How to Save Tax Legally in India

To save income tax in India legally in FY 2025-26, use a combination of the right tax regime, Section 80C investments up to ₹1.5 lakh, NPS contributions under Section 80CCD(1B) for an extra ₹50,000, health insurance deductions under Section 80D, and home loan benefits under Section 24. The regime you choose determines which deductions apply. Under the new regime, income up to ₹12 lakh is effectively tax-free due to the Section 87A rebate introduced in Budget 2025.

The First Decision: New Regime vs Old Regime

The single most important tax-saving decision you make in FY 2025-26 is choosing your tax regime. Everything else follows from this choice.

Under Budget 2025, Finance Minister Nirmala Sitharaman confirmed there will be no income tax payable on income up to ₹12 lakh under the new regime, and up to ₹12.75 lakh for salaried taxpayers after factoring in the standard deduction of ₹75,000. This is a result of the enhanced Section 87A rebate, increased from ₹25,000 to ₹60,000, per the Press Information Bureau, Government of India.

The tradeoff is clear. The new regime offers lower rates and a high rebate but eliminates most deductions. The old regime offers higher base rates but lets you reduce taxable income through investments and expenses. Neither is universally better. The right choice depends entirely on your income level and how many eligible deductions you can claim.

How to Save Income Tax in India: 6 Legal Methods

1. Section 80C: Up to ₹1.5 Lakh Deduction

Section 80C is the most widely used tax-saving method in India. It allows a deduction of up to ₹1.5 lakh per financial year on eligible investments and expenses. This deduction is available only under the old tax regime.

What qualifies under Section 80C:

• Employee Provident Fund (EPF) contributions
• Public Provident Fund (PPF) deposits
• Equity Linked Saving Scheme (ELSS) mutual funds
• Life insurance premiums
• 5-year tax-saving fixed deposits
• Sukanya Samriddhi Yojana
• Tuition fees for children (up to 2 children)
• Home loan principal repayment

Per the Income Tax Department of India, the combined deduction limit under Sections 80C, 80CCC, and 80CCD(1) cannot exceed ₹1.5 lakh in a financial year.

Important update for FY 2026-27: The new Income Tax Act 2025 renames Section 80C to Section 123, effective April 1, 2026. The deduction limit and eligible investments remain unchanged. FY 2025-26 returns are still filed under the old numbering.

2. NPS: An Extra ₹50,000 Deduction Beyond 80C

The National Pension System offers one of the hidden ways to save tax that most salaried professionals underuse.

Under Section 80CCD(1B), you can claim an additional deduction of ₹50,000 on your own NPS contributions, over and above the ₹1.5 lakh Section 80C limit. This brings your total self-contribution deduction to ₹2 lakh. Per the NPS Trust, this benefit is available only under the old tax regime.

Under the new tax regime, only your employer's NPS contribution remains deductible — up to 14% of your basic salary plus DA under Section 80CCD(2). This applies to both government and private sector employees from FY 2025-26 onwards, after Budget 2024 harmonised the rate.

In practical terms, for a salaried taxpayer in the old regime:

3. Section 80D: Save Tax While Protecting Your Health

Section 80D is one of the most practical ways for Indian taxpayers to save tax, and it applies to both regimes for health insurance.

The deduction limits for FY 2025-26, per the Income Tax Act, 1961:

Preventive health check-up expenses up to ₹5,000 are included within these limits, not over and above them.

One thing most people miss: If your senior citizen parents do not have health insurance, you can still claim their actual medical bills up to ₹50,000 as a deduction. Payments must be made through non-cash modes.

4. Home Loan: Two Deductions, One Property

A home loan is one of the most powerful tax-saving methods available to Indian taxpayers because it offers deductions on both principal and interest.

• Section 80C: Principal repayment qualifies within the ₹1.5 lakh limit
• Section 24(b): Interest on a self-occupied home loan is deductible up to ₹2 lakh per year under the old regime

According to the Income Tax Department, the Section 24(b) interest deduction is not available under the new tax regime for self-occupied property. If you have a let-out property, the actual interest paid is deductible without limit under both regimes.

5. HRA Exemption: Reduce Tax on Your Salary

House Rent Allowance (HRA) is one of the most common ways for salaried employees in metros to save on income tax. If you receive HRA as part of your salary and live in rented accommodation, you can claim an exemption on part of it.

The exempt HRA is the lowest of:

• Actual HRA received
• Actual rent paid minus 10% of basic salary
• 50% of basic salary (metro cities) or 40% (non-metro)

HRA exemption is available only under the old tax regime. Under the new regime, HRA forms part of taxable income.

6. ELSS Mutual Funds: Tax Saving With Wealth Creation

Equity-linked savings schemes are among the most effective hidden ways to save tax for investors who also want market-linked returns. ELSS qualifies under Section 80C within the ₹1.5 lakh limit, carries the shortest lock-in period of any 80C instrument at three years, and invests in equities for long-term wealth creation.

Long-term capital gains on ELSS redemptions above ₹1.25 lakh are taxed at 12.5% per Budget 2024. Gains up to ₹1.25 lakh remain tax-free.

The Regime Decision Framework: A FinAtoZ Perspective

At FinAtoZ, we treat the regime choice as the starting point of every tax plan, not an afterthought. The question we ask before recommending any instrument is: Does this person's deduction stack justify the old regime, or does the new regime's lower rate structure leave them better off with zero deductions?

The answer is rarely obvious from a tax calculator. It requires mapping the client's salary structure, employer NPS contribution, existing insurance commitments, and home loan status together. A client paying ₹1.5 lakh under 80C, ₹50,000 in NPS, ₹50,000 in 80D, and ₹2 lakh in home loan interest has ₹4.25 lakh in deductions. For that person, the old regime almost always wins above ₹15 lakh. Below that, the new regime may still come out ahead due to the rebate structure.

FinAtoZ is a SEBI-registered investment advisor (INA200006628) and provides goal-based financial planning, including tax optimisation for salaried professionals and NRIs. The firm's advisors hold CFP certification and are registered with AMFI (ARN: 114771).

Related: Why a SEBI-Registered Advisor Makes a Difference in Tax Planning

How Can I Save Income Tax: Full Deduction Summary Table

Frequently Asked Questions

How can I save tax in India if I earn less than ₹12 lakh?

Choose the new tax regime. Under Budget 2025, the Section 87A rebate ensures that income up to ₹12 lakh is tax-free. Salaried taxpayers earning up to ₹12.75 lakh pay zero tax after the ₹75,000 standard deduction. No investments are required to achieve this.

How can we save on income tax as a family?

Combine deductions strategically. Each earning member can claim their own 80C, 80D, and NPS deductions independently. You can also claim 80D for parents' health insurance separately from your own, potentially unlocking up to ₹1 lakh in health-related deductions alone.

What are the hidden ways to save tax that most people miss?

Three that are consistently underused: the additional ₹50,000 NPS deduction under Section 80CCD(1B), medical bills for uninsured senior citizen parents under Section 80D, and employer NPS contributions under Section 80CCD(2), which are deductible in both regimes.

Can NRIs claim 80C deductions?

Yes. NRIs can claim Section 80C deductions on eligible instruments, including ELSS and life insurance, under the old tax regime. They cannot claim the Section 87A rebate under the new regime.

Not sure which tax regime saves you more this year?

FinAtoZ's SEBI-registered advisors build a complete tax plan for your income structure, including regime selection, deduction mapping, and investment sequencing.

Book a free 30-minute consultation or call +91-98800 83712

Disclaimer: This article is for informational purposes only. Tax laws are subject to change. Consult a SEBI-registered advisor or qualified tax professional before making investment or tax decisions.