How to Save Tax for Salary Above 20 Lakhs?

If you're earning a salary above Rs. 20 lakh, you’re likely looking for ways to reduce your tax liability and optimize your finances. With the introduction of new tax regimes and various exemptions and deductions under the Income Tax Act, there are several strategies available to lower your taxable income. Whether you choose the new tax regime with its simplified structure or the old regime with its range of deductions, effective tax planning can help you save a substantial amount each year. 

This comprehensive guide walks you through the best ways to save tax on a salary of Rs. 20 lakh, explaining the key tax slabs, available deductions, and how to choose the most beneficial tax regime for your situation.

Key Takeaways – Tax Saving Options for ₹20 Lakh Salary

• Choose the new tax regime if you don’t have many deductions to claim. Stick with the old regime only if you have significant tax-saving deductions.
• Under the old regime, salaried employees could claim benefits like HRA, LTA, conveyance allowance, daily allowances, medical reimbursement, and deductions under Section 80C.
• Under the new regime, you get an increased standard deduction of ₹75,000 (up from ₹50,000 earlier).
• If you have a let-out house property purchased or constructed on a loan, you can claim interest on the housing loan as a deduction.
• Invest in NPS to claim additional deductions under Sections 80CCD(1B) and 80CCD(2). Employer contributions are also eligible for deduction under this section.

Key Tax Deductions and Exemptions for a Salary of Rs. 20 Lakh?

Regardless of the tax regime you choose, there are specific deductions and exemptions you can utilize to lower your taxable income. Let’s explore them:

Choose the Most Beneficial Regime 

• The decision between the old and new tax regimes should depend on the tax-saving investments you’ve made and your total income. If you have significant deductions like NPS, HRA, and Section 80C investments, the old regime may be more beneficial. However, if you don’t have many deductions, the new regime offers lower tax slabs, providing a better tax-saving opportunity.
• For high-income earners with a salary above Rs. 20 lakh, making the right choice of tax regime can lead to substantial savings.

House Rent Allowance (HRA)

House Rent Allowance (HRA) is one of the significant exemptions available for salaried employees. This allowance is provided by the company to cover the rent paid by employees. HRA is an exempt allowance under the Income Tax Act, and the exemption amount depends on certain rules. Claiming HRA can provide significant tax benefits for individuals earning a salary of Rs. 20 lakh. However, this allowance is not available under the new tax regime.

Standard Deduction 

The Standard Deduction is one of the most straightforward ways to reduce your taxable income. This deduction is available to both the general public and professionals without any specific conditions attached.

• Old Tax Regime: Rs. 50,000
• New Tax Regime: Rs. 75,000

By opting for this deduction, you can lower your taxable income, making it a popular choice for taxpayers earning above Rs. 20 lakh.

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

• Section 80CCD(2) allows deduction for contributions made by employers in the National Pension Scheme (NPS). 
• Deduction is available under both new regimes for this amount, though the limit for deduction differs according to choice of regime. 
• This deduction helps reduce taxable income, especially for high earners, and provides additional retirement savings through NPS.

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

Deduction for Interest on Borrowing for Let-Out Property (Section 24)

• If the assessee has rented out his property (residential or commercial building), deduction under section 24 can be availed. 
• The amount of interest paid for amount borrowed for purchase or construction of 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 the employment before retirement. 
• The Income Tax Act provides the maximum amount eligible for deduction for both gratuity and leave encashment. 
• This exemption is equally available for both old and new tax regimes.

Gift Taxation

• Gifts received either in cash or through kind if the amount or the value of the gift received is up to Rs.50,000 is 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 on 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.
• There is no maximum limit for deduction under this section. The entire amount contributed by Central Government can be allowed as a deduction
• This deduction is also available under both old and new regimes.

New Income Tax Slabs For FY 2025-26 (AY 2026-27)

In the Budget 2025, a significant change in the tax slabs and rates was introduced. The slab limits were enhanced to blocks of 4 lakhs and a tax rate of 25% was also introduced. 

The revised tax slabs under the new regime for FY 2025-26 (AY 2026-27) are as follows:

New Income Tax Slabs For FY 2024-25 (AY 2025-26)

As per the Finance Act 2024, changes have been made in the slab rate for the new tax regime applicable for FY 24-25 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. 

Individuals opting for the new tax regime have limited scope of claiming exemption or deduction. The main purpose of introducing a new regime is to phase out all the deductions and exemptions available in the Income-tax Act. But the taxpayers enjoy a much liberal tax slab rates under the new tax regime. Compensating such limited exemptions and deductions, taxpayers are provided with a lower tax slab providing them an incentive to switch over to the new regime.

Key Deductions and Exemptions in the New Tax Regime

The following deductions and exemptions are available to a taxpayer opting for the new tax regime:

• Transport allowances in case of a specially-abled person.
• Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
• Any compensation received to meet the cost of travel on tour or transfer.
• Daily allowance received to meet the ordinary regular charges or expenditures you incur on account of absence from his regular place of duty.
• Perquisites for official purposes
• Exemption on voluntary retirement 10(10C), gratuity u/s 10(10) and Leave encashment u/s 10(10AA)
• Interest on Home Loan on the let-out property (Section 24)
• Deduction for employer’s contribution to NPS account [Section 80CCD(2)].
• Deduction for additional employee cost (Section 80JJAA)
• Standard deduction of Rs 75,000 under the New Tax Regime applicable for FY 2024-25
• Deduction under Section 57(iia) of family pension income
• Amount paid or deposited in the Agniveer Corpus Fund under Section 80CCH(2)

Tax Saving Options Above 20 Lakhs Salary - Old Tax Regime 

Tax Slab under the old regime are as follows;

Note:  Above slab rates are applicable for individuals aged less than 60 years. The basic exemption limit for individuals over 60 years is Rs 300,000, and for individuals aged more than 80 years is Rs 500,000.

Under the old tax regime there are many components in your salary that are exempted from taxes and deductions Let’s break down some key components of salary that are exempt from taxes:

• Salary (-) Exemptions = Taxable Salary Income
• Taxable Salary Income (-) Deductions = Net taxable income

Take a look at them below:

Moreover, when you are tax planning for a salary above 20 lakhs, you can get deductions on the following:

These are some of the ways in which individuals who earn a salary above Rs 20 lakhs per annum can save on income tax. However, make sure to accurately calculate your tax liability and applicable deductions.

Tax Calculation Example: Old vs. New Tax Regime

Let us understand the tax calculations on salary above 20 lakh based on the example given below.

Example: Mr. A has a salary income of Rs 20 lakhs claiming deductions like HRA of Rs. 1,00,000, LTA of Rs. 20,000, Children's education allowance for two children of Rs. 9,600, Professional tax of Rs 2,400. He has also claimed deductions like 80C of Rs. 150,000, 80D - Medical insurance premium of Rs. 25,000, and NPS contribution of Rs 50,000. Which is the best tax regime to opt for in this case 

For FY 2025-26 the tax liability of Mr. A will be calculated as follows under the old and new tax regime:

Therefore, a taxpayer with a total income of Rs. 20 lakhs in FY 2025-26 will save Rs. 1,09,616 in taxes by opting for the new tax regime and foregoing all deductions. 

For FY 2024-25 the tax liability of Mr. A will be calculated as follows under the old and new tax regime:

Therefore, a taxpayer with a total income of Rs. 20 lakhs in FY 2024-25 will save Rs. 23,816 in taxes by opting for the new tax regime and foregoing all deductions. 

Final Word

In the above calculation, you will observe that based on the investments made by the taxpayer, the tax liability differs in both regimes. Hence if you have more investments made as stated above, then it is efficient to choose the old tax regime however, if you do not have many investments made, then choosing the new tax regime would be a more efficient way to save taxes as they provide concessional tax slab rates.

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