How To Save Tax For Salary Above 7 Lakhs?

The government proposed some major tax reforms by introducing tax rebates on an income up to ₹7 lakhs under the new tax regime. This means that taxpayers who have an income below ₹7 lakhs will not have to pay any tax at all if they choose the new tax regime. 

Budget 2025 Update

The income earned up-to Rs.12 Lakhs will ultimately have Nil tax liability. Here's how!

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

Income Tax Slabs	Tax Rates
Up-to Rs. 4,00,000	NIL
Rs. 4,00,001 - Rs. 8,00,000	5%
Rs. 8,00,001 - Rs. 12,00,000	10%
Rs. 12,00,001 - Rs. 16,00,000	15%
Rs. 16,00,001 - Rs. 20,00,000	20%
Rs. 20,00,001 - Rs. 24,00,000	25%
Above Rs. 24,00,000	30%

• The rebate allowed under section 87A has now been increased to Rs.60,000 for new regime from Rs.25,000 .
• Since the rebate allowed has been increased, and relaxations made in the slab rates, tax incidence for income up-to Rs.12,00,000 will be zero.
• Marginal relief on rebate is still applicable. 
• Rebate is not allowed for income taxable at special rates. For example, capital gain u/s 112A.

Before filing your income tax return this year, let us understand how you can save tax on your salary with an example. 

How To Save Tax If You Have Annual Salary Of Above Rs 7 Lakh?

Let’s say your gross salary is Rs.7,50,000. In the present scenario, your default tax payment system will be the new tax regime applicable from 1st April 2023. If you have income from Salary, then up to Rs 7,50,000 taxable income tax liability will be zero if you opt for the new tax regime. This zero-tax liability is possible even without claiming any deductions. 

Tax Slabs Under Old vs New Tax Regime

As per the new income tax guidelines, you can opt for either the new or the old regime while filing your taxes. Here is a difference between the two:

Tax Saving Under New Regime (FY 2024-25) 

Although you can use various exemptions and deductions under the old tax regime, you can balance that with the Tax Rebate under Section 87A in case you opt for the new tax regime.

You can also claim these deductions in the new tax regime:

• Standard deduction of Rs 75,000 for salaried individuals
• Section 80CCD(2) - Employer's contribution to NPS (14 % of basic apay + Dearness Allowance for new regime)
• Section 80CCH: Investment in the Agniveer Corpus Fund
• Section 57(iia) - Family Pension received is one-third of the pension amount subject to maximum of Rs.25,000 for the new regime. The maximum limit is Rs.15,000 for the old regime for FY 2024-25.
• 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)
• 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.
• Rebate allowed u/s 87A is Rs.25,000 under the new regime, whereas it is Rs.12,500 under the old regime for FY 2024-25.

Tax Saving Under Old Regime (FY 2024-25) 

if you opt for the old tax regime, you can avail of tax deductions and exemptions under various sections of the Income Tax Act. 

Here is a list of some of the allowable deductions applicable in the case of the old regime:

• Section 80C: Exemption of up to Rs. 1.5 lakh on investments made in pension funds, mutual funds, ULIPs, government savings schemes, life insurance premiums, home loan principal amount, education fees, etc. 
• Section 80CCD: Additional exemption of Rs. 50,000 if you invest in the National Pension Scheme. 
• Section 80CCD(2) - Employer's contribution to NPS (10 % of basic apay + Dearness Allowance for old regime)
• Section 80D: Tax deduction on health insurance premium payments made towards self or parents. 
• 80TTA: Deduction on Savings account interest. 
• 80G: Donations to charitable organisations
• Professional Tax Deduction under section 16
• Exemption under Section 10 is allowed for the below
  • House Rent Allowance
  • Relocation Allowance
  • Leave Travel Allowance
  • Mobile Reimbursement

How to Save Taxes for an Income of Rs 7 Lakhs?

You can consider the below points to derive maximum benefits of the deductions available under the Income Tax Act. 

Claim Rebate u/s 87A

If you choose new regime, rebate can be availed u/s 87A which can reduce the tax liability, even to zero!

Claim Standard Deduction 

• Standard deduction is the favorite deduction among both general public and professionals.
• It is available against salary income without any conditions attached. 
• If you choose new tax regime, a standard deduction of Rs.75,000 is available. Rs.50,000 of standard deduction is available in case of old regime.

Choose the Most Beneficial Regime 

• Lets understand the tax implications related to slab rates. Lower the slab rates, higher will be tax liability. For example, when the income upto Rs. 2,50,000 is tax exempt in the old tax regime. Whereas, the income up to Rs.3,00,000 is exempt for new tax regime. 
• So we need to pay tax for amount exceeding Rs.2,50,000 under the old regime. Whereas in new regime, no tax liability arises as long as it does not exceed Rs.3,00,000. So, we can infer that higher the slab rates, more beneficial it is.  
• The old tax regime has a lot of tax deduction options with low slab rates. Whereas, the new tax regime has limited tax deduction options with higher slab rates.
• You can analyze and find the most beneficial regime for you, considering the tax deduction investments you have made and level of income. Choice of beneficial regime greatly reduces tax liability.

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

• Section 80CCD(2) allows deduction for contribution made by employer in National Pension Scheme (NPS). 
• Deduction is available under both new regime for this amount, though the limit for deduction differs according to choice of regime. 

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)

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 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 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.

Deduction on Additional Employee Cost

Deduction under section 80JJA is available irrespective of choice of regime of the assessee. 30% of the amount expended on additional employees can be allowed as a deduction.  

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.

Example Under Old And New Tax Regime Tax For Above 7 Lakh Salary

Mr. A has a salary income of Rs 7,50,000 in FY 2024-25. He is eligible for an HRA exemption of Rs 50,000. Section 80C of Rs. 50,000. Now compute tax liability under the old and new tax regime. Which will be the best tax regime to choose for him?

In the above example, the tax liability paid for income for the salary of Rs 7.5  lakh is Rs. 44,200. In the old regime, with available deductions, the tax liability is Rs. 44,200 and under the new tax regime, even without claiming a deduction, the tax liability paid is zero. Thus, it is important to calculate the tax liability under both the regimes and select the most beneficial one.

However, if he opts for the old tax regime, he will have to file Form 10-IEA before the due date of filing ITR (such a Form needs to be submitted only If he has business income and this is not applicable if you are filing ITR 1 or 2).

Pay Zero Tax On a 7 Lakh Salary

If you earn Rs 7 lakh, opting for the new regime will benefit you because of the tax rebate. However, if you opt for the old tax regime, you must make some investments to avail of deductions and exemptions. 

Final Word

Under the old tax regime, to reduce your tax liability, you can invest in tax-saving instruments like the Employee’s Provident Fund, Public Provident Fund, National Pension Scheme, Sukanya Samridhhi Yojana, Equity Linked Savings Scheme etc. If you opt for a health insurance policy, whether for yourself or your children or parents, you can claim tax relief.

Under the New Tax Regime, there are very limited options to claim deductions like Standard deduction, NPS Contribution by employer, Gratuity, and Leave encashment exemption.

Thus, a comparative analysis between the new and old tax regimes is essential to identify the best option for you.

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