How to Save Tax on 18 Lakhs Salary? Best Regime & Tax-Saving Tips

Significant changes have recently been made in the income tax slabs of the new regime, making them more beneficial to the assessee. As per the budget 2025, Income earned up to Rs.12 lakhs (except special rate income) has been made practically tax-free by relaxing the slab rates and increasing the rebate. 

Despite significant slab relaxations, many tax-saving deductions do not apply to the new regime; they are only applicable to the old regime. Choosing the most beneficial regime becomes essential for every taxpayer at this juncture. The following article explains the tax-saving options and the most beneficial regime for a salary income of Rs.18 lakhs.

Slab Rates Applicable For Financial Year 2025-2026

The modified slab rates for the new tax regime applicable for FY 2025-2026 are as follows:

Slab Rates Applicable for Financial Year 2024-2025

As per the latest Finance Act 2024, changes have been made in the slab rate for the new tax regime applicable for FY 2024-25 as follows - 

In the new tax regime, the standard deduction has been increased from Rs 50,000 to Rs 75,000, and the deduction on family pension has also been increased from Rs 15,000 to Rs 25,000. 

Tax Slabs Under Old vs New Regime

The old regime allows for several deductions unavailable in the new one. However, the tax rates under the new regime are lower than those under the old regime. 

You can also use the old vs new tax regime calculator for a better understanding. 

The above tax slabs under the old tax regime apply to those individuals aged less than 60 years. For individuals aged between 60 and 80 years, the basic exemption is Rs 3,00,000, and for individuals aged over 80 years, the basic exemption is Rs 5,00,000. The tax slab under the new tax regime is the same for all individuals.

Comparison of Deductions Available Under New and Old Regime

The following table compares the availability of various deduction in old and new 

How to Save Taxes for an Income of Rs 18 Lakh?

The following tax-saving options are available under the old and the new regimes.

Salary Restructuring

Though many tax-saving deductions are available only for the old regime, the salary can be structured so that taxes can be reduced irrespective of the choice of regime. The following allowances and perquisites are not taxed under both the old and new regimes.

Exempt Perquisites

• Telephone provided by the employer for the employee’s residence.
• Transport facility provided to employees through rail or airways, either free or at a concessional rate.
• Payment of insurance premiums by the employer on the staff group insurance scheme.
• Personal accident policy (usually, employers take policies in business interest only. Therefore, it does not need to be included in the salary of the employee)
• A recreational facility provided by the employer. - e.g., club membership
• Reimbursement of medical expenses for specified diseases
• Reimbursement or payment of health insurance premium (eligible for deduction under section 80D)
• The following perquisites are taxable only for directors or employees holding more than 20% of beneficial interest in the company.
  • Sweeper and gardener are provided by the employer.
  • Free concessional tickets.
  • Use of a motor car.
  • Gas, electricity and water are supplied by the employer.
  • Free or concessional education facilities are provided to employees and their families.

In addition to the above perquisites, a significant amount of taxable income can be reduced by opting for the car lease option, if provided by the employer. 

A car lease is an agreement between an employer and an employee in which the employer pays for the car and leases it to the employee. The employee agrees to pay the lease instalments, which are reduced from their salary every month.

Since the employer owns the car used by the employee here, it is considered a perquisite. Usually, this car is used for both official and personal purposes. The value of perquisite is determined according to the provisions of the act, given below:

Car Provided by the Employer and used for both Official and Personal Purposes

The instalment amount, usually more than the taxable perquisite, is deducted from the employee's salary, reducing their taxable income. After about 4 years, when the car's useful life ends, ownership is transferred to the employee at a nominal cost. Since the vehicle is fully depreciated by then, the transfer has little to no tax impact.

Employer’s Contribution to NPS u/s 80CCD(2)

• Section 80CCD(2) allows deductions for employer contributions to the National Pension Scheme (NPS). 
• This deduction is available under both the old and the new regimes for this amount, though the limit for deduction differs depending on the regime chosen. 

The following table describes the quantum of deduction available under both regimes for contributions made by the employer in the NPS scheme under section 80CCD (2)

Pro tip: There is no maximum contribution limit to the NPS scheme. Therefore, you can structure the contribution in such a way that it is equal to 14% of the basic pay under the new regime. This way, we can save taxes and also have maximum disposable income.

Gift Taxation

• Gifts received either in cash or in kind, if the amount or the value of the gift received is up to Rs.50,000, are not taxable under section 56 of the Income Tax Act. 
• If the amount received or the monetary value of the gift received in kind exceeds Rs 50,000, then the entire amount is taxable. 
• This tax-saving option is available for both old and new tax regimes.

Deduction for Interest on Borrowing for Let Out Property

• If the assessee has rented out his property (residential or commercial building), deduction under section 24 can be availed. 
• The interest paid on the amount borrowed to purchase or construct immovable property can be allowed as a deduction. 
• There is no maximum limit fixed for claiming this deduction. 

Gratuity and Leave Encashment

• Exemption is available for the amount received as gratuity and leave encashment at the end of the employment tenure. The employee may either retire or terminate employment before retirement. 
• The Income Tax Act provides the maximum amount eligible for deduction for gratuity and leave encashment. 
• This exemption is equally available for both old and new tax regimes.

Deduction to Additional Employee Cost

Deduction under section 80JJA is available irrespective of the assessee's choice of regime. 30% of the amount expended on additional employees can be deducted.  

Deduction to Agniveer Corpus Fund

• Contribution made by the Central Government in Agniveer Corpus Fund of the assessee is allowed as a deduction under section 80CCH(2). 
• Individuals enrolled in the Agnipath Scheme for the armed forces are eligible to claim this deduction.
• Under this section, there is no maximum deduction limit. The entire amount contributed by the Central Government can be allowed as a deduction.
• This deduction is also available under both old and new regimes.

Illustration

Consider Mr.A, an employee of a private company, having a salary of Rs.18 lakhs per annum, of which 50% is assumed as basic pay. His tax-saving deductions include the following:

• Tax saving Investments u/s 80C - Rs 1.5 lakhs
• Health Insurance u/s 80D - Rs 50,000
• Employer’s Contribution to NPS - Rs 1.26 lakh
• Interest on home loan:
  • Self-occupied property - Rs. 1.5 lakhs
  • Let Out Property - Rs 2 lakh

In addition to the above, the employee has utilised the car lease facility. Monthly lease payments come to Rs. 30,000 for 4 years. The tax calculation under the old and the new regimes is as follows:

In this case, the new regime has proven more beneficial despite the tax-saving options opted for under the old regime. 

Final Word

It is important for the taxpayer to be aware of the beneficial aspects of both regimes so that he can understand which is most beneficial for him and plan his taxes accordingly.

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