How income tax actually works
India's income tax is slab-based: different slices of your income are taxed at different rates, and only the slice above each threshold faces the higher rate. Earning ₹13 lakh does not mean all ₹13 lakh is taxed at the top rate — the first slices are taxed at lower or zero rates, and only the portion above each cutoff moves up. This marginal system is the single most misunderstood fact in personal finance.
Your gross salary is also not your taxable income. Subtract the standard deduction (₹75,000 under the new regime), exempt allowances like HRA in the old regime, and chapter VI-A deductions such as 80C — what remains is the figure slabs apply to. Every tax plan is really about shrinking that taxable figure legally.
Old regime vs new regime
The new regime taxes income at lower slab rates but removes most exemptions — no HRA, no 80C, no 80D. It suits people with few deductions: young renters without a home loan, or anyone who prefers simplicity. It is the default regime, and salaried income up to about ₹12.75 lakh effectively pays no tax after the standard deduction and rebate.
The old regime keeps higher slab rates but preserves the full deduction toolkit: HRA, 80C (₹1.5 lakh), 80D health insurance, NPS 80CCD(1B), and home-loan interest under section 24(b). It usually wins when your total deductions exceed roughly ₹4–5 lakh — common for homeowners with HRA, 80C, and 80D combined. The only correct answer is to compute both every year, because salary changes and rule tweaks flip the winner regularly.
- New regime: lower rates, almost no deductions, simpler
- Old regime: higher rates, full deductions — wins with ~₹4–5L+ of claims
- Compare both regimes every financial year before filing
- Salaried employees can switch regimes year to year (with conditions)
Deductions that actually move the needle
Section 80C (₹1.5 lakh limit) is the workhorse: EPF contributions, PPF, ELSS funds, children's tuition fees, and home-loan principal all count — most salaried people fill half of it without trying. Section 80D covers health-insurance premiums (up to ₹25,000 for self/family, ₹50,000 for senior-citizen parents), and section 80CCD(1B) adds an extra ₹50,000 for NPS on top of 80C.
Beyond those, HRA exemption helps renters in the old regime (minimum of actual HRA, 50%/40% of basic, or rent minus 10% of salary), section 24(b) allows up to ₹2 lakh of home-loan interest against let-out or self-occupied property, and the standard deduction applies automatically. These five — 80C, 80D, NPS, HRA, home-loan interest — cover 90% of realistic tax savings for employees.
A real example: ₹12 lakh salary
Take a salaried employee earning ₹12 lakh with ₹1.5 lakh in 80C (EPF + PPF), a ₹25,000 health-insurance premium, and ₹50,000 in NPS. Old-regime taxable income: roughly ₹12,00,000 − ₹50,000 (standard deduction) − ₹1,50,000 − ₹25,000 − ₹50,000 = about ₹9.25 lakh, taxed at old-regime slabs.
Under the new regime the same person claims only the ₹75,000 standard deduction, leaving about ₹11.25 lakh taxable — but at lower slab rates with rebate mechanics. Running both side by side takes two minutes with an income-tax calculator and reveals the cheaper option instantly. Never assume last year's winner still wins.
Plan across the year, not in March
The March scramble — random ELSS purchases and insurance bought for receipts rather than needs — is how people end up with unsuitable products. Instead, declare planned 80C/80D investments to your employer in April so TDS spreads correctly, automate monthly PPF or ELSS contributions, and file proofs as they arrive.
Do a 15-minute review each quarter: July (confirm TDS matches Form 26AS/AIS), October (adjust for raises), January (final regime choice and top-ups), March only for verification. And avoid the big three mistakes: never rechecking your regime, buying insurance purely for 80C, and ignoring AIS mismatches until a notice arrives.
- April: declare planned deductions to employer for correct TDS
- July & October: reconcile TDS with Form 26AS/AIS
- January: final old-vs-new comparison and top-ups
- Separate insurance from investing; file before the July deadline