Tax-Efficient Investing for Salaried Indians

• 03 February 2026
• taxes,
• investing,
• personal-finance,
• india

Why Tax Planning Matters More Than You Think #

Here's a number that should grab your attention: a salaried professional earning ₹25 lakhs can pay anywhere from ₹3.5 lakhs to ₹5.5 lakhs in taxes—depending entirely on how they structure their investments and choose their tax regime.

That's a difference of ₹2 lakhs annually. Invested wisely, this saved amount could grow to ₹50+ lakhs over 15 years.

Yet most salaried Indians treat tax planning as a March-afterthought, making hasty ELSS investments and calling it a day. This post will change that approach. We'll cover:

• How to choose between the new and old tax regimes (with exact break-even calculations)
• Maximising the ₹1.25 lakh equity LTCG exemption through tax harvesting
• What debt fund investors need to know post-2023
• Asset location strategies that minimise your lifetime tax burden
• Smart withdrawal sequencing that can save lakhs in retirement

Let's dive in.

The New vs Old Tax Regime: Making the Right Choice #

Since its introduction in 2020, the new tax regime has evolved significantly. The 2025-26 updates made it more attractive, but the old regime still holds value for certain income levels and deduction patterns.

Current Tax Slabs Comparison #

Key Deductions: What You Lose in the New Regime #

The new regime trades lower rates for fewer deductions:

Break-Even Analysis: Which Regime Wins? #

Let's calculate the break-even points with real examples.

Example 1: ₹12 Lakh Gross Income

Old Regime Calculation:

• Gross income: ₹12,00,000
• Standard deduction: ₹50,000
• Section 80C: ₹1,50,000
• Section 80D: ₹25,000
• NPS 80CCD(1B): ₹50,000
• Taxable income: ₹9,25,000
• Tax: ₹1,10,000 (including 4% cess)
• After Section 87A rebate: ₹0

New Regime Calculation:

• Gross income: ₹12,00,000
• Standard deduction: ₹75,000
• Taxable income: ₹11,25,000
• Tax before rebate: ₹32,500
• Section 87A rebate: ₹32,500 (full rebate up to ₹60,000)
• Final tax: ₹0

Result: Both regimes result in zero tax at ₹12L income if you maximise deductions in the old regime.

Example 2: ₹20 Lakh Gross Income

Old Regime Calculation:

• Gross income: ₹20,00,000
• Standard deduction: ₹50,000
• Section 80C: ₹1,50,000
• Section 80D: ₹25,000
• NPS 80CCD(1B): ₹50,000
• HRA exemption (estimated): ₹2,00,000
• Taxable income: ₹15,25,000
• Tax: ₹2,58,000

New Regime Calculation:

• Gross income: ₹20,00,000
• Standard deduction: ₹75,000
• Taxable income: ₹19,25,000
• Tax: ₹2,19,600

Result: New regime saves ₹38,400 despite losing ₹4.75L in deductions.

Example 3: ₹35 Lakh Gross Income

Old Regime Calculation:

• Gross income: ₹35,00,000
• Total deductions (maxed): ₹5,25,000
• Taxable income: ₹29,75,000
• Tax: ₹6,89,400

New Regime Calculation:

• Gross income: ₹35,00,000
• Standard deduction: ₹75,000
• Taxable income: ₹34,25,000
• Tax: ₹6,63,600

Result: New regime saves ₹25,800.

The Decision Framework #

Pro tip: Don't lock yourself in. You can switch regimes annually when filing returns (unless you have business income). Recalculate each year.

Equity Investments: Mastering LTCG for Maximum Returns #

Equity investments enjoy the most favourable tax treatment in India, but only if you understand the rules.

The Current Structure #

The ₹1.25 lakh exemption is per financial year, not per investment. This creates a powerful optimisation opportunity.

Tax Harvesting: The ₹1.25L Annual Ritual #

Every year, you can realise up to ₹1.25 lakh in long-term capital gains tax-free. Here's how to systematically harvest this:

Step 1: Identify equity holdings with gains held over 1 year

Step 2: Sell units with gains up to ₹1.25L

Step 3: Reinvest immediately (there's no waiting period)

Step 4: Your cost basis resets, reducing future tax liability

Example:

Total tax saved over 4 years: ₹62,500

Without harvesting, you'd pay 12.5% on the entire accumulated gain when you eventually sell. With harvesting, a significant portion becomes permanently tax-free.

When Not to Harvest #

Tax harvesting isn't always optimal:

• Very short holding periods: If selling triggers STCG (20%), you lose money versus waiting for LTCG (12.5%)
• Small portfolios: If your unrealised gains are under ₹50,000, the complexity may not be worth it
• Transaction costs: Factor in brokerage and STT (0.1% on delivery trades)

Debt Funds: Navigating the Post-Indexation World #

The 2023 budget changed debt fund taxation fundamentally. Understanding these changes is crucial for fixed-income allocation.

What Changed #

Before April 2023, debt funds held over 3 years benefited from indexation, effectively reducing tax to 10-15% regardless of your slab.

Now, all debt funds (except those with <35% equity) are taxed at your slab rate, regardless of holding period. No indexation benefits.

The Current Landscape #

The Arbitrage Fund Opportunity #

Arbitrage funds exploit price differences between cash and futures markets. They're low-risk and taxed as equity:

• Holding >1 year: 12.5% LTCG with ₹1.25L exemption
• Holding <1 year: 20% STCG

Returns: 6.5-7.5% (comparable to liquid funds)

Risk: Very low; returns may dip in low-volatility periods

Example comparison for 30% slab investor:

The arbitrage fund advantage: 1.29% higher post-tax return annually

Over 10 years on ₹10 lakhs:

• FD/debt fund: ₹15.9 lakhs
• Arbitrage fund: ₹18.1 lakhs

Difference: ₹2.2 lakhs

Asset Location: Where to Hold What #

Asset location—deciding which investments go in which accounts—can significantly impact lifetime tax. Most investors ignore this completely.

The Account Types Available #

Optimal Asset Location by Investment Type #

Tax-Aware Withdrawal Planning #

Accumulating wealth tax-efficiently is half the battle. Withdrawing it strategically completes the picture.

The Withdrawal Sequence Framework #

When you need money—whether for a goal, emergency, or retirement—the order matters:

Step 1: Exhaust tax-free sources first

• PPF (fully exempt)
• EPF (exempt if 5+ years of service)
• Tax-free bonds (if any)

Step 2: Use sources with large exemption limits

• Equity LTCG up to ₹1.25L annually
• Withdrawals up to ₹5L taxable income (rebate)

Step 3: Tap tax-deferred accounts

• NPS (60% lumpsum taxed at slab) — defer to years with lower income

Step 4: Finally, use fully taxable sources

• Bank FDs
• Debt mutual funds
• Equity gains above exemption

Staggering Large Withdrawals #

If you need ₹20L for a child's education, don't withdraw everything in one year:

Savings from staggering: ₹47,000

Putting It All Together: Sample Portfolios #

Scenario 1: Rahul, 28, ₹10 Lakh Salary #

Tax Regime: Old (with deductions, pays zero tax)

Annual Savings: ₹2.5L

Portfolio Allocation:

Scenario 2: Priya, 38, ₹25 Lakh Salary #

Tax Regime: New (saves ~₹30K vs old)

Annual Savings: ₹8L

Portfolio Allocation:

Scenario 3: Amit, 48, ₹45 Lakh Salary #

Tax Regime: New (clearly better at this income)

Annual Savings: ₹15L

Portfolio Allocation:

Key Takeaways and Action Items #

The Essential Principles #

1. Choose your regime deliberately: Calculate both regimes annually. The break-even shifts with income and deduction patterns.

2. Harvest LTCG every year: The ₹1.25L exemption doesn't roll over. Use it or lose it.

3. Rethink debt allocation: Post-2023, traditional debt funds are tax-inefficient. Arbitrage funds and tax-advantaged accounts (PPF, NPS) are superior.

4. Asset location matters: Put tax-inefficient assets in tax-advantaged accounts. The same portfolio in different accounts can have vastly different after-tax returns.

5. Plan withdrawals as carefully as accumulation: The sequence can save lakhs over retirement.

Your Action Checklist #

This week:

• [ ] Calculate your tax under both regimes
• [ ] Check if you're on track for 80C (₹1.5L) and 80CCD(1B) (₹50K)
• [ ] Identify equity holdings with >1 year and unrealised gains

This month:

• [ ] Set up PPF auto-debit if not already
• [ ] Review debt fund holdings; consider shifting to arbitrage
• [ ] Calculate your optimal LTCG harvest amount

This quarter:

• [ ] Execute LTCG harvest if applicable
• [ ] Reassess asset location across accounts
• [ ] Update nomination details across all investments

This year:

• [ ] Maximise PPF contribution (₹1.5L)
• [ ] Use NPS 80CCD(1B) if in old regime
• [ ] Document your withdrawal strategy for major goals

Final Thoughts #

Tax planning isn't about avoiding taxes—it's about not paying more than necessary. The government provides legitimate avenues to reduce your tax burden; using them isn't clever accounting, it's financial literacy.

The difference between a tax-aware investor and a tax-indifferent one isn't 2-3% annually. Over a 25-year career, it can mean retiring with ₹1 crore more—or working 5 extra years to reach the same corpus.

Start this year. Your future self will thank you.

Note: Tax laws change frequently. This post reflects the rules as of February 2026. Always consult a tax professional for your specific situation, and verify current rules before making investment decisions.

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