Tax Concepts and Tax Planning in India Explained

Tax is a compulsory payment to the government under Article 265 of the Constitution of India. Tax planning is the legal way to lower it, and tax evasion is the illegal way.
 

• Direct tax: income tax, borne by the person who earns the income
• Indirect tax: Goods and Services Tax (GST) at 5%, 18% or 40%, added to the price you pay
• Planning: use deductions and the regime choice, and never hide income
• Penalty: 200% of the tax on misreported income
• Break-even: Rs. 7,87,500 of old-regime deductions on a Rs. 21,00,000 salary
   

Tax planning changes the tax you pay, and Bajaj Finance assesses the income that your return declares. File and e-verify on time before you apply for a home loan.

A tax is a compulsory payment to the government that gives you no direct service in return. Article 265 of the Constitution of India says that no tax can be levied or collected except by authority of law.

The government spends the revenue on roads, defence, health and welfare schemes. Tax also steers behaviour: progressive slabs raise more from higher earners, and the 40% GST rate applies to luxury and sin goods. Read how to calculate what you owe in the guide to income tax liability.

Direct tax falls on the person who earns the income, and indirect tax is added to the price of what you buy. The seller collects indirect tax from you and pays it to the government.
 

Tax deducted at source is a way of collecting direct tax, and it is not a separate tax. GST has two main rates, 5% and 18%, plus a 40% rate for luxury and sin goods, in force since 22 September 2025 (Tally Solutions, checked 8 October 2026). The guide to types of taxes in India explains progressive, regressive and proportional taxes.

Tax planning uses the law as written, and tax evasion breaks it. Tax avoidance sits between the two: an arrangement that follows the wording of a provision while defeating its purpose.
 

Under Section 439 of the Income Tax Act, 2025, under-reporting income attracts a penalty of 50% of the tax on that income, and misreporting attracts 200% (Income Tax Department, checked 8 October 2026). Keep a document for every claim that you make.

Tax planning lowers your total income before the slab rates apply, or moves you to the regime that taxes you less. One formula describes the mechanism.

Formula used: Tax payable = (gross income − exemptions − deductions) × slab rates + 4% health and education cess.

1. List your income for the financial year (FY), which runs from 1 April to 31 March.
2. Work out the tax under the new regime, which allows the Rs. 75,000 standard deduction and few other deductions.
3. Work out the tax under the old regime, with the Rs. 50,000 standard deduction and every deduction that you can prove.

4. Choose the lower figure, and invest before 31 March only if the old regime wins.
    

   Old-regime lever	Section (1961 Act)	Limit (Rs. a year)
   Provident fund, Public Provident Fund (PPF), tax-saver deposits and home loan principal	80C	1,50,000
   Additional contribution to the National Pension System (NPS)	80CCD(1B)	50,000
   Health insurance premium for self and family below age 60	80D	25,000
   Interest on a home loan for a self-occupied house	24(b)	2,00,000

The Income Tax Act, 2025 applies from 1 April 2026 and renumbers these sections. Section 80C becomes Section 123, and Section 80D becomes Section 126. The guide to tax regime meaning explains what each regime bundles.

The new regime saves more tax unless your old-regime deductions pass a break-even figure, which is Rs. 7,87,500 on a salary of Rs. 21,00,000. Arjun Nair, 38, lives in Bengaluru, earns Rs. 21,00,000 a year and has a CIBIL Score of 768. For tax planning in FY 2026-27, he lists Rs. 4,25,000 of old-regime deductions: Rs. 1,50,000 under Section 80C, Rs. 50,000 for NPS, Rs. 25,000 under Section 80D and Rs. 2,00,000 of home loan interest.
 

New-regime slabs: 20,000 + 40,000 + 60,000 + 80,000 + 6,250 = Rs. 2,06,250. Old-regime slabs: 12,500 + 1,00,000 + 1,87,500 = Rs. 3,00,000. The new regime saves Arjun Rs. 97,500.

The old regime matches the new regime when taxable income falls to Rs. 13,12,500. Total deductions, including the standard deduction, must then reach Rs. 7,87,500. Arjun's total is Rs. 4,75,000, which is Rs. 3,12,500 short, so he picks the new regime. 

A home loan adds two old-regime deductions: up to Rs. 2,00,000 of interest and the principal under the Rs. 1,50,000 limit of Section 80C. The new regime allows neither for a self-occupied house.

Arjun borrows Rs. 40,00,000 at 8.50% per annum for 240 months (20 years), with an equated monthly instalment (EMI) of Rs. 34,713. His interest in year 1 is Rs. 3,36,946, and he repays Rs. 79,609 of principal. The old regime lets him claim Rs. 2,00,000 of that interest, so Rs. 1,36,946 goes unused.

A joint loan can use that gap. If his spouse co-owns the house, co-borrows and pays part of the EMI, each can claim up to Rs. 2,00,000. With a 50:50 split, each claims Rs. 1,68,473. If both pay tax at 30% under the old regime, the extra saving is Rs. 1,36,946 × 31.2% = Rs. 42,727, where 31.2% is the 30% slab plus 4% cess.

For Arjun, the new regime still wins, so this lever helps only where both spouses gain from the old regime. Section 80EEA, which gave Rs. 1,50,000 of extra interest relief, applied only to loans sanctioned up to 31 March 2022.

Tax planning adds nothing if your tax is already nil. Under the new regime, taxable income up to Rs. 12,00,000 gets a full Section 87A rebate, so a salary of Rs. 12,75,000 pays no tax after the Rs. 75,000 standard deduction (Storyboard18, 1 February 2026).

Do not buy a product only for the deduction. A tax-saver fixed deposit locks money for 5 years, an equity-linked savings scheme (ELSS) for 3 years and a PPF account for 15 years. Money that you lock away cannot fund your down payment.

Tax planning changes the tax you pay, and Bajaj Finance assesses income, existing obligations and credit record. Your filed return documents the income that you declare, so the figures in it should match your salary slips.

File and e-verify your return on time before you apply. Read the guide to income tax liability to see how your return links to what you owe.

Approval timelines can extend where the income in the return and the salary slips need clarification, and minimum income thresholds can differ by city. Check your home loan eligibility before you apply.