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Key Highlights
- The new tax regime offers lower tax rates but removes key deductions like HRA, LTA, and 80C benefits, making the old regime better if deductions exceed ₹2.5 lakh.
- After the ₹50,000 standard deduction, taxable income on a ₹20 lakh salary becomes ₹19.5 lakh.
- Tax-saving strategies include maximising NPS contributions, home loan benefits, medical insurance deductions, and tax-free allowances like LTA and employer perks.
- Employer-provided benefits like fuel vouchers, company-leased accommodation, and reimbursements for travel and communication can help reduce taxable income.
- Investing in tax-free bonds, Section 54EC capital gains bonds, and utilising deductions under 80D for health insurance can further optimise tax savings
Earning a salary above ₹20 lakh is a significant achievement, but it comes with financial challenges, particularly tax liabilities. While the Government offers different tax regimes, the new tax regime introduces unique opportunities and challenges.Understanding how it works and optimising savings can help maximise your income. The new tax regime simplifies compliance by removing most exemptions and deductions available earlier. However, strategic planning can still help reduce taxable income.This blog explores effective tax-saving strategies, compares the old and new tax regimes, and highlights key deductions under Sections 80C, 80D, and 80E.
Income Tax on ₹20 Lakh Salary Under the New Regime
The new tax regime was introduced to simplify tax calculations by reducing the number of exemptions and deductions available to taxpayers.While it offers lower tax rates across various income slabs, it does not allow deductions for common expenses, such as House Rent Allowance (HRA) , Leave Travel Allowance (LTA) , or contributions to provident funds, which were available under the old regime.However, the new regime compensates for this by providing lower tax rates, making it a more straightforward system for taxpayers who don’t have significant exemptions to claim.To calculate the income tax on ₹20 lakh under the new regime, the following steps are involved:
Income Slabs & Tax Rates
Under the new regime , the tax slabs are designed to reduce the tax burden for individuals with higher incomes. For a ₹20 lakh salary, the tax rates under the new regime are as follows:
| Income Slab | Tax Rate |
| Up to ₹2.5 lakh | Nil |
| ₹2.5 lakh to ₹5 lakh | 5% |
| ₹5 lakh to ₹7.5 lakh | 10% |
| ₹7.5 lakh to ₹10 lakh | 15% |
| ₹10 lakh to ₹12.5 lakh | 20% |
| ₹12.5 lakh to ₹15 lakh | 25% |
| Above ₹15 lakh | 30% |
Standard Deduction
A standard deduction of ₹50,000 is available under both the old and new tax regimes, which helps reduce the taxable income. Therefore, if your salary is ₹20 lakh, after applying the ₹50,000 standard deduction, the taxable income is ₹19.5 lakh.
Tax Calculation
Let’s break down the tax calculation for a ₹20 lakh salary after the standard deduction:
| Income Slab | Taxable Amount | Tax Rate | Tax Amount (₹) |
| Up to ₹2.5 lakh | Nil | Nil | 0 |
| ₹2.5 lakh to ₹5 lakh | ₹2.5 lakh | 5% | 12,500 |
| ₹5 lakh to ₹7.5 lakh | ₹2.5 lakh | 10% | 25,000 |
| ₹7.5 lakh to ₹10 lakh | ₹2.5 lakh | 15% | 37,500 |
| ₹10 lakh to ₹12.5 lakh | ₹2.5 lakh | 20% | 50,000 |
| ₹12.5 lakh to ₹15 lakh | ₹2.5 lakh | 25% | 62,500 |
| Above ₹15 lakh | ₹4.5 lakh | 30% | 1,35,000 |
| Total Tax Before Cess | — | — | ₹3,22,500 |
Health and Education Cess
A cess of 4% is applied to the total tax calculated above, which is ₹3,22,500. The cess would be ₹12,900 (4% of ₹3,22,500), bringing the total tax liability to ₹3,35,400.This simplified calculation shows how an individual with a ₹20 lakh salary would be taxed under the new regime. The tax burden is lighter compared to the old regime if you do not qualify for significant deductions or exemptions.However, it’s crucial to assess whether the new regime is the best option for you, considering factors like your overall deductions and exemptions. Also Read: What is Tax? Meaning, Types, Features & Benefits Explained
Tax Calculation: New vs. Old Regime
When deciding between the old and new tax regimes, it’s essential to understand how your income is taxed under each system. In this section, we compare the tax calculation for a ₹20 lakh salary in both regimes, highlighting key differences.
| Income Slab | Old Regime Tax Rate | New Regime Tax Rate |
| Up to ₹2.5 lakh | Nil | Nil |
| ₹2.5 lakh - ₹5 lakh | 5% | 5% |
| ₹5 lakh - ₹7.5 lakh | 20% | 10% |
| ₹7.5 lakh - ₹10 lakh | 20% | 15% |
| ₹10 lakh - ₹12.5 lakh | 30% | 20% |
| ₹12.5 lakh - ₹15 lakh | 30% | 25% |
| Above ₹15 lakh | 30% | 30% |
Standard Deduction
- The standard deduction of ₹50,000 is available under both regimes.
- No 80C, 80D, or HRA deductions under the new regime.
How to Save Tax on ₹20 Lakh Salary?
Saving tax on a ₹20 lakh salary requires strategic planning and the right investment choices. This section outlines effective methods to reduce your tax liability, even under the new regime.
1. Opt for the Old Tax Regime If Beneficial
- If your deductions exceed ₹2.5 lakh (EPF, NPS, 80C, 80D, HRA), the old regime may be better.
- Under the new regime, only the standard deduction is available.
2. Maximise NPS (National Pension System) Contributions
- Deduction of ₹50,000 under Section 80CCD(1B) (only in the old regime).
- Additional tax-free employer contributions under 80CCD(2).
3. Leverage Home Loan Benefits
- Deduction of up to ₹2 lakh on home loan interest (old regime, Section 24B).\
- First-time homebuyers can claim an additional ₹1.5 lakh deduction under 80EEA.
4. Health Insurance and Medical Deductions (80D, 80DD, 80DDB)
- Up to ₹75,000 deduction on medical insurance for self, family, and parents.
- Tax benefits for medical expenses on specified diseases under 80DDB.
5. Tax-Free Allowances & Perquisites
- Leave Travel Allowance (LTA) – tax-free on actual travel expenses.
- Meal, fuel, and gift vouchers from employers are tax-exempt up to limits.
- Gratuity, EPF, and leave encashment are tax-free under specified conditions.
6. Investing in Tax-Free Bonds & Capital Gains Exemptions
- Tax-free returns on government bonds and PPF.
- Invest capital gains in Section 54EC bonds to reduce liability.
Select The Tax Regime That Suits You Best
While the new tax regime simplifies compliance, it removes key exemptions. If you have high deductions, sticking to the old regime can be more tax-efficient.Careful planning with NPS , home loans , medical insurance , and tax-free allowances can help optimise your tax liability and maximise savings. Always assess your tax liability before selecting the best regime each year. Also Read: What is Income Tax in India? Details You Should Know
FAQS - FREQUENTLY ASKED QUESTIONS
Which tax regime is better for a ₹20 lakh salary?
If you claim significant deductions such as 80C, HRA, and NPS, the old tax regime might be more beneficial for you. However, if your deductions are minimal, the new tax regime with
lower tax rates could be the better option.
How much tax will I pay on ₹20 lakh under the new regime?
Under the new regime, after applying the ₹50,000 standard deduction, your taxable income becomes ₹19.5 lakh. The total tax liability (including cess) would be approximately ₹3.37 lakh for the given income.
Can I switch between tax regimes every year?
Yes, salaried individuals have the flexibility to switch between the old and new tax regimes every year, depending on which one offers better tax benefits based on their financial situation.
How does NPS help in tax savings?
NPS (National Pension System) allows for an additional ₹50,000 deduction under Section 80CCD(1B) in the old regime. Additionally, employer contributions to NPS are tax-free, further helping in reducing your taxable income.
Is HRA applicable under the new tax regime?
No, under the new tax regime, deductions for House Rent Allowance (HRA) are not available. If you rely on HRA deductions, the old regime may be more beneficial for you.
What are some employer-provided tax benefits?
Employers may offer various tax-free benefits, including food and fuel vouchers, company-leased accommodation, and tax-free reimbursements like Leave Travel Allowance (LTA) and telephone bills, which can help reduce taxable income.
Can I save tax through home loans?
Yes, under the old regime, you can claim up to ₹2 lakh deduction on home loan interest under Section 24B. First-time homebuyers can also avail an additional ₹1.5 lakh deduction under Section 80EEA, further reducing your tax liability.
Are tax-free bonds a good investment?
Yes, tax-free bonds, typically government-backed, provide tax-free interest income. These can be a smart investment option for those looking to reduce their taxable income while ensuring stable returns.
What is the benefit of Section 80D?
Section 80D offers deductions for health insurance premiums, allowing up to ₹75,000 for premiums paid for yourself, your family, and your parents. This provides a valuable opportunity to save tax while securing your health.
Can capital gains be exempted from tax?
Yes, capital gains can be exempted by investing in 54EC bonds or reinvesting in property under Section 54. These exemptions allow you to reduce or eliminate capital gains tax on the sale of assets.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
