How to Save or Reduce TDS on Salary?

Key Takeaways

• TDS (Tax Deducted at Source) reduces your take-home pay, but smart investments lower it legally.

• Invest in PPF, NPS, ULIP, SSY, FDs, and ELSS under old regime for maximum benefit.

• Submit proofs early to your employer for immediate TDS reduction.

• Mix safe and growth options based on your age and goals.

• Protect your family with suitable life insurance plans, guaranteed return plan, child insurance plan, or pension plan alongside tax saving.

What is TDS Full Form?

TDS stands for Tax Deducted at Source. It is a system introduced by the government so that tax is collected directly from your income at the time it is earned. For salaried people, your company (employer) calculates the estimated tax you owe for the whole year and deducts a small portion from every monthly salary. This money goes straight to the government. At the end of the year, if you have paid more tax than required, you can claim a refund while filing your Income Tax Return (ITR). TDS makes tax collection easy and regular for the government.

What is Tax Deducted at Source of Income – TDS Rate on Salary?

TDS on salary is deducted under Section 192 of the Income Tax Act. Your employer looks at your total expected salary for the year, subtracts any deductions or exemptions you declare, and then applies the tax slab rates to calculate the tax. This tax is then divided across 12 months and deducted from your payslip.

In FY 2025-26 (Assessment Year 2026-27), the new tax regime is the default option. Its slab rates are:

• Income up to ₹4 lakh: 0% tax

• ₹4 lakh to ₹8 lakh: 5%

• ₹8 lakh to ₹12 lakh: 10%

• ₹12 lakh to ₹16 lakh: 15%

• ₹16 lakh to ₹20 lakh: 20%

• ₹20 lakh to ₹24 lakh: 25%

• Above ₹24 lakh: 30%

The new regime gives a higher standard deduction of ₹75,000 but very few other deductions. The old tax regime allows you to claim many deductions like PPF, ELSS, etc., but has different slab rates (basic exemption up to ₹2.5 lakh, then 5%, 20%, and 30% in higher brackets).

Without proper planning, a person earning ₹15-20 lakh annually may see 15-25% of their salary going as TDS. But by investing wisely and submitting proofs, you can bring down this deduction significantly and enjoy higher take-home pay every month.

How to Save TDS on Salary?

The easiest and completely legal way to reduce TDS is to lower your taxable income by claiming deductions. In the old tax regime, you can invest in popular options such as PPF, NPS, ULIP, SSY, 5-year tax-saving fixed deposits, and ELSS mutual funds. These investments qualify under Section 80C (up to ₹1.5 lakh) and give an extra ₹50,000 benefit in NPS.

When you invest and submit the proof (receipts or statements) to your HR or accounts department using Form 12BB, your employer recalculates your tax liability. They will then deduct less TDS from your remaining monthly salaries. This means more money reaches your bank account every month instead of waiting for a big refund later.

Start planning early in the financial year (April to June is best). Even if you begin mid-year, you can still save on the remaining months. For people aged 25 to 55, this approach not only reduces tax but also builds a strong financial future for retirement, children’s education, or emergencies.

Quick Comparison of Tax-Saving Options (2026)

This table helps you quickly understand which option matches your age, risk comfort, and family goals. Now let’s understand each one in simple detail.

PPF (Public Provident Fund)

Public Provident Fund is a government-backed savings scheme that feels like a safe bank account with good returns. As of 2026, it offers a steady interest rate of 7.1% per annum. The interest is calculated every month on the lowest balance and added to your account once a year.

You can deposit any amount from ₹500 up to ₹1.5 lakh in a financial year. The entire ₹1.5 lakh qualifies for deduction under Section 80C. This directly reduces the income on which your employer calculates TDS, so less tax is deducted from your salary.

The account has a 15-year lock-in period, but you can extend it further in blocks of 5 years. After 5 years, you can make partial withdrawals for important needs like education or marriage. Loans are also available from the third year.

Best part? Both the interest you earn and the final maturity amount are completely tax-free. It is perfect for people in their 30s and 40s who want zero risk and guaranteed growth. You can open a PPF account at any nationalized bank, private bank, or post office, and even manage it online. Many parents use it to save for their children’s higher studies. If you deposit ₹12,500 every month, you will comfortably reach the ₹1.5 lakh limit and enjoy lower TDS plus safe wealth creation.

NPS (National Pension System)

National Pension System is a long-term retirement plan that gives you market-linked returns while helping you save tax today. In the old tax regime, your own contribution up to 10% of salary (basic + dearness allowance) comes under the ₹1.5 lakh 80C limit. On top of that, you get an extra ₹50,000 deduction under Section 80CCD(1B). This means you can reduce your taxable salary by up to ₹2 lakh just through NPS.

Returns depend on the funds you choose (equity, debt, or a mix) and have historically given 9-12% over long periods. The money stays locked till you turn 60, but you can make partial withdrawals for specific reasons like education, marriage, or medical needs after certain years.

At retirement, you can take up to 60% of the corpus as a lump sum (tax-free) and use the remaining 40% to buy an annuity that gives you regular monthly

pension income for life. This makes NPS very suitable for people aged 35-50 who are thinking seriously about life after retirement. You can start NPS through your employer or open an individual Tier-I account. Submit the contribution proof to your HR department early — your TDS will come down from the next salary itself.

ULIP (Unit Linked Insurance Plan)

Unit Linked Insurance Plan is a unique product that gives you two benefits in one: life insurance cover and investment growth. The premium you pay every year (up to ₹1.5 lakh) qualifies for deduction under Section 80C, which helps reduce your taxable income and lowers monthly TDS.

A part of your premium goes towards providing life cover for your family. The rest is invested in equity or debt funds chosen by you, offering potential returns of 8-12% over time. The lock-in period is only 5 years, which is shorter than most other options.

If you follow the rules (especially keeping premiums within limits), the maturity amount and death benefit can be completely tax-free under Section 10(10D). ULIP is popular among young professionals aged 25-40 because it combines protection with wealth building.

While selecting a ulip plan, also look at pure protection through online term insurance or a 1 crore term plan for extra low-cost cover. ULIP forms an important part of overall life insurance plans and investment plan for many families.

SSY (Sukanya Samriddhi Yojana)

Sukanya Samriddhi Yojana is a special government scheme created for the bright future of a girl child. You can open this account if your daughter is below 10 years old. In 2026, it offers a high interest rate of 8.2% per annum, which is compounded annually and remains one of the best among safe schemes.

You can deposit from ₹250 up to ₹1.5 lakh per year. The full amount qualifies for Section 80C deduction, helping bring down your TDS on salary. The account remains open till your daughter turns 21. After she turns 18, you can withdraw money for her higher education. Both the interest and the final maturity amount are fully tax-free.

Parents in their 30s and 40s find SSY very comforting because it provides safe, high returns specifically for a daughter’s education and marriage expenses. Open it at any bank or post office. It is one of the smartest ways to save tax while securing your girl child’s dreams.

Tax-Saving FDs (Fixed Deposits)

Tax-saving fixed deposits are straightforward 5-year bank deposits that qualify for deduction under Section 80C up to ₹1.5 lakh. In 2026, banks and small finance banks offer interest rates between 6% and 7.5% per annum (sometimes higher for senior citizens).

You can open them quickly online or at a branch. The principal amount reduces your taxable salary and lowers TDS immediately. However, the interest earned is added to your income every year and taxed as per your slab, so the net return after tax is a bit lower.

There is almost no risk — your money is safe with the bank (up to ₹5 lakh covered by deposit insurance). This option is best for conservative investors who want a short commitment, fixed returns, and simplicity without worrying about market ups and downs.

ELSS (Equity Linked Savings Scheme)

Equity Linked Savings Scheme is a mutual fund that invests primarily in shares of companies. It has the shortest lock-in of just 3 years among all 80C options, giving you more flexibility. Investment up to ₹1.5 lakh qualifies for deduction under Section 80C, directly cutting your taxable income and TDS.

Over the long term, ELSS has the potential to deliver 12-15% returns, though returns are not guaranteed and depend on stock market performance. Because it invests in equity, there is higher risk in the short term, but this risk reduces if you stay invested for 5-10 years or more.

You can start with a Systematic Investment Plan (SIP) of just ₹500 or ₹1,000 per month. This option works very well for people aged 25-45 who can handle some market fluctuations in exchange for higher growth potential. After the 3-year lock-in, gains above ₹1.25 lakh are taxed at 12.5% as long-term capital gains.

Old Regime vs New Regime – Which One Should You Choose?

The new regime has lower tax rates and is the default, but it does not allow most deductions like PPF, ULIP, SSY, or the extra NPS benefit. The old regime has slightly higher slabs but lets you claim full deductions up to ₹2 lakh (₹1.5 lakh + ₹50,000 NPS).

If your annual salary is above ₹12 lakh and you are ready to invest regularly, the old regime usually saves more tax overall and reduces your monthly TDS effectively. You can inform your employer at the beginning of the year and choose the old regime. You also have the flexibility to switch regimes every year while filing ITR.

Real Example of Tax Savings

Imagine you are 35 years old and earn ₹15 lakh per year. Without any investments, under the new regime your TDS could be around ₹1.1 to 1.3 lakh after standard deduction.

But if you choose the old regime and invest ₹1.5 lakh in a mix of PPF/ELSS/SSY plus ₹50,000 in NPS, your taxable income drops by ₹2 lakh. You can save nearly ₹50,000 to ₹60,000 in tax every year. That translates to ₹4,000–5,000 extra in your monthly salary — money you can use for family needs or further investments.