For most of us, looking at a salary slip is confusing. You see a “Gross Salary” figure at the top, but the amount that actually hits your bank account is much lower. Where does the money go? The answer, usually, is tax.

With the government introducing major changes in the Finance Act 2025, understanding your salary tax is more important than ever. If you pick the wrong tax regime or miss a simple deduction, you could lose thousands of rupees.This guide simplifies the complex world of salary tax. We break down exactly what is taxed, what is exempt, and how you can save maximum money in Financial Year 2025-26.

What Counts as “Salary Income”?

Many people think salary is just the basic pay they receive. However, In the eyes of the Income Tax Department, “Salary” is much broader. According to Section 17(1) of the Income Tax Act, salary includes almost everything your employer gives you.

Written by Roshni Rai , Finance Associate (BSA)

Here is what makes up your taxable salary:

• Wages and Basic Pay: The fixed amount you receive.
• Allowances: Cash payments for specific needs, like Dearness Allowance (DA) or House Rent Allowance (HRA), etc.
• Bonus and Commission: Any performance bonus or sales commission.
• Perquisites: Non-cash benefits like a company car, rent-free home, or club memberships, ESOPs.
• Retirement Benefits: Pension, gratuity, and leave encashment are also taxed as salary (though they have special exemptions).

Simple Rule: If it comes from your employer, it is taxable unless the law specifically exempts it.

The Big Debate: New vs. Old Tax Regime in 2025

• From FY 2025–26, the New Tax Regime is the default regime. However, salaried employees can still opt for the Old Regime if it is more beneficial.
• Now, the biggest question for every salaried employee comes into existence: which regime should they choose?
• Budget 2025 has made the New Tax Regime the default and most attractive option for the majority of earners.
  
  

The New Tax Regime (The Default Choice)
This system offers lower tax rates but takes away most of the deductions and exemptions like HRA and Section 80C (investments). However, it comes with a massive benefit this year: the Standard Deduction has been increased to ₹75,000.

The New Tax Slabs for FY 2025-26:

• Up to ₹4 Lakh: No Tax (0%)
• ₹4 Lakh to ₹8 Lakh: 5% Tax
• ₹8 Lakh to ₹12 Lakh: 10% Tax
• ₹12 Lakh to ₹16 Lakh: 15% Tax
• ₹16 Lakh to ₹20 Lakh: 20% Tax
• ₹20 Lakh to ₹24 Lakh: 25% Tax
• Above ₹24 Lakh: 30% Tax

The Old Tax Regime
This system has higher tax rates but allows you to claim all your traditional deductions like LIC premiums, PPF, tuition fees, and home loan interest.In most cases, the Old Regime is beneficial only if total deductions exceed ₹3.5 – ₹4 lakh annually.

3 Magic Deductions to Lower Your Tax
Even if you earn a high salary, you don’t have to pay tax on the entire amount. The government allows specific “exemptions” that reduce your taxable income.

1. Standard Deduction (The Flat Relief)
This is the easiest deduction because you don’t need to submit any bills.
New Regime: You get a flat deduction of ₹75,000.

Old Regime: You get a flat deduction of ₹50,000.
This amount is directly reduced from your gross salary before tax calculation.

2. House Rent Allowance (HRA)-Old Regime Only
If you live in a rented house, this is your biggest tax saver, You can claim exemption on the least of the following:
Actual HRA received from your employer.

50% of your Basic Salary + DA (for metro cities) or 40% (for non-metros).

Actual Rent paid minus 10% of your Basic Salary + DA.

Pro Tip: You must have a valid rent agreement and rent receipts. If your rent is over ₹1 Lakh per year, you also need your landlord’s PAN.

3. Leave Travel Allowance (LTA)
Does your employer pay for your vacations? You can claim tax exemption on the travel costs (flight or train tickets only) for two domestic trips in a block of four years. This exemption is for travel within India only and does not cover hotel or food bills.

The Hidden Tax: Perquisites
Perquisites, or “perks,” are benefits your employer provides instead of cash. Many employees ignore these, but they are taxable.

• Company Car: If you use a company car for personal and office work, a fixed amount (usually ₹1,800 to ₹2,400 per month) is added to your taxable salary.
• Accommodation: If your employer provides a flat, a percentage of your salary (usually 15%) is added to your income as a “perquisite value.”
• ESOPs: Employee Stock Options are taxed twice—once as a perquisite when you buy them, and again as Capital Gains when you sell them

Rebate under Section 87A – The Game Changer
Section 87A is one of the most impactful tax relief provisions for salaried individuals in FY 2025–26, especially under the New Tax Regime. It has fundamentally changed how middle-income earners approach tax planning.

What is Section 87A Rebate?
Section 87A is a tax relief given to resident individuals only whose income is within a certain limit. This relief helps reduce the amount of income tax you have to pay.

• Under the New Tax Regime, you can get this rebate if your total income is up to ₹12 lakh.
• Under the Old Tax Regime, this rebate is available only if your total income is up to ₹5 lakh.

Section 87A exists in both regimes, but the income threshold and benefit are significantly higher under the New Tax Regime, making it far more attractive for middle-income salaried taxpayers.

Earlier, salaried individuals had to rely heavily on deductions like LIC, PPF, HRA, or home loan interest to reduce tax. With the enhanced rebate under Section 87A in the New Tax Regime, even individuals without any investments can legally pay zero income tax.

If your total income (after standard deduction) is ₹12 lakh or less, your tax liability on salary income becomes NIL under the New Tax Regime.
Exception : Section 87A provides rebate only on tax calculated under normal slab rates. It does not apply to income taxed at special rates under the Income-tax Act, such as capital gains, winnings from lottery, betting, gambling, or other income taxed at flat rates.

A Simple Calculation Example: Old Regime vs New Regime
Let us understand the tax impact under both regimes with a practical example
Mr. Sharma, who earns ₹12 Lakhs P.A., In the beginning of the FY 2025-26, he has to decide to choose between New Tax Regime and Old Tax Regime
Now lets calculate his tax liability for the F.Y. 2025-26

New Tax Regime Calculation

• Gross Salary: ₹12,00,000
• Less: Standard Deduction: ₹75,000

Taxable Income: ₹11,25,000

Tax Computation (Before Rebate):

• ₹0 – ₹4,00,000 : Nil
• ₹4,00,001 – ₹8,00,000 @5% : ₹20,000
• ₹8,00,001 – ₹11,25,000 @10% :  ₹32,500

Total Tax (Before Rebate): ₹52,500

Less: Rebate under Section 87A: ₹52,500

Tax Payable (New Regime): ₹0 

Old Tax Regime Calculation

• Gross Salary: ₹12,00,000
• Less: Standard Deduction: ₹50,000
• Less: HRA Exemption: ₹1,20,000(assumed)
• Less: Section 80C: ₹1,50,000(assumed)
• Less: Section 80D: ₹25,000(assumed)

Taxable Income: ₹8,55,000

Tax Computation:

• ₹0 – ₹2,50,000 : Nil
• ₹2,50,001 – ₹5,00,000 @5% : ₹12,500
• ₹5,00,001 – ₹8,55,000 @20% : ₹71,000

Total Tax: ₹83,500

• Less: Rebate u/s 87A (Not available as income exceeds ₹5 lakh)

Health & Education Cess @4%: ₹3,340

Tax Payable (Old Regime): ₹86,840

Conclusion: Despite higher taxable income, the New Tax Regime is clearly more beneficial in this case due to the enhanced rebate under Section 87A. This comparison highlights why salaried employees must evaluate both regimes before finalising their tax choice.

Common Mistakes to Avoid

• Forgetting to Switch Regimes: If the Old Regime is better for you, you must specifically choose it at the start of the year. Otherwise, your employer will deduct tax based on the New Regime by default.
• Not Declaring Investments: If you don’t tell your employer about your investments (like LIC or PPF) by January, they will deduct higher TDS. You will then have to wait for a refund after filing your ITR.
• Ignoring Form 26AS: Always check Form 26AS on the income tax portal to ensure your employer has deposited the tax they deducted from your salary.

Final Verdict: Plan Early, Save MoreTax on salary income doesn’t have to be a nightmare. The secret is planning. At the start of the financial year, calculate your likely tax under both regimes. If you have a home loan and heavy insurance premiums, stick to the Old Regime. If you prefer simplicity and cash in hand, the New Regime with its ₹75,000 deduction is your best friend.In short For salaried individuals with limited investments, the New Tax Regime combined with Section 87A has become a powerful tax-saving tool.

Disclaimer: Tax laws change frequently. While this guide covers the FY 2025-26 rules, always consult a Tax professional for your specific case.