How to save income tax as a salaried employee in India (FY 2026-27)

Every salaried employee in India can legally reduce their income tax through a combination of deductions, exemptions, and the right regime choice. The difference between a well-planned and an unplanned tax strategy can be ₹50,000 to ₹1,50,000 per year for someone earning ₹15–25 lakh. This guide covers every option available to you for FY 2026-27.

Step 1 — Choose the right tax regime

The single biggest tax decision for a salaried employee is which regime to file under. FY 2026-27 has two options:

The new regime is better if your total deductions are below ₹3–3.5 lakh. The old regime wins when you have significant 80C investments, pay rent, or are repaying a home loan. Use our income tax calculator to compare both regimes side by side with your actual numbers.

Step 2 — Section 80C investments (up to ₹1,50,000)

Section 80C is the most popular tax-saving avenue for salaried employees, available only under the old regime. You can claim deductions up to ₹1,50,000 per year. Since your EPF contribution (12% of basic) is automatically included, many salaried employees with a reasonable basic salary are already close to or at the ₹1.5L limit without investing anything extra.

Eligible investments under 80C include:

• EPF (Employee Provident Fund) — Your 12% contribution is auto-included. Check your payslip.
• PPF (Public Provident Fund) — Government-backed, 15-year lock-in, currently ~7.1% p.a. tax-free returns.
• ELSS mutual funds — Shortest lock-in (3 years), market-linked returns, historically 10–14% p.a.
• Life insurance premium — LIC or any life policy premium for self, spouse, or children.
• 5-year tax-saving FD — Fixed 7–7.5% return, lock-in 5 years, interest is taxable.
• Home loan principal repayment — The principal component of your EMI counts toward 80C.
• Tuition fees — Full-time education fees for up to two children.
• NSC (National Savings Certificate) — Post office instrument, 5-year lock-in.
• Sukanya Samriddhi Yojana — For girl child below 10 years, tax-free returns.

Check your payslip first. If your EPF contribution is already ₹1.2L or more (which happens at a ₹10L+ basic), you may have little room left for additional 80C investments.

Step 3 — Section 80D health insurance (up to ₹50,000)

Section 80D allows you to deduct health insurance premiums paid for yourself, your spouse, children, and parents. This is separate from 80C and does not affect your 80C limit.

If your employer provides group health insurance, the premium they pay does not count as your 80D deduction. But if you pay for a separate individual or family floater policy, that premium qualifies.

Step 4 — NPS additional deduction (₹50,000 extra under 80CCD(1B))

The National Pension System (NPS) allows an additional deduction of ₹50,000 per year under Section 80CCD(1B), which is over and above the ₹1.5L 80C limit. This is one of the few ways to claim more than ₹1.5L in deductions. At the 30% tax bracket, ₹50,000 in NPS saves ₹15,600 in tax.

NPS has a lock-in until age 60, with 60% of the corpus tax-free at withdrawal and 40% mandatory annuity (pension). It suits long-horizon investors who are comfortable with partial illiquidity.

Step 5 — HRA exemption if you pay rent

If you pay rent and your employer provides HRA as part of your salary, you can claim an exemption on the HRA received. The exempt amount is the minimum of three values: actual HRA received, 50% of basic (metro) or 40% (non-metro), and rent paid minus 10% of basic.

This exemption can be large — on a ₹40,000 basic in Mumbai paying ₹25,000 rent, the annual HRA exemption can easily be ₹1.5–2 lakh. Use our HRA calculator to find your exact exemption amount.

Step 6 — Home loan interest under Section 24(b)

If you have a home loan on a self-occupied property, you can deduct up to ₹2,00,000 per year in interest paid under Section 24(b), available only under the old regime. In the early years of a home loan, the interest component of the EMI is high — this deduction provides substantial tax relief at higher income levels.

How much can you actually save? A quick example

Not everyone will qualify for all of these at once — home loan and HRA exemption cannot typically be claimed together for the same property. But even claiming 80C + 80D + NPS alone can save ₹78,000 in tax per year at the 30% slab.

Frequently asked questions

Disclaimer: Tax laws change frequently. This guide reflects FY 2026-27 rules to the best of our knowledge. Always verify with a chartered accountant for your specific situation. This is for informational purposes only and not professional tax advice.