The New Tax Regime is often perceived as offering limited opportunities for tax savings. However, the reality is somewhat different. If your annual salary is ₹20 lakh, with proper planning and salary structuring, your tax liability can be reduced to zero.
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New Delhi. People often assume that avenues for tax exemptions under the New Tax Regime have been closed off, and that individuals earning a substantial salary—such as ₹20 lakh—are inevitably bound to pay a hefty tax bill. Typically, a salary of this magnitude would attract a tax liability exceeding ₹1 lakh. However, tax experts suggest that by correctly ‘structuring’ your salary package, you can effectively reduce your tax liability to zero.
While the New Tax Regime does not offer exemptions on investments (such as LIC or PPF), it is still possible to save on taxes through certain benefits provided by one’s employer. To achieve this, you will need to seek assistance from your company. If the salary package of ₹20 lakh is structured with a Basic Pay component of 50% (i.e., ₹10 lakh), certain additional components—which are inherently tax-free—can be incorporated into the package.
Meal Allowance
By utilizing meal coupons or cards, you can avail of tax exemptions amounting to approximately ₹1.05 lakh annually.
Company Contribution to PF and NPS
If your company contributes 12% of your basic salary to your Provident Fund (PF) and 14% to the National Pension System (NPS), this entire amount is tax-free. This can result in additional savings of approximately ₹2.6 lakh.
Car Leasing: A ‘Game Changer’
Car leasing offers the greatest potential for savings. If you lease a car through your company, the lease installments are deducted directly from your salary, and this portion of your income remains exempt from tax. Consequently, an amount of up to approximately ₹4.23 lakh can effectively be brought outside the purview of income tax.
Direct Savings of ₹1.18 Lakhs on a Salary of ₹20 Lakhs
The total tax exemption—comprising meal allowances, the company’s contribution to PF and NPS, and car lease benefits—amounts to approximately ₹7.88 lakhs. Subsequently, after deducting the standard deduction of ₹75,000, the taxable income is reduced to approximately ₹11.36 lakhs. At this level, thanks to the rebate available under the new tax regime, your tax liability could effectively drop to zero. However, if the car lease benefit is not availed, the taxable income remains at approximately ₹15.59 lakhs, and you may be liable to pay a tax of around ₹1.18 lakhs.
