Deductions for Salaried Employees in Income Tax in 2025

In the financial year 2025-26 (Assessment Year 2026-27), salaried employees in India have access to several key deductions under the Income Tax Act, 1961. These deductions are designed to reduce taxable income, ultimately lowering the overall tax liability. Understanding the available deductions and knowing how to claim them can significantly impact the amount of tax one pays.

The importance of these deductions cannot be overstated. By strategically utilizing them, salaried individuals can optimize their tax savings, ensuring that they benefit fully from the provisions set out by the government. From standard deductions to investments in schemes like the Public Provident Fund (PPF), the tax-saving opportunities available in 2025 are crucial for reducing taxable income and making the most of the available benefits.

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Table of Contents

1. Overview of deductions available to salaried employees in FY 2025-26

2. Importance of these deductions in reducing taxable income

3. Standard Deduction

4. Section 80C Deductions

5. Employer’s Contribution to NPS (Section 80CCD(2))

6. House Rent Allowance (HRA) and Other Allowances

7. Family Pension Deduction

8. Tax Rebate Under Section 87A

9. Choosing Between the Old and New Tax Regimes

10. Filing and Documentation

11. Conclusion

12. Most Asked Questions

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Overview of Deductions Available to Salaried Employees in FY 2025-26

For salaried employees in India, the Income Tax Act, 1961, provides several deductions to reduce taxable income, which ultimately lowers tax liability. These deductions vary based on the tax regime chosen (old or new) and cover a range of expenses such as insurance, provident fund contributions, and pension schemes. The 2025 Budget has introduced updates to the tax structure, adding clarity to existing deductions and making tax planning simpler for salaried individuals.

Importance of These Deductions in Reducing Taxable Income

These deductions are critical in optimizing tax liability, allowing salaried employees to lower their taxable income by claiming eligible expenses and investments. By reducing the total income subject to tax, individuals can save significantly on their overall tax payments. Therefore, understanding the available deductions is essential to ensure that every eligible benefit is claimed, and maximum tax savings are achieved.

Standard Deduction

What Is the Standard Deduction for Salaried Employees in 2025?

The standard deduction is a flat amount subtracted from a salaried individual’s income, making it one of the simplest ways to reduce taxable income. For the financial year 2025-26 (Assessment Year 2026-27), the standard deduction amount is Rs. 75,000 under the new tax regime and Rs. 50,000 under the old tax regime. This deduction is provided without requiring any proof of expenses and applies to all salaried individuals, making it a straightforward tax benefit.

Is the Standard Deduction Allowed in the New Tax Regime?

Yes, the standard deduction of Rs. 75,000 is available to salaried employees under the new tax regime. This regime, introduced to simplify tax calculations by eliminating most exemptions and deductions, still allows for this flat deduction to reduce the taxable income, making it a valuable benefit for individuals opting for the new structure.

How the Standard Deduction Works in the Old Tax Regime

Under the old tax regime, salaried employees can claim a standard deduction of Rs. 50,000. While the new tax regime offers a higher standard deduction, the old regime allows for a broader range of other deductions (such as Section 80C, 80D, etc.) that might be more beneficial for higher-income earners or those with significant eligible expenses. Employees can choose between the two regimes based on which offers the maximum tax benefit, factoring in both the standard deduction and other available deductions.

How to Claim Standard Deduction

The standard deduction is automatically applied to your salary income when filing your Income Tax Return (ITR). No documentation or proof of expenses is required to claim this deduction. However, employees must ensure they file their returns on time and disclose their total income to ensure the benefit is reflected accurately in their tax calculations. Form 16, issued by the employer, will also reflect this deduction, making it easier for employees to claim the benefit while filing their ITR.

Section 80C Deductions

What Expenses Qualify Under Section 80C for 2025?

Section 80C allows for deductions of up to Rs. 1,50,000 on a variety of qualifying investments and expenses. These include contributions to Provident Fund (PF), Public Provident Fund (PPF), life insurance premiums, National Savings Certificates (NSC), 5-year fixed deposit with banks, and the principal repayment on home loans. This section also covers investments in tax-saving fixed deposits, the National Pension Scheme (NPS), and tuition fees for children’s education. As of 2025, the limit for Section 80C remains capped at Rs. 1,50,000, making it an essential deduction for most salaried individuals looking to maximize their savings and reduce taxable income.

Limitations and Key Exclusions

While Section 80C offers a wide array of qualifying expenses, there are limitations on certain types of investments. For instance, the Rs. 1,50,000 limit is shared among all eligible expenses, so employees need to plan their investments accordingly to ensure they claim the maximum deduction. Additionally, Section 80C only applies to specified investments, and expenses like rent, daily living costs, or insurance premiums not related to life insurance policies are excluded from this section’s benefits. Careful tracking of eligible expenses is essential to avoid missing out on any potential tax savings.

Old vs New Regime: Impact on 80C Deductions

The availability of deductions under Section 80C is applicable only under the old tax regime. Employees who opt for the new tax regime will not be able to claim deductions under Section 80C, as the new tax structure offers a reduced number of deductions in exchange for lower tax rates. Therefore, employees should evaluate their investments and tax liabilities to determine which regime maximizes their savings. Those with significant contributions to Section 80C-eligible investments may find the old regime more beneficial due to the combined effect of multiple deductions.

Employer’s Contribution to NPS (Section 80CCD(2))

Tax Benefits for Employer’s Contribution to NPS in 2025

Employer contributions to the National Pension System (NPS) under Section 80CCD(2) are eligible for tax benefits. The amount contributed by your employer up to 14% of your basic salary and dearness allowance is exempt from tax. This contribution is over and above the Rs. 1.5 lakh limit under Section 80C, providing an additional tax-saving opportunity for salaried employees. The NPS provides a powerful vehicle for long-term retirement savings, making it an attractive option for those looking to save on taxes while planning for their future.

How NPS Contribution Reduces Your Taxable Income

The contribution made by your employer to NPS is not part of your taxable income. This means that the amount contributed by your employer directly reduces your taxable salary, lowering the amount of tax you owe. This tax exemption is applicable regardless of the tax regime you choose, further enhancing the benefits of NPS as a tax-saving tool. This can be particularly beneficial for individuals with a higher income, as the contribution is calculated as a percentage of your basic salary, offering a substantial reduction in taxable income.

Availability Under Both Tax Regimes

Employer contributions to NPS are available under both the old and new tax regimes. The key difference lies in the overall deductions and exemptions available under each regime. While the new regime offers a higher standard deduction (Rs. 75,000), it limits the number of deductions you can claim, including NPS contributions. On the other hand, the old regime allows a wide range of deductions, including NPS, Section 80C, and other allowances. Therefore, salaried employees need to assess their overall tax liability to determine the most beneficial regime when considering NPS contributions.

House Rent Allowance (HRA) and Other Allowances

How HRA Deductions Work in 2025

House Rent Allowance (HRA) provides tax relief to salaried employees who live in rented accommodation. The amount of HRA you can claim as an exemption is calculated based on your salary, the rent you pay, and the city in which you live. To claim this deduction, you must provide rent receipts and ensure the rent paid is above 10% of your salary. The exemption is subject to the lowest of the following: the actual HRA received, rent paid minus 10% of salary, or 50% of salary for metro cities (40% for others).

Is HRA Allowed in the New Tax Regime?

Under the new tax regime, you cannot claim HRA as a deduction. The new tax regime offers lower tax rates and fewer exemptions, which means that if you opt for the new regime, the benefit of HRA exemption is not available. However, salaried employees can still take advantage of the higher standard deduction under the new regime (Rs. 75,000), which might offset the loss of HRA benefits.

Exemptions for Conveyance and Telephone Reimbursements

Conveyance and telephone reimbursements are exempt from tax if they are provided by the employer for official duties and if the expenses are backed by bills. The exemption is available to the extent of the actual expenses incurred and is not subject to any monetary cap. This exemption helps reduce the taxable income of employees, as long as the reimbursements are strictly for work-related purposes.

Medical Allowance and Its Replacement by Standard Deduction

Medical allowance used to be a common exemption available to salaried employees. However, this has been largely replaced by the standard deduction of Rs. 75,000 under the new tax regime. While medical expenses incurred for family members are still deductible under Section 80D (if applicable), the medical allowance exemption is no longer available in the old regime either. Employees no longer need to provide receipts for medical expenses, making it simpler to claim this benefit.

Tax-Free Gifts and Vouchers: What You Need to Know

Gifts and vouchers provided by employers are tax-free up to Rs. 5,000 per year, provided they are given as part of a structured employee welfare scheme. However, if the value of the gifts exceeds Rs. 5,000, the excess amount will be treated as taxable income. This provision applies to both the old and new tax regimes, making it a simple and effective way for employees to receive non-taxable benefits from their employers.

Family Pension Deduction

How the Family Pension Deduction Works in 2025

The family pension deduction provides tax relief to individuals receiving a family pension. The amount received as a family pension is considered taxable income. However, a standard deduction of Rs. 25,000 is available for those receiving a family pension, which reduces the taxable amount. This deduction helps reduce the tax burden on pensioners who may not have other significant sources of income.

Increase in Deduction Limit from Rs. 15,000 to Rs. 25,000

In the 2025 Budget, the deduction limit for family pensions was increased from Rs. 15,000 to Rs. 25,000, offering greater tax relief to individuals who depend on family pensions. This increase benefits senior citizens and others receiving family pensions, providing them with a larger deduction and helping to mitigate the impact of taxes on their pension income.

Tax Rebate Under Section 87A

Who Is Eligible for the Tax Rebate Under Section 87A in 2025?

The tax rebate under Section 87A is available to individual taxpayers whose total taxable income is below Rs. 12 lakh. This rebate allows for a reduction in tax liability, making income up to Rs. 12 lakh effectively tax-free for eligible individuals. The rebate under Section 87A has been expanded, making it accessible to more taxpayers in 2025.

How the Tax Rebate Makes Income Up to Rs. 12 Lakh Tax-Free

For salaried individuals with a taxable income of Rs. 12 lakh or below, the Section 87A rebate ensures that their income remains tax-free up to the specified limit. The rebate is directly deducted from the tax payable, meaning if your total tax liability is Rs. 12,000, the rebate can reduce it to zero, making the income effectively tax-free before applying the standard deduction.

Choosing Between the Old and New Tax Regimes

Which Tax Regime Is Better for Salaried Employees in 2025?

The choice between the old and new tax regimes depends on the employee’s income level and the deductions claimed. The new tax regime offers lower tax rates but fewer deductions, while the old regime allows more deductions (like 80C, 80D, and HRA). Employees need to evaluate their total taxable income, deductions, and exemptions to determine which regime offers the best tax savings.

Deductions Available in the Old vs. New Tax Regime

• Old Regime: Allows a variety of deductions, including HRA, Section 80C, 80D (medical insurance), and NPS contributions.

  
  

• New Regime: Offers lower tax rates but does not allow deductions for HRA, 80C, 80D, and other exemptions. It does, however, offer a higher standard deduction.

How to Make the Right Choice Based on Your Income and Deductions

For individuals with income below Rs. 12 lakh, the new regime might be more beneficial due to the higher standard deduction. However, those earning between Rs. 12 lakh and Rs. 24 lakh should assess the value of their deductions to determine which regime provides the best benefits.

Income Below Rs. 12 Lakh – Which Regime to Choose?

Salaried individuals with income below Rs. 12 lakh will typically benefit more from the new tax regime due to the higher standard deduction (Rs. 75,000) compared to the old regime’s lower standard deduction (Rs. 50,000). The new regime is straightforward and offers simplicity in tax filing.

Above Rs. 24 Lakh – Breakeven Analysis for Deductions

For higher-income earners, the decision between the old and new tax regimes becomes more nuanced. A breakeven analysis can help determine the point at which the additional deductions available under the old regime outweigh the tax savings of the new regime. It’s advisable to consult a tax professional for this analysis.

Filing and Documentation

Documents Required for Claiming Deductions

To claim tax deductions, salaried employees must maintain records such as salary slips, investment proof for Section 80C, medical insurance receipts for Section 80D, and rent receipts for HRA. These documents are necessary to validate the claims made in the income tax return (ITR).

How to Submit Form 12BB to Your Employer

Form 12BB is used by employees to provide proof of deductions (like HRA, 80C investments, etc.) to their employers. This form should be submitted to the employer at the time of filing for tax deductions, so that the correct TDS (Tax Deducted at Source) can be applied.

How to Use Form 16 and File Income Tax Return (ITR)

Form 16 is issued by the employer and provides details of salary paid and the TDS deducted. It’s essential for filing your ITR. The form will show your gross salary, tax deductions, and the TDS applied, which you will use to file your ITR.

Revised Returns and Claims via ITR-U

Taxpayers have up to four years to revise their returns through the ITR-U (Updated Return) facility if they realize that they missed claiming deductions or made any errors in their earlier filings.

Conclusion

Salaried employees in 2025 have several opportunities to reduce their taxable income through various deductions and exemptions. Whether it's claiming deductions under Section 80C, NPS contributions, or the increased family pension deduction, proper planning can lead to significant tax savings. The choice between the old and new tax regimes requires careful consideration of individual income, deductions, and overall tax liability. It’s important to stay updated on the latest regulations and file returns accurately to ensure that all eligible benefits are claimed.

FAQs

1. What is the maximum standard deduction allowed under the new tax regime for 2025? 

Under the new tax regime for FY 2025-26, the maximum standard deduction allowed is Rs. 75,000. This deduction applies to salaried employees and pensioners, simplifying the tax filing process by reducing taxable income without requiring proof of expenses.

2. Can I claim HRA under the new tax regime in 2025? 

No, under the new tax regime, you cannot claim House Rent Allowance (HRA) as a deduction. The new tax regime offers lower tax rates in exchange for the removal of various exemptions and deductions, including HRA.

3. What documents do I need to submit to claim deductions under Section 80C? 

To claim deductions under Section 80C, you must submit proof of investment. This can include receipts for contributions to Provident Fund (PF), Public Provident Fund (PPF), life insurance premiums, or any other eligible instruments. You may need to submit these documents to your employer if you're claiming them through payroll deductions, or include them when filing your Income Tax Return (ITR).

4. Is the family pension deduction available in the new tax regime? 

Yes, the family pension deduction is available under both the new and old tax regimes. For FY 2025-26, the standard deduction for family pensions has increased to Rs. 25,000, up from Rs. 15,000, to help reduce taxable income from family pensions.

5. How does NPS contribution reduce my taxable income in 2025? 

The employer’s contribution to the National Pension System (NPS) under Section 80CCD(2) is exempt from tax, up to 14% of basic salary. This helps lower your taxable income. Employees can also make individual contributions to NPS under Section 80C, which is eligible for additional deductions, further reducing their taxable income.

6. Can I claim both HRA and the standard deduction? 

No, if you opt for the new tax regime, you cannot claim both HRA and the standard deduction. The new tax regime replaces the need for deductions like HRA, so only the standard deduction of Rs. 75,000 is applicable. However, under the old tax regime, you can claim both HRA and the standard deduction, provided you meet the necessary conditions.

7. What are the tax benefits of investing in a PPF under Section 80C?

 Investing in a Public Provident Fund (PPF) under Section 80C allows you to claim a deduction of up to Rs. 1.5 lakh from your taxable income. Additionally, the interest earned on a PPF is tax-free, and the maturity proceeds are also exempt from tax, making it a highly beneficial long-term investment.

8. How do I file my tax return to claim all available deductions? 

To claim all available deductions, you need to file your Income Tax Return (ITR) through the official income tax portal. Ensure that you provide details of deductions under sections like 80C, 80D, and others in your ITR form. You must also provide proof of these deductions, either through Form 12BB (submitted to your employer) or directly when filing the ITR.

9. Is it mandatory to submit Form 12BB to claim deductions? 

Yes, it is mandatory for salaried employees to submit Form 12BB to their employers to claim deductions like 80C, 80D, HRA, and others. This form helps employers calculate the correct TDS (tax deducted at source) on your salary, reflecting your eligible deductions.

10. What is the impact of choosing the old tax regime for salaried employees? 

Choosing the old tax regime allows salaried employees to continue claiming various deductions like 80C, 80D, and HRA. While the tax rates are higher under the old regime, it may be beneficial for those with significant deductions. It offers more flexibility in reducing taxable income, especially for those who can claim multiple exemptions.

11. Can I avail tax rebate under Section 87A if my income exceeds Rs. 12 lakh? 

No, the tax rebate under Section 87A is only available for individuals whose taxable income does not exceed Rs. 12 lakh. For FY 2025-26, incomes up to Rs. 12 lakh are effectively tax-free before the standard deduction, and taxpayers within this limit can claim a rebate of up to Rs. 12,500 under Section 87A.

12. How to calculate the tax liability if I choose the old tax regime?

To calculate your tax liability under the old tax regime, first determine your gross taxable income. Then, subtract any eligible deductions, such as those under Sections 80C and 80D. Once the deductions are applied, calculate the tax based on the applicable income tax slabs. If your income exceeds the threshold for any rebate or exemption, adjust accordingly, and apply the corresponding tax rates.