How to Save Income Tax on Salary Income in 2026

Differences of Tax Regimes, Slabs and Deductions (FY26/AY27)

In India, there are two parallel tax regimes – the new tax regime  and the old tax regime . The New Tax Regime is the default, while the ITR is optional. Overall income tax slab rates remain unchanged after significant recalibrations in the 2025 budget.

Tax Slabs (New Tax Regime vs Old Tax Regime)

Taxpayers may actively opt for the Old Tax Regime when filing the Income Tax Return (ITR), as per their choices, if they think the Old Tax Regime is more beneficial than the New Tax Regime. Once chosen for a year, switching back has restrictions in certain cases, though the default remains the New Tax Regime.

Tax Deductions/Exemptions/Benefits (New Tax Regime vs Old Tax Regime)

Regime Comparison and Decision Framework

The regime choice depends on total deductions and exemptions. In the New Tax Regime, most tax deductions (80C, 80D, HRA, home loan interest for self-occupied property) are unavailable. On the other side, the Old Tax Regime continues to incentivise aggressive savings and investments, but at higher marginal rates for mid-to-high incomes. At a glance, if the salary income is around ₹15–20 lakh gross, then the Old Tax Regime may be beneficial, subject to certain savings and investments (deductions/incentives allowable). Below ₹15 lakh gross salary income, the New Tax Regime may be preferred due to lower rates and inbuilt generous rebates & standard deductions. The new IT Rules 2026 introduce updated exemption limits for certain perquisites and allowances (e.g., higher children’s education allowance and expanded cities qualifying for 50% HRA exemption), which primarily benefit the old regime 

Ideal Strategies to Save Income Tax on Salary

Optimising Under the New Tax Regime

Salaried employees should:

• Always claim the inbuilt Standard Deduction: ₹75,000 to reduce gross salary directly.
• Ensure the benefit of tax rebate under 87A available up to ₹60,000 (for taxable income ≤ ₹12,00,000).
• Try to maximise Employer NPS Contribution and negotiate with the employer to contribute up to 14% of base salary + DA (typically 30–50% of gross salary) to the NPS Tier-I account. This amount is exempt from taxable salary and helps build a retirement corpus.
• Try for salary structuring with exemption/reimbursable components and may request the employer/HR to restructure salary with certain allowable components with favourable tax deduction treatment.
  • Under the Income Tax Rules, 2026, key opportunities include the following:
    • Telephone / Mobile Reimbursement: Fully exempt when paid directly by the employer.
    • Meal Vouchers / Food Coupons / Subsidised Canteen Meals: This is applicable now under the New Tax Regime also for food and non-alcoholic beverages provided during office/working hours on office premises. Also, non-transferable paid meal vouchers/food coupons (usable only at certain eating places) are applicable for such a tax incentive. The exemption limit is now ₹200/meal against the prior limit of ₹50/meal. Assuming two meals per day over 22 working days per month, this may provide a tax incentive of around ₹1.05 lakh/year.
    • Non-cash Gifts / Vouchers / Coupons: Gifts: Vouchers, or tokens provided by the employer (on ceremonial occasions or otherwise) are exempt up to an aggregate value of ₹15,000 per FY (increased from the prior ₹5,000). But cash gifts remain fully taxable.
    • Other Reimbursements: Certain official-purpose reimbursements may qualify for exemption.
    • Note on HRA: House Rent Allowance (HRA) exemption is not available under the new tax regime.
    • Interest incentive on Let-Out Property (if any): If the salaried employee has any such Let-Out property, which he purchased on borrowed capital (home loan), he can adjust the total interest on such home loan against his rental income (under the head ‘Income from House Property’). Although there is no upper limit on this decoction, any loss (higher interest paid than actual rental income) generally can’t be adjusted against salary or other income heads in the New Tax Regime.

An illustration of tax computation availing all potential rebates, exemptions & deductions: New Tax Regime (New Tax Regime)

Common for Both New Tax Regime & Old Tax Regime

Additional Perquisites that may be added back to the gross salary: The Income-tax Rules, 2026 (Rule 15) have revised the valuation of several perquisites. Notably, the taxable value for motor car facilities has increased significantly: 

• For cars with engine capacity up to 1.6 litres (or electric vehicles – EV), where running and maintenance expenses are borne by the employer – ₹5,000 per month + ₹3,000 per month 
• if a chauffeur is provided. For cars exceeding 1.6 litres: ₹7,000 per month + ₹3,000 for chauffeur.
• Lower values apply if the employee bears the running and maintenance expenses for personal use. 
• No perquisite arises if the car is used wholly and exclusively for official duties with proper documentation (e.g., logbook). 
• Certain official-use reimbursements may still qualify for exemption ─ they may still provide income tax relief.
• Employers must update payroll systems to reflect these new valuations and issue the revised salary statement (Form 130, which replaces the earlier Form 16) for the Tax Year 2025-26 onwards.

Note: Car perquisites ─ If the employee is provided a chauffeur-driven car by his employer (company) for both official & personal purposes (mixed), then an average perquisite cost of ₹8000-10000/month may be added to his gross salary; if the use of the car is strictly official, supported by proper documentation, the value of such a car perquisite is zero.

Optimising Under the Old Tax Regime:

If the potential tax deductions and exemptions exceed the tax differential, then one may opt for the old regime. Salaried employees should:

• Always claim the inbuilt Standard Deduction: ₹50,000 to reduce gross salary directly.
• Ensure the Tax rebate under 87A is automatically available up to ₹12,500 (for taxable income ≤ ₹1,500,000)
• Focus on Section 80C (up to ₹1.5 lakh): Invest in PPF, EPF (voluntary), ELSS mutual funds, 5-year tax-saving fixed deposits, NSC, life insurance premiums, or children’s tuition fees. Employee PF contribution is often automatic.
• Ensure additional NPS (80CCD (1B)): Claim additional ₹50,000 beyond 80C for self-contribution.
• Focus on Section 80D: Up to ₹25,000 (self/family) or ₹50,000 (senior citizen parents) for health insurance premiums, plus preventive health check-ups.
• Focus on HRA Exemption: 
  • Calculate the lowest of actual HRA received, 50% or 40% of salary (depending on metro/non-metro city; more cities now (8) ─ Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad qualify for 50% under updated rules, or actual rent paid minus 10% of salary. 
  • Always disclose the landlord's PAN & other details if the rent exceeds ₹1 lakh annually.
• Ensure Home Loan Benefits: Deduct up to ₹2 lakh interest for self-occupied property u/s 24(b); principal repayment qualifies under 80C. 
• Also, ensure to focus on any let-out properties, bought with a home loan ─ full interest is deductible.
• Ensure to avail Children’s Education and Hostel Allowances: Under the new Income Tax Rules, 2026, exemption limits have been significantly enhanced:
  • Children’s Education Allowance: Up to ₹3,000 per month per child (increased from the earlier ₹100), for a maximum of two children.
  • Children’s Hostel Expenditure Allowance: Up to ₹9,000 per month per child (increased from ₹300), for a maximum of two children.
  • These exemptions are available only under the old tax regime and are not permitted in the new tax regime. For two children, the combined annual exemption can reach up to ₹2.88 lakh (₹72,000 from education allowance + ₹2.16 lakh from hostel allowance), providing meaningful relief for families with school-going children and potentially saving ₹80,000+ in tax for those in the 30% bracket (including cess).
  • For College-Going Children: There is no separate enhanced employer allowance for higher education. However, parents can claim the following:
  • Tuition fees under Section 80C (actual fees paid to recognised universities/colleges/schools, up to the overall ₹1.5 lakh limit, for up to two children).
  • Education loan interest under Section 80E (full interest deductible for up to 8 years on loans for higher education of children).
  • Note: Always obtain a certificate from the head of the institution to support the claim for education/hostel allowances. Employers must include these in the salary structure and reflect them correctly in the new salary statement (Form 130).
• Focus on potential other Provisions/Notes.
  • Section 80G (donations)
  • Exemptions on leave encashment or gratuity (with higher limits in some cases)
  • Most of the perquisite exemptions and reimbursements as discussed above in the New Tax Regime  are also available under the Old Tax Regime  for FY26.

The valuation and exemption rules for perquisites (under Rule 15 and related provisions) generally apply to both regimes (New Tax Regime+Old Tax Regime) because they relate to the computation of Salary" income u/s 17. The main difference is that the Old Tax Regime additionally allows major Chapter VI-A deductions (80C, 80D, etc.) and specific exemptions such as HRA, children's education/hostel allowances, and home loan interest on self-occupied property.

An illustration of tax computation availing all potential rebates, exemptions & deductions: Old Tax Regime (Old Tax Regime)

Conclusion

Considering all the potential tax exemptions /deductions/benefits/rebates available under both the new & old tax regimes, an annual gross salary of up to ₹15 lakh may be beneficial for taxation under the new tax regime, as the employee does not have to invest heavily to save taxes, unlike in the old tax regime. Till a gross annual salary of ₹15 lakh, net tax payable is nil under both the new & old tax regimes, but under the old regime, the employee has to invest heavily to get the same tax benefit as under the new one. But for a higher annual salary above ₹15 lakh – like ₹20-30 lakh – the old tax regime may be more beneficial than the new, as illustrated in the above two computation tables. For gross annual salaries of ₹20-25-30 lakh, the effective tax rate is around 7%, 9% and 12% in the new tax regime vs. 3%, 6% and 9% under the old tax regime in an ideal scenario, as illustrated in the above two tax computation tables.

Anyway, proper tax planning for blue-collar employees requires a balanced approach ─ for most, the simplicity and inbuilt lower/nil tax liability of the new regime  may be preferable for a gross salary up to ₹12.75–13.70/15.00 lakh. Also under the old regime , an investment-savvy salaried person may have a tax-free gross salary of around ₹7.00-12.00/15.00 lakh after considering all the potential exemptions & deductions. For an annual gross salary above ₹15 lakh, the old regime may be more beneficial if the employee can fulfil all the heavy investment obligations to get the desired tax benefits.