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10 Best Tax-Friendly Habits to Adopt for a Sound Financial Future
Navigate India's complex financial landscape with our ten tax-friendly habits, settin...
Key takeaways
- Most tax-saving deductions in India work only under the old tax regime. Under the new regime, the employer’s NPS contribution under Section 124 is usually the main lever left.
- The ₹1.5 lakh Section 123 basket (earlier Section 80C) is shared across EPF, PPF, ELSS, life insurance, and tax-saving FDs, so these compete for one cap rather than stacking on top of each other.
- The right option for you depends on three things, your risk appetite, your lock-in tolerance, and how much you can comfortably set aside.
Salaried Indians ask the same question every tax season, how to save tax before the financial year closes. The March rush for investment proofs leaves little room to check whether an option actually fits, and many end up buying the wrong one. Tax planning is only one part of your finances, tied to your investments, insurance, retirement, and estate, and a choice that saves tax on its own can still set back the rest. Spreading the decision across the year, rather than leaving it to the final week, prevents that rushed mistake.
The best tax saving schemes in India are open to every salaried taxpayer, whatever their grasp of the tax code. Which one fits depends on your income, your time horizon, and the risk you can carry, and that match matters more than the marketing behind any product. Personalised, unbiased guidance earns its place where the right choice is this personal.
The tax regime you pick decides your options
Most tax saving strategies in India below work only under the old tax regime. The new regime, now the default for most salaried taxpayers, trades nearly all deductions for lower slab rates and a ₹75,000 standard deduction. One exception runs through both, the employer’s NPS contribution, covered below. Deciding your tax regime is the first move, because it sets which levers you can pull.
The section numbers mentioned in this article are as per the Income Tax Act 2025, which applies from TY 2026-27 onwards. While the section numbers have changed from the previous law, the deduction limits and conditions discussed remain unchanged unless otherwise notified.
Also check: Compare your income tax with 1 Finance’s Old vs New Tax Regime Calculator and find which tax regime saves you more.
The Section 123 basket worth up to ₹1.5 lakh
Section 123, earlier Section 80C under the Income Tax Act 1961, holds the largest deduction available to salaried Indians. A total of ₹1.5 lakh across a set of eligible instruments comes off your taxable income each year. The list is broad, and you may already be filling part of it without counting.
Employee Provident Fund and Public Provident Fund contributions sit here, alongside life insurance premiums, home loan principal repayment, children’s tuition fees, ELSS funds, tax-saving fixed deposits, and National Savings Certificate.
All these deductions share a single ₹1.5 lakh limit per financial year, which is where many taxpayers get confused. For example, if your home loan principal repayment itself exceeds ₹1.5 lakh, you have already exhausted the limit. Any additional tax-saving investment will not give you an extra deduction.
Before making a new investment, check how much of this limit has already been used so you can claim the deduction effectively.
Provident funds inside the Section 123 basket carry EEE treatment
Exempt-exempt-exempt (EEE) treatment means contribution, interest, and maturity all stay tax-free.
Employees’ Provident Fund (EPF): A mandatory retirement savings scheme for salaried employees. You contribute 12% of your basic salary and dearness allowance every month, and your employer makes a matching contribution. The declared interest rate for FY 2025–26 is 8.25%.
Public Provident Fund (PPF): A government-backed, voluntary savings scheme that currently offers 7.1% interest for the July-September 2026 quarter. You can invest up to ₹1.5 lakh a year, and the account has a 15-year lock-in period.
Voluntary Provident Fund (VPF): An optional extension of EPF that allows you to contribute more than the mandatory 12% from your salary. It earns the same interest rate as EPF. However, interest earned on your own contributions exceeding ₹2.5 lakh in a financial year is taxable under “Income from Other Sources”.
Equity Linked Savings Schemes (ELSS) has the basket’s shortest lock-in period
Equity Linked Savings Schemes are the one mutual fund category earning a Section 123 deduction, with the shortest lock-in in the basket at three years. Money here buys units in an equity fund, and returns follow the market rather than a fixed rate.
Equity brings higher long-term returns alongside the risk of a short-term fall due to compounding, with capital gains above ₹1.25 lakh a year taxed at 12.5%. For an investor comfortable with market swings, ELSS pairs a deduction with equity growth and the quickest access to capital.
National Pension Scheme adds a deduction the basket cannot
If you follow the old tax regime, you can claim an additional deduction of up to ₹50,000 for your NPS contribution under Section 124(1)(b), over and above the ₹1.5 lakh limit available under Section 123.
Also read: NPS vs equity mutual funds: Similar returns, ~₹72 lakh difference driven by taxes
In the case of Corporate NPS, employer contributions are deductible under Section 124 of the Income Tax Act 2025. Under the new tax regime, you can claim a deduction of up to 14% of your basic salary and dearness allowance. Under the old tax regime, the limit is 10% for private-sector employees. This deduction is available over and above other deduction limits, making it one of the few significant tax benefits available under the new tax regime.
NPS is designed for retirement planning, so your contributions not only help reduce your tax liability but also build a retirement corpus over the long term.
Also read: What’s new in NPS: How retirement income scheme (RIS) changes NPS withdrawal rules
Tax-saving fixed deposits for the risk-averse people
Tax-saving fixed deposits suit anyone wanting a Section 123 deduction without touching the equity market. A five-year deposit with a bank qualifies, and the amount placed, up to ₹1.5 lakh, comes off your taxable income for the year. The return is fixed and guaranteed, which is the whole appeal for a saver who values certainty over market-linked growth.
Health insurance premiums under Section 126
Health insurance premiums are eligible for deduction under Section 126 (previously known as Section 80D) of the Income Tax Act 2025, if you opt for the old tax regime.
- You can claim up to ₹25,000 a year for premiums paid for yourself, your spouse and dependent children.
- An additional deduction of up to ₹25,000 is available for premiums paid for your parents. The limit increases to ₹50,000 if the person insured is a senior citizen.
- Preventive health check-up expenses of up to ₹5,000 are included within these limits.
The maximum deduction depends on the age of the insured members:
- ₹50,000 if both you and your parents are below 60 years of age (₹25,000 + ₹25,000).
- ₹75,000 if you are below 60 years of age but your parents are senior citizens (₹25,000 + ₹50,000).
- ₹1 lakh if both you and your parents are senior citizens (₹50,000 + ₹50,000).
Section 126 also allows deductions for contributions to the Central Government Health Scheme (CGHS) and notified schemes. In certain cases, medical expenditure incurred on uninsured senior citizens is also eligible for deduction, subject to the prescribed limits.
House Rent Allowance (HRA) for salaried tenants
If you are a salaried employee living in rented accommodation, you can claim an HRA exemption under Section 10(13A) of the Income Tax Act 2025, provided you opt for the old tax regime.
The exempt amount is the lowest of the following three:
- The HRA amount paid by your employer.
- The actual rent paid minus 10% of your salary.
- 50% (metro) or 40% (non-metro) of your eligible salary for HRA purposes.
To claim the exemption, you must submit rent receipts to your employer. If your annual rent exceeds ₹1 lakh, you also need to provide your landlord’s PAN.
Also check: Calculate your tax-free house rent allowance with 1 Finance HRA Exemption Calculator and maximize your tax savings.
Home loan interest on a self-occupied property
If you have taken a home loan for a self-occupied property, you may claim a deduction of up to ₹2 lakh a year on the interest paid under Section 22 (formerly Section 24(b)) of the Income Tax Act 2025, if you opt for the old tax regime and satisfy the prescribed conditions.
This deduction is separate from the deduction for home loan principal repayment under Section 123 (formerly Section 80C). Since it is claimed under the head “Income from House Property,” it doesn’t use up your Section 123 limit. You can claim both benefits if you are eligible.
The deduction isn’t available under the new tax regime for a self-occupied house property, making your choice of tax regime an important factor when planning your taxes.
Will and estate planning shapes the tax your heirs pay
Tax planning seldom extends to what happens after you, yet estate planning carries a real tax dimension. India levies no inheritance or estate tax, and assets pass to heirs untaxed at transfer. The tax arrives later, when heirs sell an inherited asset and pay capital gains from the original owner’s purchase price and holding period, not the value on the day they inherited it. A registered Will, clear ownership records, and planned gifting to relatives keep that eventual tax orderly.
1 Finance’s guide to the tax side of inheritance in India works through how inherited assets are taxed before you pass them on.
Other deductions worth checking under the old tax regime
A few smaller deductions can also help reduce your tax liability under the old tax regime.
- Interest paid on an education loan is deductible under Section 129 of the Income Tax Act 2025. The deduction is available for up to eight consecutive tax years from the year you begin repaying the interest, or until the interest is fully paid, whichever is earlier.
- Eligible charitable donations may qualify for a deduction of 50% or 100% under Section 133, subject to the prescribed conditions.
- Senior citizens can claim a deduction of up to ₹50,000 on interest earned from specified deposits under Section 153.
These deductions are available only if you meet the respective eligibility conditions and have the relevant expenses or income.
Tax planning is one part of overall financial wellbeing
Most people buy whatever gets recommended in March, without checking whether these financial products are personalised to their financial needs. The result is a set of tax-savers built for someone else, an insurance policy bought only for its deduction, or a lock-in longer than the money can afford to sit still. Matching each option to your income, your goals, and your regime turns the saving into a plan rather than a purchase.
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A checklist before choosing your tax saving strategies
The best tax saving strategies fall flat when they don’t suit your life, narrowing to three important questions.
Your risk tolerance decides where equity belongs. ELSS and NPS carry equity market exposure and higher long-term returns, while PPF, tax-saving FDs, and provident funds hold steady at a fixed rate, which suits anyone near a goal or uneasy with volatility.
Your financial obligations set what you can spare. Before locking funds into a five-year FD or a fifteen-year PPF, account for your EMIs, an emergency fund, and any expense on the horizon to keep spare money.
The lock-in period decides where each rupee belongs. ELSS frees capital after three years, a tax-saving FD after five, PPF after fifteen, and NPS holds it until you turn 60, which means money you may need soon belongs in a shorter option.
Frequently Asked Questions
Which tax-saving option has the shortest lock-in period?
Among the Section 123 options, ELSS mutual funds have the shortest lock-in period of three years. Tax-saving fixed deposits have a five-year lock-in period, PPF has a 15-year lock-in period, and NPS generally remains invested until retirement. ELSS therefore provides earlier access to your money, although its returns are market-linked and not guaranteed.
Do tax-saving investments work under the new tax regime?
Most tax-saving instruments don’t. The new tax regime removes nearly all deductions, including those available under Sections 123 and 126, and the additional NPS deduction under Section 124(1)(b), in exchange for lower tax rates and a standard deduction of ₹75,000. One key exception is the employer’s contribution to NPS under Section 124(2), which remains deductible under both tax regimes, subject to the prescribed limits.
Is the interest on a tax-saving fixed deposit tax-free?
No. Only the amount invested in a five-year tax-saving fixed deposit qualifies for deduction under Section 123. The interest earned is fully taxable at your applicable income tax slab rate. This differs from PPF, which enjoys exempt-exempt-exempt (EEE) tax treatment, subject to the applicable provisions.
What is the additional NPS tax deduction for salaried employees?
Under Section 124(1)(b) of the Income Tax Act 2025, you can claim a deduction of up to ₹50,000 for contributions made to your NPS Tier I account, over and above the ₹1.5 lakh limit under Section 123. Employer contributions to NPS under Section 124(2) are eligible for a separate deduction and may also be claimed under the new tax regime, subject to the prescribed limits.
Does Will and estate planning save tax?
India doesn’t levy inheritance tax or estate tax. Assets inherited by legal heirs aren’t taxed at the time of transfer. However, if the inherited asset is subsequently sold, capital gains tax may arise based on the original owner’s cost of acquisition and holding period, subject to the applicable tax provisions. Proper estate planning can help ensure a smooth transfer of assets and reduce the likelihood of disputes and tax-related complications.
How can a salaried employee save tax in India?
The right tax-saving strategy depends on your income, financial goals, existing investments, and the tax regime you opt for. Tax-saving investments should be chosen based on your personal financial needs, not just the deductions they offer. Before investing or selecting a tax regime, consult a Qualified Financial Advisor (QFA) for unbiased and personalised advice.
