Tax Planning in India: Complete Guide for FY 2025-26

• Zero tax up to ₹12.75 lakh for salaried individuals under the new tax regime (Budget 2025)
• New regime is the default for FY 2026-27 under Section 202 of the Income-tax Act, 2025 (old Section 115BAC)
• Deadline: 31 March 2027 for all tax-saving investments applicable to FY 2026-27
• Standard deduction of ₹75,000 available under the new regime for salaried individuals under Section 19(1)
• Rebate under Section 156 (old Section 87A) makes income up to ₹12 lakh effectively tax-free under the new regime

Tax planning is the examination of your financial position and the planning of your income, investments and expenditure so that your tax liability for the year is legally reduced. You pay only what the law requires and not a rupee more through availment of the deductions, exemptions, rebates and reliefs under the Income-tax Act, 2025.

Effective tax planning is not a last-minute exercise. It is a year-round, structured approach that aligns your financial goals with the provisions of the tax law. Done well, it frees up capital that would otherwise go to the government and channels it toward wealth creation.

There are four broad types of tax planning:

• Short-term tax planning involves actions taken toward the end of the financial year to reduce tax liability for that year — such as making last-minute investments under Section 123 (old Section 80C) before 31 March. It does not involve any permanent financial commitment.
• Long-term tax planning is planned at the beginning of the financial year and followed consistently throughout the year. Examples include investing in PPF, NPS or taking a home loan—the tax benefits are spread over multiple years and simultaneously build wealth for the long term.
• Permissive tax planning is when you make use of the specific provisions, deductions and exemptions that the legislature has specifically provided in the tax law. Claiming an HRA exemption, investing in ELSS or contributing to NPS are all examples of permissive planning—perfectly within the intent of the law.
• Tax planning should be purposive, meaning it should be about structuring transactions to achieve a particular tax result, such as timing asset sales for long-term capital gains exemptions or structuring salary components to maximise exempt allowances. This too is legal, provided it does not cross into artificial arrangements that the General Anti-Avoidance Rule (GAAR) would disallow.

These three terms are frequently confused, but they carry very different meanings—and very different legal consequences.

The Income-tax Act, 2025 empowers tax authorities through its General Anti-Avoidance Rule (GAAR) under Sections 178 – 184 to disregard or recharacterise arrangements that are impermissible avoidance arrangements — those that lack commercial substance and exist primarily to obtain a tax benefit. Sound tax planning stays well within these boundaries.

Since FY 2020-21, taxpayers have had the option to choose between two tax regimes. From FY 2023-24 onwards, Section 202 of the Income-tax Act, 2025 (old Section 115BAC) makes the new regime the default. Unless you explicitly opt for the old regime when filing your return — or inform your employer at the beginning of the year — the new regime will apply automatically.

Tax Slab Comparison: FY 2026-27

Rebate under Section 156 (old Section 87A) of ₹60,000 makes income up to ₹12 lakh fully tax-free. With the standard deduction of ₹75,000 for salaried individuals, the effective zero-tax threshold is ₹12.75 lakh.

Old Tax Regime:

Rebate under Section 156 is available up to ₹5 lakh. Standard deduction of ₹50,000 for salaried individuals.

Key Differences at a Glance

If you have substantial deductions and exemptions to claim, the old regime still makes sense. As a general rule of thumb, if the sum total of your deductions across Section 123 (80C), Section 126 (80D), HRA, home loan interest and NPS is more than around ₹3.75 lakh, then the old regime is likely to result in a lower tax outgo.

Specific scenarios where old regime works better:

• You are paying home loan interest of ₹2 lakh or more on a self-occupied property.
• You are paying rent and claiming HRA exemption on a considerable part of your salary.
• You have maximised the ₹1.5 lakh limit under Section 123 through PPF, ELSS, or LIC premiums.
• You are contributing to NPS and claiming the additional ₹50,000 deduction under Section 124(3) (old Section 80CCD(1B)).

The new regime is more advantageous if you have limited deductions or if your income is at or below ₹12.75 lakh as a salaried individual.

It is also suitable for:

• First-time earners or young professionals who have not yet built up investment commitments.
• Business or professional income with limited personal deductions.
• For those who want liquidity and flexibility instead of locking money in tax-saving instruments.
• Taxpayers with income above ₹15 lakh but with total deductions below ₹3.75 lakh.

Section 123 (old Section 80C) — Up to ₹1.5 Lakh

• Section 123 of the Income-tax Act, 2025: This is the most widely used tax-saving provision, offering a deduction of up to ₹1.5 lakh per tax year on investments and payments toward specified instruments listed in Schedule XV. Key options include:
• Equity Linked Savings Scheme (ELSS): Mutual fund schemes with a mandatory three-year lock-in period — the shortest among all Section 123 instruments. They invest primarily in equities and offer market-linked returns alongside the tax deduction. Long-term capital gains from ELSS above ₹1.25 lakh are taxed at 12.5% under Section 198 (old Section 112A).
• Public Provident Fund (PPF): A government-backed savings scheme with a 15-year tenure. PPF falls under the EEE (Exempt-Exempt-Exempt) category — the investment qualifies for deduction under Section 123, interest earned is fully exempt under Schedule II, Sl. No. 3, and maturity proceeds are tax-free with no upper limit.
• Premium paid towards life insurance policies is deductible u/s 123 (Schedule XV, para 2) subject to the premium amount not exceeding 10% of the sum assured in case of policies issued after 1st April 2012 Life Insurance Premiums (LIC / Term Plans) Home Loan Principal Repayment: The principal component of your home loan EMI is deductible u/s 123 within the overall limit of ₹1.5 lakh.
• NPS — Employee Contribution: Your own contribution to NPS is eligible under Section 124(3) up to ₹50,000 (in addition to Section 123 limit).
• EPF: Your EPF contribution is covered by Section 123 and is typically auto-invested by your employer.

Other instruments allowed under Section 123 are 5-year tax saving fixed deposits, Sukanya Samriddhi Yojana, Senior Citizens Savings Scheme, National Savings Certificate and tuition fees for up to two children.

Section 126 (old Section 80D) — Health Insurance Premiums

Section 126 of the Income-tax Act, 2025 allows a deduction for premiums paid toward health insurance policies:

• Up to ₹25,000 per year for premiums for yourself, your spouse, and dependent children.
• An additional ₹25,000 for premiums for your parents (below 60 years).
• If your parents are senior citizens (60 years or above), the limit for their premium increases to ₹50,000.
• If both you and your parents are senior citizens, the maximum combined deduction is ₹1,00,000.
• Preventive health check-up expenses of up to ₹5,000 are included within the overall Section 126 limit.

HRA Exemption — Schedule III, Sl. No. 11 (old Section 10(13A))

If you are a salaried employee and residing in a rented house, you can claim exemption on the HRA component of your salary under Schedule III of the Income-tax Act, 2025 read with Rule 279 of the Income Tax Rules, 2026.

The exemption is the least of:

• Actual HRA received from your employer.
• 50% of your basic salary (metro cities — Delhi, Mumbai, Chennai, Kolkata) or 40% (non-metro cities).
• Actual rent paid minus 10% of your basic salary.

To claim HRA, furnish your employer with rent receipts. If annual rent exceeds ₹1 lakh, also provide the landlord’s PAN. HRA exemption is not available under the new regime – Section 202(2)(a)(i) of the Income-tax Act, 2025 specifically disallows it.

NPS: Additional ₹50,000 Under Section 124(3) (old Section 80CCD(1B))

Over and above the ₹1.5 lakh ceiling under Section 123, you can claim an additional deduction of ₹50,000 for contributions to the National Pension System under Section 124(3) of the Income-tax Act, 2025. This brings the effective tax-saving ceiling to ₹2 lakh for NPS contributors under the old regime.

At the 30% tax bracket, claiming the full ₹50,000 under Section 124(3) saves an additional ₹15,000 in tax (plus cess). The NPS Tier I account is the eligible account for this deduction.

Your employer's contribution to your NPS account is separately deductible under Section 124(1) and 124(2) — up to 14% of basic salary (Central/State Government employers) or 10% (other employers) — and this deduction is available under the new regime as well, making it relevant regardless of which regime you choose.

Home Loan Interest – Section 22(1)(b) (old Section 24(b))

Under Section 22(1)(b) of Income tax Act, 2025 you can claim deduction upto ₹2 lakh in a tax year on the interest you pay on home loan taken for a self occupied residential property. For a let-out property, the interest deduction has no upper cap, though set-off of house property losses against other heads of income is capped at ₹2 lakh per year — the unabsorbed loss can be carried forward for eight years.

This deduction is not available under the new regime — Section 202(2)(a)(v) specifically disallows it for self-occupied properties.

For Salaried Employees

Salaried individuals have the advantage of structured tax planning since many deductions — EPF, HRA, LTA — are built into their salary structure. Key actions for salaried taxpayers:

• Declare your regime choice early. You will have to inform your employer regarding the tax regime you have opted for taxation at the beginning of the financial year Your employer will deduct TDS as per section 392 of the Income-tax Act, 2025. If you do not declare, the employer defaults to the new regime.
• Submit investment proofs on time. Employers typically ask for investment declarations in January–February. Missing these deadlines means higher TDS deductions in the final months of the year.
• Understand your Form 16. Form 16 is your TDS certificate issued by your employer after the financial year ends. Part A contains TDS deducted and deposited; Part B details salary and deductions considered. Match these figures with your own calculations before filing your return.
• Standard deduction. A flat standard deduction of ₹75,000 (new regime) or ₹50,000 (old regime) is available to all salaried individuals and pensioners under Section 19(1) Table, Sl. No. 2 of the Income-tax Act, 2025, without requiring any proof or investment.
• Employer NPS contribution. If your employer contributes to your NPS account, ensure it is being made — it is deductible under Section 124(1) and 124(2) in both regimes.

For Self-Employed & Freelancers Section 44ADA

Professionals such as doctors, lawyers, architects, engineers, accountants, technical consultants, interior designers with gross receipts up to ₹75 lakh can choose the presumptive scheme. Under this scheme, 50% of gross receipts is deemed to be net income — no need to maintain books or get accounts audited.

Advance tax obligations. Self-employed individuals and freelancers must pay advance tax under Section 208 of the Income-tax Act, 2025 in four instalments:

Failure to pay advance tax on time attracts interest under Section 419 (old Section 234B — shortfall in total advance tax) and Section 420 (old Section 234C — deferment of individual instalments) at 1% per month.

Deductions for business expenses. If you are self-employed, you can deduct all valid business expenses from business income. If you do not opt for presumptive taxation, you will have to maintain books of account and get them audited under Section 44AB if gross receipts are Rs 75 lakh or more.

Waiting until March to make all investments. Investing in ELSS in a lump sum in March rather than through monthly SIPs means you miss out on rupee cost averaging and early compounding. Spread your Section 123 investments across the year.

Ignoring the additional NPS deduction under Section 124(3). Most taxpayers exhaust their ₹1.5 lakh under Section 123 but miss the additional ₹50,000 available exclusively for NPS contributions under Section 124(3). At the 30% tax bracket, this is a straightforward ₹15,000 saving.

Not declaring HRA to the employer. Salaried individuals living in rented accommodation who forget to submit rent receipts during the investment declaration process will have TDS computed without the HRA exemption — resulting in excess deduction and a refund claim at the time of filing.

Missing the employer NPS contribution under Section 124(1) and 124(2). This deduction is available in both regimes. Many employees are unaware it exists in the new regime and fail to verify whether their employer is making the contribution.

Not reviewing the regime choice annually. What is your best regime can change from year to year depending on income, home loan status, HRA eligibility and investment commitments. Compute your liability under both regimes at the start of every financial year before making a declaration.

Overlooking Section 126 deduction for parents. Premiums paid for senior citizen parents yield an additional deduction of up to ₹50,000 under Section 126 — one of the highest-value deductions available under the old regime that is frequently missed.