4 Smart Tax-Saving Tips for Salaries Above ₹12 Lakh Post Union Budget 2025 

The Union Budget 2025 introduced significant changes to the income tax structure, offering much-related relief to the middle class and stimulate economic growth. One of the notable adjustments was raising the tax exemption limit (in the new tax regime) from ₹ 7 Lakh to ₹ 12 Lakh annually, allowing individuals earning up to this amount to be exempt from income tax.

But, if you earn above ₹ 12 Lakh in a year, you may find yourself in a higher tax bracket, impacting your take-home salary. Fortunately, there are several tax-saving opportunities that can help reduce income tax on salary while ensuring long-term financial growth. 

Here are four effective strategies to optimise tax on salaries post-Union Budget 2025.

1. Investing in Tax-Saving Instruments 

The government offers various tax-saving schemes that allow salaried individuals to claim deductions and reduce taxable income. These investments not only provide tax benefits but also help in accumulating wealth for long-term financial security. Many of these options such as Public Provident Fund (PPF), Employees' Provident Fund (EPF), Life Insurance, etc., fall under the purview of Section 80C of the Income Tax Act, with a combined annual limit of ₹ 1.5 Lakh per annum. While these options are still available in the old tax regime, unfortunately they cannot be claimed in the new regime. However, you do have the option of investing in NPS.

Contributions to the National Pension System (NPS) qualify for tax deductions under Section 80CCD of the Income Tax Act. There are three components under Section 80CCD:

1. Section 80CCD(1): Deduction available on self-contributions to NPS.
2. Section 80CCD(2): Deduction available on employer contributions to NPS.
3. Section 80CCD(1B): Additional deduction exclusively for NPS contributions.

You can save additional tax in the new tax regime by opting for Section 80CCD(2), however, you need to be a salaried employee to avail of this benefit. For government employees and private-sector employees opting for the next tax regime, the deduction is capped at 14% of salary (Basic + DA). This limit has been increased to 14% from 10% previously.

Let us take the example of a person earning ₹ 17 Lakh per annum as salary. They receive 40% of the amount as basic salary amounting to ₹ 6,80,000. By opting for the maximum limit of 14% NPS contribution, they can save ₹ 95,200 under Section 80CCD(2). As you can see, the higher the basic salary, the more money you save through this avenue.

2. Capital Gains Exemptions on Income from Long-Term Investments 

Long-term investments in equity instruments can be a useful tool for tax-efficient wealth creation. This is because Long-Term Capital Gains (LTCG) exemptions on equity shares and mutual funds of up to ₹ 1.25 lakh per year are tax-free. And for amounts over this limit, the tax is charged at 12.5% only, provided the stocks or units are held for over one year.

Let’s assume you bought shares worth ₹ 1 Lakh and sold them in 18 months for a 50% profit of ₹ 50,000. Since this amount falls within the exemption limit, you will not need to pay any tax at all. Now, let’s suppose the value of your shares tripled leading to a profit of ₹ 2 Lakh. In this case, the income tax calculation will be:

2,00,000 - 1,25,000 (exemption limit) = 75,000

75,000 x 12.5% (LTCG rate) = ₹ 9,375 tax.

Choosing investments that offer capital gains tax exemptions ensures both tax efficiency and long-term wealth accumulation. By carefully planning your sale or withdrawal each year, you can reduce your tax liability. Some popular ways to invest in equities include direct shares, and equity-based mutual funds, Equity-Linked Savings Scheme (ELSS).

3. Optimise Salary Structure: Leverage Allowances and Perquisites 

Restructuring your salary to include specific allowances and reimbursements can lead to substantial tax savings. Key components to consider include:

• Transport Reimbursement: Differently and specially-abled people are allowed to claim transportation expenses for commuting between work and home. The limit for this is ₹ 38,400 per annum, or ₹ 3,200 per month. If you qualify for this reimbursement, you can factor this in your salary structure and avail of the benefit.
• Conveyance Allowance: Several companies offer a tax-free salary component known as Conveyance Allowance, usually in the range of ₹ 800 to ₹ 1,500 per month. By getting this component added to your salary, you can potentially save up to ₹ 19,200 annually.
• Communication Reimbursement: Smartphones and the internet have become integral parts of today’s workplace. With a large number of people still working in hybrid modes, many companies offer a predetermined allowance or reimbursement option for mobile and internet connections. By restructuring your salary to include these and other similar options, you can potentially reduce your net taxable income for the year.

4. Avail Home Loan Benefits

Owning a home has always been the great Indian dream. But did you know, buying a home can also help you reduce your income tax liability? Yes, under Section 24(b), if you are a homeowner and have rented out your property, then you can claim deductions for the entire interest paid on the loan for the year. This can significantly lower your tax obligation for the year, thereby boosting your net income for the year.