowances or coupons, and NPS contributions. 

2. Estimate Your Income Post-Appraisal

Include variable pay, bonus earnings, and incentives when you calculate your expected annual figure. This clarity helps you understand the impact on your taxes.

3. Use Non-Taxable Perks

Ask HR if your policy includes employer-paid health insurance, travel allowances for disabilities, gift allowances, or phone reimbursement.

4. Track Your Deductions

If you earlier claimed multiple deductions under the old regime, then list all of them and check which ones continue under the new structure.

5. Declare Your Preferred Regime

Inform HR before TDS calculations begin for your revised salary. This step ensures accurate TDS and avoids corrections later.

Key Tax Saving Deductions for Salaried Employees

These deductions help you lower your taxable income in a clear and structured way.

1. Employer’s NPS Contribution

The employer’s contribution to NPS (Section 80CCD(2)) remains one of the strongest tax-saving tools. Under the new regime, companies can contribute up to 14% of basic + DA, which becomes a complete deduction for you. If your employer offers NPS matching, ask HR to optimise this benefit.

2. Agniveer Corpus Fund Deductions

Individuals enrolled in the Agnipath Scheme receive deductions for contributions to the Agniveer Corpus Fund under Section 80CCH.

3. Additional Employee Cost Deduction (For Startups)

Businesses hiring new employees can claim a 30% deduction on additional employee costs for up to three years, under Section 80JJAA. If you work in a startup, check with your accounts team to understand this benefit.

4. Allowances Still Exempt in the New Regime

A few allowances continue to be exempt:

• Travel and transfer allowances for official travel
• Conveyance allowance for employees with disabilities
• Daily allowance for outstation official work
• Certain expatriate allowances for government employees

5. PF Withdrawal, Leave Encashment & Gratuity

Leave Encashment

• Up to ₹25 lakh exempt for non-government employees
• Fully exempt for government employees

PF Withdrawal

Tax-free if:

• You complete 5 years of service
• Your job ends due to health or business closure

Gratuity

• Up to ₹20 lakh exempt for private-sector employees
• Fully exempt for government and defence personnel

Section 24(b) Deduction

If you have a let-out property, you can continue to claim a full interest deduction under the new regime. For self-occupied properties, only the old regime allows a deduction of up to ₹2 lakh. If you plan to rent out your home, this can significantly reduce your taxable income.

Strategies to Save Tax on Salary Under the New Regime

Here’s how to use the new regime in a practical manner and reduce your tax outflow.

1. Use Employer-Provided Health Insurance

Many companies include health insurance in the salary package. This is tax-free and offers financial protection.

2. Maximise Employer NPS

This gives you a clear tax reduction and builds long-term retirement savings.

3. Use Home Loan Interest (Let-Out Property)

A strong deduction if you own a rented property.

4. Utilise Non-Cash Perquisites

Phone reimbursement, food allowances, and travel allowances help reduce taxable income.

5. Optimise Salary After Appraisal

Request HR to increase benefits and allowances instead of raising only the basic salary.

How To Decide Between The Old Regime and the New Regime

Choose the tax path that matches your income limits and your savings behaviour so you can file confidently.

Choose New Regime If:

• Your deductions are limited
• You do not have a home loan interest for a self-occupied house
• You want a simple filing process
• Your income is up to ₹12.75 lakh

Choose Old Regime If:

• You claim deductions above ₹2–3 lakh yearly
• You invest consistently in ELSS, PPF, NPS, and insurance
• You pay rent and claim HRA
• You have a self-occupied home loan

Switching Regimes

Salaried individuals can switch regimes every year. You must declare your choice to HR before the first payroll of the financial year or after their appraisal if it shifts them across slabs.

Choose the Right Tax Path

A higher salary is a milestone, but keeping more of that salary is a responsibility. With the new tax regime becoming the default, the tax system is shifting towards simplicity. 

This makes understanding how to save income tax on salary, and learning about deductions, important for all salaried employees.

So review your income details carefully, stay aware of yearly updates and follow clear rules to avoid errors and manage your salary taxes in a smooth manner.