How to Save Income Tax for salaried employees?


I am sure all of us want to save Income Tax legally. If we don’t reduce our taxable income by utilizing all exemptions. Then no matter how many deductions we claim, we won’t be able to take full advantage of tax saving.

Income Tax deduction & Exemption

Income Tax Act provides two types of relief for salaried employees to reduce their tax liability.

  • Exemption
  • Deduction

Mostly, people use Exemption, and Deduction interchangeably, which is incorrect.

For example, say Ram works in an MNC, owns a farm, and is a silent partner in a partnership firm. He earns a salary of Rs 10 lakh from the MNC. His agricultural income is Rs 5 lakh. And he gets profit share of 2 lakh from partnership firm. Thus, his net earning is 10+5+2= Rs 17 lakh. But the 5 lakh agricultural income, and 2 lakh profit share are completely exempt from income tax. In fact, he can also claim many exemptions on the 10 lakh salaried income.


So, if you remove all exemptions from your earnings then you get taxable income. On this taxable income, you can claim deductions like 80C, 80D, etc. And after deductions, you get the final net taxable income, on which you have to pay tax. Hence, it is important to reduce your taxable income to gain further benefits from deductions.

Old Tax Regime vs New Tax Regime

Questions come to your mind. Why take the hassle of exemptions, and deductions. when we can just opt for the new tax regime. It has no exemptions, deductions claim and will reduce tax liability too. To decide which tax regime to follow,


Take for instance you fall under the 30% tax slab rate. To save tax, you invested Rs 1.5 lakh annually, which is Rs 12500 per month. At an 8% return rate, in 15 years, you will receive this much amount.

In the second case, take you to fall under the 30% slab rate even in the new tax regime. You will not get Rs 1.5 lakh, but approx Rs 1 lakh only, because 30% tax will be deducted from it. Thus, your monthly SIP will come to Rs 8600. If you invest this for 15 years at 13%, then the return will be approximately equivalent to an 8% PPF investment. Because remember that both principal and interest are tax-free under PPF. But if you invest in any other equity mutual fund or debt fund, you need to pay a minimum of 10% LTCG.

And say for instance in the new tax regime you fall under 20% slab rate instead of 30%, then you can make slight adjustments accordingly. But the point is that 8% return in PPF is Approximately equal to 12 % to 13% return in equity, or debt mutual fund. Because you get many tax exemptions in PPF investment. Now if you are super confident of generating so much return on your Rs 1.5 lakh. Then definitely option for new tax regime, and forget about exemptions, and deductions.

Exemption for salaried persons

Basic, and DA which occurs in all salaries. Then there might be some allowances such as HRA, Leave Travel Allowance (LTA), Conveyance, Washing, etc. Lastly, you might probably also see reimbursements in some companies such as Mobile, Food Coupon, Internet, etc. On the Basic, and DA part, you will have to pay full tax. But on allowances, and reimbursements you can get many exemptions. Then you might think of taking your full salary under HRA, or other allowances instead of Basic, and DA. So you can take the exemption on full salary. To prevent you from saving a lot of money through exemptions, the government has two things in order.

  • Firstly, the government has introduced the Code on Wages. This limits a minimum of 50% of gross salary under basic.
  • Secondly, Income Tax Department has put limitations on the exemptions on various allowances. However, an aware citizen, will still be able to optimize all allowances, and save considerable tax.

The first key to save Income Tax is HRA Tax Exemption

HRA majorly helps in saving tax. The government assumes that an employee will need to relocate for job purposes and rent a new place there. Paying pre-tax on the new house rent will unburden employee’s pockets a little. Hence government gives exemption on HRA. For finding HRA, you need to calculate 3 numbers the lowest among these 3 will be your actual HRA exemption value.

  1. Actual HRA received- If no HRA component is given in your salary slip, you will not get an HRA exemption.
  2. 50% of basic for metros, and 40% of basic for non-metros. – Suppose your basic is Rs 5 lakh then you can get a maximum of Rs 2.5 lakh as HRA exemption annually.
  3. Rent- 10% of basic. suppose your basic is Rs 5 lakh, and annual rent is rs 3 lakh. Then benifit = 3lakh – (10% of 5 lakh=) 50,000 = Rs 2.5 lakh is your maximum HRA exemption.

Calculate all these 3 values, and the least value among them will be your HRA exemption amount. Also note that the second, and third components work in reverse order. If you reduce the Basic value, then the third component will reduce. Then, the overall third component will be a bigger value, and your exemption will be larger. But in the same case, the second component of 50% basic will also reduce. So for every rent, there is an optimized number you can keep for HRA to save maximum tax.

The Second key to save Income Tax is LTA

Very few companies and employees take advantage. If you and your family take 2 trips within 4 years which is very common for taking vacations. Then your travel expenses for train, flight, etc, can be exempted under Leave Travel Allowance (LTA). Subject to the fact that you get LTA from your company. Suppose your family of 4 travels from Delhi to Andamans. Take a one-way ticket flight at Rs 10,000 then the total travel expense for flights would be Rs 80,000 for 4 people. Which can be completely exempted under LTA. Think of it as not paying 30% tax, hence your ticket is 30% cheaper. So do travel all over India, and ask your employer to pay you LTA.

The third and fourth key to save Income Tax

Although third, and fourth allowances may not give big exemptions. But leaving them out is stupid. They are Children Education Allowance & Hostel Allowance. They are only applicable for employees with kids. Maximum Rs 9600 exemption for up to 2 kids is possible annually. But if you have kids who study in school then definitely take Education Allowance. And If they stay in boarding, day-boarding, college hostel, then also claim Hostel Allowance. In the future, these limits may increase, so your benefits may increase as well.

Reimbursements to save Income Tax

If you make any expenses on behalf of the business, the business pays you back for reimbursement. Then generally you don’t have to pay any tax on it. Say your cellphone is predominantly for office use. You take reimbursement for the cellphone bill then that is tax exempted. Say, you are working from home, and have taken a high-speed internet connection to work efficiently. Then that internet bill can also be reimbursed by the company, and be tax exempted. Hence, try to claim such small expenses made on behalf of the company as reimbursements rather than as allowances. Submit the billing as proof to the company, and get them all tax exempted.

One more reimbursement you can get is a food coupon such as Sodexo. Companies can pay you a maximum of Rs 50 per meal twice a day. Which is essentially equal to 50 X 2 X 26 = Rs 2600 for 26 working days. And 2600 X 12 = Rs 31,200 per annum which you can take as food coupons to redeem. Now, many of you employees might say that this is under the HR & employer’s discretion to give. So I suggest that you talk it out with your employer, and they will surely understand the same.

There is one downside to this from the employer’s POV. By increasing the Basic, the PF or Gratuity components may also increase a bit consecutively. But here, we are discussing salaries in terms of CTC. So it is possible to readjust components that will overall not affect employees’ in-hand salary or the company’s expenses. Since anyway there is an upper limit on the amount payable as PF, and other components.

Deduction for salaried persons to save Income Tax

Salaried employees can firstly option for Rs 50,000 standard deduction, which is a no-brainer. Suppose, your taxable income comes to Rs 10 lakh then it automatically becomes Rs 9.5 lakh.

The next deduction which everyone is aware of is 80C. Under 80C, you can get deductions for investments in PPF, SSY, kid’s tuition fees. If you want to take more risk then you can also invest in ELSS. However, 8% investment in PPF is probably a better than 13% investment in mutual funds. And PPF interest rate also fluctuates a little. Like right now it is supposed to go below 7% which I cannot give a surety about.


But in the past few years it has consistently been giving around 8% returns.

The second deduction is 80CCD

The second deduction which people often talk about that can give you Rs 50,000 deduction is 80CCD (NPS) deduction. But I don’t suggest it a lot since the lock-in period is high. upon retirement, you have to buy a minimum of 40% annuity which also does not give high returns. And at that time due to inflation, the amount may be equal to peanuts for you. So if I’m doing tax planning for myself, I’ll only option for NPS if necessary.

For example, my income is at Rs 5.5 lakh, and the tax payment is Rs 12,750 then I’ll invest 5000-6000 in NPS. And reduce my tax liability to under Rs 5 lakh, so my full 12,750 tax gets saved. Otherwise, I’d rather opt for another investment that provides better liquidity rather than NPS.

80D Health Insurance

Under health insurance, you can claim a maximum of up to Rs 25,000 personally, and Rs 50,000 for parents. But do note that common salaried employees never claim such high health insurance. It usually ranges between 7000-10,000. And while taking it understand that you are essentially saving 30% tax on this if you fall under the 30% tax slab rate.

80EE interest on home loan exemptions

If you have taken a home loan or electric vehicle loan, for 8.5% – 9% then as per some conditions you can claim deduction on the interest. Now do not forcefully take such loans to save tax. See it as getting a 30% discount on the interest rate if you fall in the 30% slab, and fulfill all the T&C. Effectively, your 10% interest rate will become a 7%-7.5% interest rate with this deduction. So only take loans if necessary. And when you go to banks to take loans, the associates there will inform you of all the deductions you will get.

Lastly, some small deductions like Rs 5000 for a preventive health check-up. Which we suggest anyone above 25-30 years go for once a year at least. And take the 5000 deductions for it. For interest on saving account, and FD account you can get a Rs 10,000 deduction, and 50,000 deductions for senior citizens. Apart from these, you will find many more deductions in Chapter 6 of the Income Tax Act which are usually not helpful for the common man.

Tax Calculation Example


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