How to Save Tax on Salary Above 20 Lakhs?

Key takeaways

• The new regime offers lower tax rates, ₹4 lakh exemption, and ₹75,000 standard deduction* but excludes HRA, LTA, and 80C.
• The old regime is useful if deductions like 80C, 80D, HRA, or home loan together cross ₹2.5–3 lakh.
• On a ₹20 lakh salary, taxable income becomes ₹19.5 lakh after standard deduction*; the new regime usually reduces tax slightly.
• Major savings include 80C investments, NPS extra ₹50,000, health insurance under 80D, and home loan interest under Section 24.
   

Income tax slab rates for new tax regime applicable for FY 2025-2026

The new tax regime for FY 2025–26 aims to simplify income taxation by offering lower tax rates and providing a few exemptions and deductions compared with the old regime. Here are the new income tax rates applicable for FY 2025-2026.
 

Revised income tax slabs (FY 2025–26)

The update introduces an increased basic exemption limit of ₹4 lakh and a higher rebate of ₹60,000 under Section 87A. Under this regime, individuals with income up to ₹12 lakh will have no tax liability. Additionally, salaried taxpayers are entitled to a standard deduction* of ₹75,000, effectively making income up to ₹12.75 lakh fully exempt from tax.
 

How to choose between new and old tax regime?
 

With the updated income tax slabs for FY 2025–26, selecting an appropriate tax regime is important. The choice depends on your income, tax-saving investments, and the salary breakdown, including basic pay, allowances, and other benefits.
 

A. When to consider the new tax regime
 

1. Income up to ₹12 lakh: Individuals earning up to ₹12 lakh may benefit from a full tax rebate under Section 87A, resulting in zero tax liability.
2. Limited deductions: If your salary does not include significant exemptions such as house rent allowance (HRA), home loan interest, or investments under Section 80C, the new regime’s lower tax rates can apply effectively.
3. Simplified compliance: The new regime eliminates the need to track multiple exemptions and deductions, simplifying the tax filing process.

The new regime may be suitable for individuals who prefer a straightforward approach without managing multiple deductions and exemptions.
 

B. When to stick with the old tax regime
 

1. Substantial deductions: If you claim deductions like 80C, 80D, HRA, home loan interest, etc., and the total amounts to ₹5 lakh or more, the old regime may offer lower tax liability.
2. Customised salary structures: Individuals with salary components like house rent allowance (HRA), leave travel allowance (LTA), and other allowances that are tax-exempt under the old regime may find it suitable.

What is the Income Tax Calculation for 20 Lakhs Per Annum?

Calculating income tax for a 20-lakh salary involves the following steps:
 

• Step-1: Determine Taxable Income

The first step is to calculate your taxable income. To do this, subtract all the rebates, deductions and exemptions from your gross income. 
 

• Step-2: Apply Income Tax Slab

The next step is to apply a tax slab according to the new or old tax regime, depending on your deductions and financial situation. As mentioned in the table, the old tax regime has higher tax rates than the new one.
 

However, the new regime does not allow significant deductions, making it suitable for individuals with fewer deductions. So, if you have multiple deductions, then the old tax regime will be a better option; else you can go with the new regime. Note that if you earn more than ₹15 lakhs per year, then you fall in the 30% tax bracket. 
 

• Step-3: Determine Tax Liability 

Calculate your tax liability by applying the given tax rate. For individuals earning ₹20 lakhs per year, the tax on 20 lakhs of income will be 30% of their taxable income. 
 

Here is the simple formula for income tax calculation for 20 lakhs per annum:
 

• Gross Salary - Exemptions = Taxable Income

• Taxable Income - Deductions = Net Taxable Income
   

Tax saving options above Rs. 20 lakhs salary - New tax regime

The new tax regime is designed for taxpayers who prefer to avoid several deductions and exemptions available under the old tax regime. As a result, individuals with salaries exceeding Rs. 20 lakhs have limited tax-saving opportunities under this regime. The following table highlights tax-saving options above Rs 20 lakh salary under the new tax regime.

Other available deductions

The new regime also provides the following additional deductions:

• Transport allowance: Available for specially abled individuals
• Conveyance allowance: Covers travel expenses related to employment duties
• Home loan interest: Deductions available under Section 24 on home loan interest (only on let-out property)
   

Tax saving options above ₹20 lakh salary old tax regime

The old tax regime allows taxpayers to reduce their tax liability using various deductions and exemptions. For a salary above ₹20 lakh, the following options are available:

How to save income tax on 20 lakhs salary?

With proper tax planning  for a 20 lakh salary, you can increase your tax savings and optimise your income. The following are some ways you can do so:
 

• Invest in tax saving instruments (Section 80C)

  Section 80C is one of the common ways to save tax and obtain potential returns on your investments. You can avail tax benefits of up to ₹1,50,000 per year by investing in the following options:
   

  • Life Insurance Policies

  • Public Provident Fund (PPF)

  • Employee Provident Fund (EPF)

  • Home Loan Repayment and Stamp Duty

  • Equity Linked Saving Scheme Funds (ELSS)

  • National Savings Certificate (NSC)

  • Sukanya Samriddhi Yojana (SSY)

  • 5 years Fixed Deposit
     

• Purchase health insurance policy

  Health insurance offers financial safety against unforeseen events. Besides this safety net, a health insurance policy can also help you get great tax deductions as well. As per Section 80D, you can claim up to ₹25,000 on health insurance premiums in the name of yourself, your spouse, and your children.
   

  For an insured aged above 60, you can claim up to ₹50,000. 
   

  Further, if you have health insurance plans for your parents or dependent senior citizens, you can additionally claim up to ₹25,000 (₹50,000 for those above age 60). 
   

• Opt for education loans

  Getting an education loan may be a reasonable way to save income tax on a 20 lakh salary. Under Section 80E of the Income Tax Act, you can claim an interest deduction of up to 8 years from the repayment date of the loan taken for yourself, your children, your spouse, or any dependant of whom you are the legal guardian. 

• Claim deductions on home loan

  Under Section 80C, you may claim up to ₹1,50,000 on the principal amount of your home loan. Further, you may claim up to ₹2,00,000 on interest under Section 24b. It can be a substantial tax-saving option for high-salaried individuals.
   

• Medical expenses to treat disabled

  If you are bearing the medical expenses of your legal dependant who is disabled, then you may get the following deductions under Section 80DD:
   

  • Up to ₹75,000 for 40% disability 

  • Up to ₹1,25,000 for 80% disability 
     

• Donate to charity

  Section 80G allows 50% to 100% tax deductions for charity donations. It means that you can save nearly the full tax amount by making eligible donations to charitable trusts and organisations.

Conclusion

Choosing the right tax regime for a ₹20 lakh salary requires careful evaluation of your deductions, allowances, and investment plans. The new regime offers lower tax rates and a simple process, while the old regime supports those who want to claim higher deductions. Using available options like Section 80C investments, NPS, health insurance, home loan interest, and HRA can lower your taxable income. Compare both regimes closely, calculate your expected liability, and select the structure that aligns with your financial situation.