How to Save Income Tax in India: A Practical Guide for FY 2025-26

Most salaried Indians spend more time choosing a phone than choosing how to save tax. The result is that they leave somewhere between Rs 30,000 and Rs 1,50,000 of legitimate, perfectly legal tax savings on the table every year. This guide walks through the major sections of the Income Tax Act that you can actually use, the difference between the new and old regimes, and the practical decisions that move the needle.

Which tax regime should you pick?

For FY 2025-26, you have two regimes to choose from at the time of filing your return:

Old regime

• Higher headline rates.
• Lets you claim every deduction in this guide — 80C, 80D, HRA, home loan interest, NPS, and so on.
• Works best when your total deductions add up to roughly Rs 3 lakh or more (HRA + 80C + 80D + home loan + NPS).

New regime (default)

• Lower headline rates with revised slabs.
• Most deductions and exemptions are not allowed, including 80C, 80D, HRA and home loan interest on a self-occupied property.
• Standard deduction (Rs 75,000 in the new regime as of FY 2025-26) and employer NPS contribution under 80CCD(2) are still allowed.

The new regime is now the default. You'll need to actively opt for the old regime when filing if you want to claim the deductions. As a rule of thumb:

• Income up to Rs 7-8 lakh: new regime usually wins because of the rebate.
• Income Rs 8-15 lakh with a home loan, HRA, and full 80C: old regime often wins.
• Income above Rs 15 lakh: depends entirely on how many deductions you actually use. Run the numbers both ways.

Our income tax calculator compares both regimes side by side and tells you the breakeven for your income.

Section 80C — the Rs 1,50,000 workhorse

Section 80C lets you deduct up to Rs 1,50,000 from your taxable income for investments and expenses across a wide list. The most common ones used by salaried taxpayers:

The Rs 1.5 lakh limit is shared across all of these. So if your EPF contribution alone is Rs 1.2 lakh in a year, you only need Rs 30,000 more in any other 80C instrument to fully use the section.

Section 80D — health insurance

Health insurance premiums are deductible under Section 80D, separately from the 80C limit. The deduction caps depend on whose health you're insuring:

• Self, spouse, dependent children: up to Rs 25,000.
• Parents (under 60): additional Rs 25,000.
• Parents (60 and above): additional Rs 50,000 (raised cap for senior citizens).
• Self / spouse 60 and above: Rs 50,000 cap on the self-family side.

If both you and your parents are below 60, your maximum 80D deduction is Rs 50,000 per year. If your parents are senior citizens, you can claim up to Rs 75,000 (your Rs 25k + their Rs 50k). If you and your parents are all senior citizens, you can claim up to Rs 1,00,000.

Within these caps, preventive health check-up expenses up to Rs 5,000 are also covered.

Home loan deductions

If you have a home loan on a residential property, two separate deductions apply (in the old regime):

Section 80C — principal repayment

The principal portion of your EMIs is deductible under 80C, within the Rs 1.5 lakh overall cap. So if you're already filling 80C with EPF, this overlaps and may not give you extra benefit beyond what 80C already provides.

Section 24(b) — interest on home loan

The interest portion is deductible separately under Section 24(b):

• Self-occupied property: up to Rs 2,00,000 per year.
• Let-out property: the entire interest is deductible against rental income, with no upper cap. (Net loss from house property can be set off against other income up to Rs 2 lakh per year.)

Together, 80C principal + Section 24 interest can give a salaried home-loan holder a deduction of up to Rs 3.5 lakh per year. The catch: this is only available in the old regime.

HRA exemption — if you live in a rented home

If your salary slip includes a House Rent Allowance and you actually live in rented accommodation, you can claim an HRA exemption equal to the least of:

• Actual HRA received from your employer.
• 50% of basic salary (40% if you live in a non-metro city).
• Rent paid in excess of 10% of basic salary.

Example: basic salary Rs 50,000/month, HRA Rs 20,000, rent paid Rs 18,000 in Mumbai.

• HRA received: 20,000 x 12 = Rs 2,40,000
• 50% of basic: 25,000 x 12 = Rs 3,00,000
• Rent minus 10% of basic: (18,000 - 5,000) x 12 = Rs 1,56,000

The exemption is the smallest, so Rs 1,56,000 is exempt from tax. The remaining (Rs 2,40,000 - Rs 1,56,000 = Rs 84,000) is taxable.

Keep rent receipts and (for rent above Rs 1 lakh per year) your landlord's PAN. Without these, your employer may not allow the HRA exemption at source.

NPS — the extra Rs 50,000

The National Pension System gives you a unique additional deduction under Section 80CCD(1B): Rs 50,000 over and above the Rs 1.5 lakh of 80C. So if you fully use 80C and contribute Rs 50,000 to NPS, your total deduction goes up to Rs 2,00,000.

NPS funds are managed by professional pension fund managers, with a mix of equity (max 75% under the active choice for younger subscribers), corporate bonds, government bonds, and alternative assets. Returns over 10+ year periods have been competitive with mutual funds, with low fund-management fees.

Two cautions:

• NPS is locked until age 60. At maturity, you can withdraw 60% tax-free; 40% must be used to buy an annuity, which is taxable as income.
• The Rs 50,000 deduction is only in the old regime. The new regime does not allow it.

There is also Section 80CCD(2) — employer's contribution to your NPS (up to 14% of basic salary for central government employees, 10% for others). This is allowed in both regimes and is the one notable retirement deduction in the new regime.

Lesser-known sections worth using

Section 80E — education loan interest

The entire interest on an education loan (for self, spouse, children, or a student you are the legal guardian of) is deductible for up to 8 years. There is no upper cap, only a time limit. This is a generous deduction that few claim.

Section 80EEA — additional home loan interest

For first-time home buyers of affordable property (stamp duty value up to Rs 45 lakh), an additional Rs 1.5 lakh of home loan interest is deductible over and above the Section 24 limit. This brings the total home-loan interest deduction up to Rs 3.5 lakh in qualifying cases.

Section 80G — donations

Donations to registered charities and public-relief funds are deductible at 50% or 100%, depending on the institution. The Prime Minister's National Relief Fund and certain disaster-relief funds qualify for 100%.

Section 80TTA / 80TTB — savings interest

Interest on savings bank accounts up to Rs 10,000 (Rs 50,000 for senior citizens, including FD interest) is deductible. This is small but easy to claim.

LTA — leave travel allowance

Twice in a four-year block, your travel expenses for domestic travel with your family can be exempted under LTA (in the old regime), provided your salary structure includes this allowance.

Common tax-saving mistakes

1. Buying insurance to save tax. The biggest, most expensive mistake. ULIPs and traditional endowment policies are sold heavily in March each year. They give 4-6% returns over 15+ years, while ELSS gives 11-13%. Buy term insurance for protection, equity for wealth.
2. Choosing PPF over ELSS without thinking. PPF is fine for the conservative portion of your savings, but ELSS has a 3-year lock-in vs PPF's 15. Most investors should have both.
3. Claiming HRA without paying rent. Submitting fake rent receipts to a relative is fraud. The IT department now uses PAN-level matching to flag this.
4. Forgetting employer NPS contribution. 80CCD(2) is allowed in both regimes, costs you nothing if your employer offers it, and adds 10% of basic to your retirement corpus tax-free.
5. Not tracking the regime breakeven. Some taxpayers who shifted to the new regime in FY 2023-24 should have stayed in old, and vice versa. Recompute every year as your salary, deductions, and slabs change.

Frequently Asked Questions

Can I switch between the new and old regime every year?

Salaried taxpayers can switch every year while filing their return. Business income earners can switch only once between the regimes during their lifetime, and once they revert to the old regime they cannot go back to new (subject to current rules).

Is the standard deduction available in both regimes?

Yes. For FY 2025-26, the standard deduction is Rs 75,000 in the new regime and Rs 50,000 in the old regime.

Are crypto profits eligible for any deduction?

No. Crypto / virtual digital asset gains are taxed at a flat 30% with no offsets, no deductions, no slab benefit, and no setoff against other gains. There are no tax-saving instruments that reduce this.

What if I missed declaring deductions to my employer?

You can still claim them when filing your income tax return. Excess TDS deducted gets refunded. Keep all proof documents in case the assessing officer asks.

Should retired people prefer the old or new regime?

Senior citizens have higher 80D caps (Rs 50,000) and additional Section 80TTB savings interest deduction (Rs 50,000). With pension income and these deductions, the old regime often works out better, but it depends on the income level.

Final word

Tax saving is not the same as tax planning. Tax saving is a March-end scramble of buying instruments to claim deductions. Tax planning is structuring your salary, investments and home-loan strategy in April so you naturally claim the most deductions through the year. The biggest single thing you can do is run the new-vs-old regime numbers once at the start of every financial year — if you've never done it, you may be paying tens of thousands of rupees more than required.

Use our income tax calculator to model both regimes and see how each deduction affects your final tax. If you're considering whether to invest a tax-saving amount in a recurring deposit or a SIP, our SIP calculator and RD calculator can compare the two side by side over your investment horizon.