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Best Tax Deductions for Salaried Employees AY 2026-27

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ITAI Blogger

If you are a salaried employee planning your taxes for FY 2025-26 (AY 2026-27), choosing the right deductions and exemptions can reduce your tax liability significantly. The biggest decision this year remains the choice between the old tax regime and the new tax regime. While the new regime offers lower slab rates and a higher rebate threshold, the old regime still helps taxpayers who actively invest and claim exemptions such as HRA, 80C, 80D, and home loan benefits.

This guide covers every major deduction a salaried employee can claim in AY 2026-27, including the latest rules on standard deduction, section 80C deduction limit FY 2025-26, NPS tax benefits, HRA exemption calculation, LTA rules, and old vs new tax regime deductions AY 2026-27.

Old vs New Tax Regime Deductions AY 2026-27

The new tax regime continues as the default regime under Section 115BAC. However, salaried employees can still opt for the old regime while filing their income tax return.

Here is the key difference:

Particulars Old Tax Regime New Tax Regime
Tax Slabs Higher Lower
Most Deductions Allowed Yes No
Standard Deduction Yes Yes
HRA Exemption Yes No
80C, 80D, 80E etc. Yes Mostly No
Home Loan Interest on Self-Occupied Property Yes No
NPS Employer Contribution Yes Yes

According to the latest Income Tax rules notified by the Government of India, salaried employees under the new regime can still claim:

  • Standard deduction
  • Employer contribution to NPS under Section 80CCD(2)
  • Transport allowance for specially-abled employees
  • Agniveer Corpus Fund deduction

You can review updated tax provisions on the official Income Tax Department portal.

Standard Deduction for Salaried Employees New Tax Regime

The standard deduction remains one of the biggest tax reliefs for salaried employees.

Standard Deduction Limit AY 2026-27

For FY 2025-26:

  • Salaried employees can claim a standard deduction of ₹75,000 under the new tax regime.
  • Pensioners receiving family pension can claim deduction under separate rules.

The increase in standard deduction was announced in recent Union Budget updates and continues for AY 2026-27.

Example

If your salary income is ₹12,00,000:

  • Gross Salary: ₹12,00,000
  • Less Standard Deduction: ₹75,000
  • Taxable Salary: ₹11,25,000

This deduction applies automatically. No bills or investments are required.

Section 80C Deduction Limit FY 2025-26

Section 80C remains the most popular tax-saving provision under the old regime.

Maximum Deduction Allowed

The section 80C deduction limit FY 2025-26 is:

  • Maximum deduction: ₹1,50,000

Eligible Investments and Expenses

You can claim deduction for:

  • Employee Provident Fund (EPF)
  • Public Provident Fund (PPF)
  • Equity Linked Savings Scheme (ELSS)
  • Life insurance premium
  • National Savings Certificate (NSC)
  • Sukanya Samriddhi Yojana
  • Tax-saving fixed deposits
  • Tuition fees for children
  • Principal repayment of home loan

The deduction is available only under the old tax regime.

Detailed provisions are available under Section 80C on the Income Tax portal.

Best Tax Saving Options for Salaried Employees AY 2026-27

For most salaried individuals, these remain effective:

  1. EPF plus VPF for stable retirement savings
  2. ELSS funds for wealth creation and tax saving
  3. PPF for long-term guaranteed returns
  4. NPS for additional retirement deduction
  5. Health insurance under Section 80D

Section 80D Health Insurance Deduction Salaried Employees

Health insurance premiums qualify for deduction under Section 80D if you choose the old regime.

Deduction Limits Under Section 80D

Insured Person Maximum Deduction
Self, spouse, children ₹25,000
Parents below 60 years Additional ₹25,000
Senior citizen parents Additional ₹50,000

Maximum possible deduction:

  • ₹75,000 if parents are senior citizens

Preventive Health Check-up

You can also claim:

  • Up to ₹5,000 for preventive health check-ups

Example

Rahul pays:

  • ₹22,000 for family health insurance
  • ₹48,000 for senior citizen parents

Total deduction:

  • ₹70,000 under Section 80D

You can verify deduction rules on the CBDT website.

NPS Tax Benefit Under Section 80CCD(1B) FY 2025-26

The National Pension System (NPS) offers one of the best additional deductions.

Additional Deduction Available

Under Section 80CCD(1B):

  • Additional deduction up to ₹50,000
  • Over and above Section 80C limit

This means:

  • ₹1,50,000 under 80C
  • ₹50,000 under 80CCD(1B)
  • Total potential deduction: ₹2,00,000

Employer Contribution Benefit

Employer contribution to NPS under Section 80CCD(2):

  • Available in both old and new regimes
  • Deduction up to:
    • 14% of salary for Central Government employees
    • 10% for others

This is one of the few major deductions available in the new tax regime.

Learn more at the official NPS Trust website.

House Rent Allowance HRA Exemption Calculation AY 2026-27

HRA remains a valuable exemption for salaried employees living in rented accommodation under the old regime.

Conditions to Claim HRA

You must:

  • Receive HRA as part of salary
  • Live in rented accommodation
  • Pay rent exceeding ₹1,00,000 annually through traceable means
  • Provide landlord PAN if annual rent exceeds ₹1,00,000

HRA Exemption Calculation

The least of the following is exempt:

  1. Actual HRA received
  2. Rent paid minus 10% of salary
  3. 50% of salary for metro cities or 40% for non-metros

Example

Suppose:

  • Basic salary: ₹6,00,000
  • HRA received: ₹2,40,000
  • Rent paid: ₹2,10,000
  • City: Mumbai

Calculation:

  • Actual HRA: ₹2,40,000
  • Rent minus 10% salary: ₹1,50,000
  • 50% of salary: ₹3,00,000

Exempt HRA:

  • ₹1,50,000

Taxable HRA:

  • ₹90,000

Leave Travel Allowance LTA Exemption Rules India

Leave Travel Allowance helps salaried employees claim tax exemption on domestic travel expenses.

Key LTA Rules

You can claim exemption:

  • Only for travel within India
  • For self and eligible family members
  • For actual travel expenses only

Not covered:

  • Hotel expenses
  • Food expenses
  • Local sightseeing costs

Frequency of Claim

LTA exemption is allowed:

  • Twice in a block of four calendar years

Current block:

  • 2022 to 2025

Eligible Transport Expenses

Allowed expenses include:

  • Airfare
  • Rail fare
  • Bus fare

Rules are governed under Section 10(5) of the Income Tax Act.

Home Loan Tax Benefits for Salaried Employees

Home loan deductions remain highly useful under the old regime.

Section 24(b): Interest Deduction

For self-occupied property:

  • Interest deduction up to ₹2,00,000 annually

Section 80C: Principal Repayment

Principal repayment:

  • Included within ₹1,50,000 Section 80C limit

Additional Deduction Under Section 80EEA

Subject to conditions:

  • Additional deduction up to ₹1,50,000 for affordable housing loans sanctioned within eligible periods

Other Important Income Tax Exemptions for Salaried Employees India

Professional Tax

Professional tax paid to state governments:

  • Deductible under old regime

Children Education Allowance

Exemption:

  • ₹100 per month per child
  • Maximum two children

Hostel Expenditure Allowance

Exemption:

  • ₹300 per month per child
  • Maximum two children

Gratuity Exemption

Gratuity received by non-government employees remains exempt subject to prescribed limits under the Income Tax Act.

Which Tax Regime Is Better for Salaried Employees in AY 2026-27?

New Tax Regime Works Better If:

You:

  • Have fewer investments
  • Do not pay rent
  • Do not have home loan interest
  • Prefer simpler compliance

Old Tax Regime Works Better If:

You claim:

  • HRA exemption
  • 80C investments
  • Home loan deductions
  • 80D medical insurance
  • NPS deductions

Quick Comparison Example

Particulars Old Regime New Regime
Salary ₹15,00,000 ₹15,00,000
Deductions Claimed ₹3,50,000 ₹75,000
Taxable Income ₹11,50,000 ₹14,25,000

For taxpayers with large deductions, the old regime may still produce lower tax liability.

Common Questions About Deductions for Salaried Employees AY 2026-27

Can salaried employees claim both 80C and standard deduction?

Yes. Under the old regime, salaried employees can claim both:

  • Standard deduction
  • Section 80C deduction

Is HRA allowed in the new tax regime?

No. HRA exemption is not available under the new tax regime.

Can I switch between old and new regimes every year?

Salaried employees without business income can generally switch between regimes each financial year while filing returns.

Is NPS deduction available in the new regime?

Yes, employer contribution under Section 80CCD(2) remains available in the new regime.

Final Thoughts on Best Tax Saving Options for Salaried Employees AY 2026-27

Understanding the deductions for salaried employees AY 2026-27 can help you reduce taxes legally and improve long-term financial planning. The right combination of section 80C investments, section 80D health insurance deduction salaried employees benefits, HRA exemption, and NPS tax benefit under section 80CCD(1B) FY 2025-26 can create substantial savings under the old regime.

However, the standard deduction for salaried employees new tax regime and lower slab rates also make the new regime attractive for taxpayers with limited deductions. Before filing your return, compare both options carefully and choose the structure that minimizes your total tax outgo for FY 2025-26.

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