This session was hosted by CA Chinmay Kale from ‪Cleartax India‬ . In this session, we break down how salaried professionals can plan their taxes and investments effectively for FY 2026–27. From understanding salary exemptions to comparing the old vs new tax regime, this video will help you make smarter financial decisions.

What is employee tax in India?

Employee tax in India is the portion of your salary that the government collects as income tax, deducted at source by your employer every month in the form of TDS. It is governed by the Income Tax Act, 1961, and it is not a flat charge. It is a function of how much you earn, which tax regime you choose, and what deductions or exemptions you can legitimately claim.

Two decisions determine your tax outgo every April. The first is which tax regime you opt into. The second is your investment and exemption declaration submitted to your employer, which directly determines how much TDS is deducted from your salary each month. Get either of these wrong and you either overpay throughout the year or face a lump-sum demand at filing time.

Since FY 2023-24, the new tax regime has been the default. You have to actively opt out to switch to the old one. This is not an accident. The government is deliberately engineering a migration, and the Budget 2025 accelerated it further.

As an HR professional, your payroll team processes TDS based on the regime declaration each employee submits. Incorrect declarations, missed deadlines, or zero declarations default the entire workforce to the new regime. This directly affects your employees' take-home pay and your company's compliance posture. It is worth building a structured declaration process every April, not leaving it to employees to figure out independently.

To watch the entire conversation on ‘New vs Old Tax Regime’, click on the link.

Employee tax slab rates for FY 2026-27

The Budget 2025 meaningfully revised the new regime slabs. Here is the complete picture under both regimes. 

New tax regime - slabs for FY 2025-26 (AY 2026-27):

Standard deduction under the new regime is ₹75,000, up from ₹50,000. Section 87A provides a rebate of up to ₹60,000, effectively zeroing out tax liability for incomes up to ₹12 lakh. A 4% education cess applies on top of the final tax computed.

Old tax regime - slabs (unchanged):

Standard deduction under the old regime remains ₹40,000. The 87A rebate under the old regime applies only up to ₹5L taxable income and is capped at ₹12,500. No revised slabs, no enhanced rebate. What it does offer, though, is a wide suite of exemptions and deductions.

What deductions reduce your employee tax?

This is where most salaried employees get confused. There is a sharp divide between the two regimes.

Deductions available only under the old tax regime:

• House rent allowance (HRA, Section 10(13A)) is the most impactful exemption for employees staying in rented accommodation. The exempt amount is the least of actual HRA received, 40% of basic salary (50% in metro cities), or actual rent paid minus 10% of basic salary. City of residence, rent paid, and your basic salary structure all shape this number. The incoming new labor law, which mandates basic to be at least 50% of gross CTC, will change the arithmetic of HRA exemptions significantly once enforced.
• Leave travel allowance (LTA) covers domestic travel (air economy class or first-class rail) for self and dependents including spouse, children, and siblings. Claimable for two journeys within a four-year block. The current block is 2022 to 2025. Maximum exemption is ₹2 lakh. Food and accommodation are not covered, only the travel fare.
• Food coupons and Sodexo: up to ₹2,200 per month (₹26,400 per year) is exempt if your employer credits meal vouchers to a Sodexo or Paytm wallet. A small but consistent benefit that requires zero additional effort from the employee.
• Section 80C (up to ₹1.5L) is the broadest deduction bucket. It covers EPF, VPF, PPF, ELSS mutual funds, life insurance premiums, housing loan principal repayment, five-year fixed deposits (interest still fully taxable), and tuition fees for up to two children. As Chinmay explained during the session, "ELSS has a lock-in of three years, the FD has a lock-in of five years. The profit from ELSS is taxable, but the principal you invest is not. Only the additional gain above your investment is taxed as capital gains."
• Section 80CCD(1) and 80CCD(1B): Your own NPS contribution forms part of the ₹1.5L 80C umbrella. Beyond that, 80CCD(1B) offers a separate additional ₹50,000 deduction for voluntary NPS contributions. Both are available only under the old regime.
• Section 80D for health insurance premiums: up to ₹25,000 for self, spouse, and children below 60 years. Up to ₹50,000 if your parents are senior citizens. An additional ₹5,000 within these limits is claimable for preventive health checkups. This is one of the most consistently underutilized deductions in India's salaried workforce.
• Section 80E for education loan interest: full interest deduction on loans taken for higher education, for up to eight years. Covers self, spouse, and dependent children. The course must be approved by a government-recognized institution. Private tutoring and unrecognized courses are excluded.
• Section 80G for donations: 100% deduction for contributions to PM Relief Fund, COVID funds, and Chief Minister Relief Funds. 50% for religious institutions like temples, mosques, and churches. All donations must be in non-cash mode. Any cash donation exceeding ₹10,000 is disallowed entirely.
• Section 24B for housing loan interest: up to ₹2 lakh per year on a self-occupied property. Pre-construction interest can be claimed in five equal annual installments after the property is completed. The cumulative ₹2L cap applies to both pre- and post-construction interest combined.
• One instrument worth calling out under 80C that does not get nearly enough attention: the Sukanya Samriddhi Yojana. For parents of daughters below 10 years of age, SSY currently offers a government-guaranteed 8.2% interest rate, compounding annually, with a 15-year contribution window and full maturity at 21 years. Fixed deposit rates are sitting at 6 to 7%. If you have an eligible daughter and any remaining 80C space, this is objectively one of the best instruments in the basket.

Deductions available under the new tax regime:

The list is intentionally short.

Everything else, including HRA, LTA, 80C, 80D, housing loan interest, and NPS self-contribution, is unavailable under the new regime. In exchange, you get wider slabs, a higher standard deduction, and more take-home every month.

Employee contribution to NPS in new tax regime: What's allowed?

This is one of the most misunderstood areas in payroll planning. Here is the clean breakdown.

The government is offering a 4% sweetener on employer NPS under the new regime. This is a deliberate nudge. Under the new labor law, the basic salary will need to be at least 50% of gross CTC. If your CTC is ₹20L, basic would be ₹10L, and employer NPS of up to ₹1.4L would be deductible, which is a meaningful offset.

But here is what employees often miss. As Chinmay explained during the session, "When you ask your employer to contribute 10% of your basic toward NPS, he will deduct 10% from your salary first and contribute an additional 10% on top. Your in-hand salary will reduce. You get the tax benefit only for the employer contribution, not your self-contribution under the new regime." Run the take-home math before opting in.

Is NPS worth pursuing after 30? Yes, particularly under the new regime where employer NPS is the only real investment deduction available. Up to 40% of the NPS corpus on retirement is tax-free as a lump sum. The remaining 60% is received as monthly pension and taxed as regular income. For a long-horizon investor, the employer NPS route under the new regime is one of the cleanest instruments available.

Watch the full conversation on the New vs Old Tax Regime here.

Real numbers: ₹24L salary employee tax comparison

Abstract regime comparisons are useless without actual numbers. Here is what the math looks like at a ₹24 lakh gross salary, a bracket representative of mid-to-senior salaried professionals in Tier 1 cities, with maximum reasonable deductions applied under each regime.

Key insight: Even after exhausting every legitimate deduction under the old regime, including housing loan interest, HRA, full 80C, NPS, and family health insurance, the new regime still saves approximately ₹94,000 in annual employee tax on a ₹24 lakh salary. You are running a five-lakh-rupee investment marathon and still losing by almost a lakh. The break-even point, the total deduction amount at which the old regime finally becomes beneficial, is approximately ₹8 to ₹9 lakh in this bracket. Almost nobody reaches it.

The ₹12L no employee tax myth

This misconception is widespread and it costs employees real money.

The myth: "My salary is ₹15L. Tax is only on the ₹3L above ₹12L."

• The actual law: If your income exceeds ₹12L, the Section 87A rebate vanishes entirely. Tax is calculated from scratch on the full ₹15L using all applicable slabs, starting from zero: nil on the first ₹4L, 5% on the next ₹4L, 10% on the next ₹4L, and 15% on the remaining ₹3L.
• As Chinmay put it plainly during the session: "Everybody will think, I have a ₹15L salary, up to ₹12L there is no tax, only on the ₹3L I pay taxes. No. The slab rates are for medium-earning employees who are not required to pay any taxes at all. Anything above ₹12L is completely taxable as per the scratch from 0 to ₹15L."
• The same logic applies to capital gains income, online gaming winnings, and lottery prizes. These are taxed at special rates, 30% on winnings, and do not enjoy the 87A rebate even if your total income is under ₹12L. The ₹100 you won on Dream11? ₹30 goes to the government, no exceptions.
• On marginal relief: for incomes fractionally above ₹12L, there is a safety mechanism. If the tax payable on, say, ₹12.5L exceeds the incremental income of ₹50,000 itself, the government limits your additional tax to that excess amount. This prevents the situation where earning ₹50,000 more results in a net loss after tax. It is a narrow cushion but it matters for those earning in the ₹12L to ₹13L range.

Employer employee insurance tax benefit: How it reduces your tax

The Budget 2024-25 removed GST from all insurance premiums, including group health insurance, term insurance, and life insurance policies. At an 18% GST rate, this is a meaningful reduction. On a ₹25,000 health insurance premium, policyholders were previously paying ₹4,500 in GST alone. That cost is now gone.

Under the old tax regime, Section 80D allows employees to claim up to ₹25,000 per year on premiums paid for self, spouse, and children. If parents are senior citizens (60 and above), an additional ₹50,000 is claimable for their health insurance. Within these limits, up to ₹5,000 spent on preventive health checkups is also deductible.

For senior-citizen parents who cannot get insured, many insurers reject applications beyond ages 70 to 75, Section 80D provides an alternative. Actual medical expenditure of up to ₹50,000 per year can be claimed in place of the insurance premium, subject to proof of expenditure.

For HR teams structuring CTC: group health insurance paid by the employer is not included in the employee's taxable salary. It sits outside the income tax computation entirely under both regimes. When structuring CTC, this makes group medical cover a particularly tax-efficient benefit to include. The employee gets coverage without any tax consequence, and the employer gets no adverse treatment either.

One important note: Section 80D is not available under the new tax regime. The premium deduction is strictly an old-regime benefit. Group cover provided by the employer, however, remains non-taxable under both regimes.

Employee professional tax: Does it affect your ITR?

Employee professional tax is a state-level levy, not a central government tax. It is deducted from your monthly salary by your employer and remitted to the respective state government. The maximum any state can levy is ₹2,500 per year, typically ₹200 per month for the first eleven months and ₹300 for the twelfth.

Under the Income Tax Act, professional tax paid is deductible from gross salary income under both the old and new regimes. It reduces your taxable income by the amount deducted, and your Form 16 will reflect it. Your ITR should match that figure. It is a small amount, but it is yours to claim.

Professional tax is not applicable in all states. Karnataka, Maharashtra, Tamil Nadu, and West Bengal levy it. Delhi does not. HR teams managing multi-state payroll need to maintain state-wise compliance for this.

Which regime saves more employee tax?

The answer, backed by the numbers above, is that the new regime saves more for most salaried employees in FY26. But there are clearly defined exceptions.

• Choose the new regime if your annual income is ₹12L or below and your liability is nil, if your income falls between ₹12L and ₹20L with limited investment commitments, if you prefer higher monthly in-hand over forced annual savings, if your cumulative deductions under the old regime are realistically below ₹8 to ₹9L, or if simplicity and faster ITR filing matter to you.
• Choose the old regime if you pay ₹1.2L or more in annual rent and fully claim HRA, if you carry an active housing loan with ₹2L or more in annual interest, if you have fully exhausted 80C every year and claim 80D for family health cover, if your cumulative deductions genuinely exceed ₹8 to ₹9L, or if you have senior-citizen parents with significant medical costs.

As Chinmay framed it during the session: "The new tax regime will provide you with the spending capacity. The old tax regime will forcefully require you to make investments. Both have merit. The question is which direction you need to be pushed in."

This is an underrated way to think about it. The old regime functions as a behavioral constraint. It extracts a portion of your income into long-term instruments before you can spend it. For employees who would otherwise not invest proactively, the tax incentive doubles as a financial planning nudge. The new regime puts more money in your account and trusts you to allocate it wisely. If you will not, the old regime may produce a better financial outcome even if it means slightly higher tax in the short term.

Can salaried employees switch regimes every year?

Yes, if you are a pure salaried employee whose income comes from salary, house property, capital gains, and other sources only, with no business or professional income. In that case, you can switch between regimes every financial year, any number of times.

• This is a significant flexibility that is rarely communicated clearly during annual investment declaration cycles. If your circumstances change, say you pay off your housing loan or move into your own home and stop claiming HRA, you can recalculate and switch for the following year.
• The rules differ for business owners and consultants. If you have any income under profits and gains from business or profession, the default is the new regime. You can opt out to the old regime once, but once you switch back to the new regime, that switch is permanent. One-way door.
• For HR teams: most payroll systems lock the regime declaration at the start of the financial year. Employees should know they can revise their choice when filing their ITR, even after payroll TDS has been processed. The ITR filing is the final word, not the employer's deduction. If the regime at filing differs from the one used for TDS, a refund or additional payment will result at settlement.

How to file income tax return online for salaried employees

For those on the new tax regime with no capital gains or business income, ITR filing is genuinely straightforward. Here is the practical path.

Step 1: Collect your Form 16 from your employer, which should arrive by June 15 each year. This is the single most important document. It contains your salary breakup, TDS deducted, and the regime your employer used for deduction.

Step 2: Download your Form 26AS and Annual Information Statement (AIS) from the income tax portal at incometax.gov.in. Cross-verify every income figure in these documents against your Form 16 and bank statements before filing.

Step 3: Log in to the e-filing portal. Pre-filled ITR forms, specifically ITR-1 for most salaried employees, now auto-populate most data from 26AS and AIS. Review every line carefully. Pre-fill is accurate but not infallible.

Step 4: Choose your tax regime for the year. Run both scenarios if you are unsure. The comparison is worth five minutes.

Step 5: Add any income not reflected in your Form 16, including bank interest, dividend income, rental income, and capital gains. Every rupee of income above ₹4L needs to be declared regardless of whether TDS was deducted.

Step 6: Verify and submit. E-verify immediately using Aadhaar OTP, net banking, or a digital signature certificate.

One time-sensitive note: as of April 2026, you can file updated returns under Section 139(8A) for financial years 2021-22 through 2024-25. If you have missed filing for any of these years, or filed incorrectly, this window is still open. The penalty starts at 25% of additional tax due for the first year, scaling to 50%, 60%, and 70% for subsequent years. Refunds cannot be claimed through this route, but you can regularize your compliance record and claim existing TDS credits. If you need a loan, a visa, or any government subsidy, a clean ITR history is non-negotiable. Use this window before it closes.

For employees with complexity, including multiple employers, ESOPs, overseas income, or significant capital gains, the recommendation is to work with a CA or a platform like ClearTax. Explore the entire discussion on the New vs Old Tax Regime:

Make employee tax planning effortless for your team. With Pazcare, you can structure tax-efficient CTCs, optimize group health insurance benefits, and help employees choose the right tax regime, without the annual confusion.

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