New Tax Regime: Under the new tax regime, income of up to ₹20 lakh can be made tax-free through a properly structured salary package. Learn how to combine various benefits to reduce your taxable income to zero.
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New Tax Regime: At first glance, the new income tax regime appears to offer very little scope for tax savings. Due to the elimination of most exemptions and deductions, a salaried individual earning ₹20 lakh typically seems to end up paying over ₹1 lakh in taxes. However, the reality is slightly different.
Upon closer examination, certain benefits still exist that can help save on taxes, even under the new regime. If utilized correctly, one’s taxable income can be significantly reduced—potentially bringing the tax liability down to zero.
What Has Changed in the New Regime?
Under the old tax regime, taxes were saved by making investments under sections such as Section 80C. In contrast, the new regime relies more heavily on the salary structure. This means that what matters now is how your CTC is designed, rather than the amount you invest subsequently.
Assuming a CTC of ₹20 lakh—with 50 percent of that amount, or ₹10 lakh, constituting the basic salary—several tax-efficient components can be incorporated into it.
How Deductions Are Structured
First, let’s look at the meal benefit. If calculated at ₹200 per meal, twice a day, over 22 working days, approximately ₹1.05 lakh becomes tax-free annually.
Next comes the employer’s contribution to the EPF, which amounts to 12% of the basic salary. This provides an exemption of approximately ₹1.2 lakh.
Additionally, under Section 80CCD(2), the employer’s contribution to the NPS offers an additional exemption of about ₹1.4 lakh. This can amount to up to 14% of the basic salary.
While these amounts may appear modest when viewed individually, collectively they establish a substantial tax-free base.
The Major Advantage: Car Leasing
Car leasing makes the most significant difference. If an employee leases a car worth ₹8 lakh for a period of two years, the annual cost—including interest—comes to approximately ₹4.23 lakh. When this expense is routed through the salary structure, it is treated as a tax-efficient perquisite. This single decision significantly boosts the total deductions.
By incorporating a car lease, the total deductions reach approximately ₹7.88 lakh. Without it, the total remains at just ₹3.65 lakh.
If you own your own car, you can also claim expenses related to fuel and a driver. Maintaining a logbook is mandatory to claim these expenses.
What is the Final Tax Liability?
According to ClearTax, after accounting for all these deductions, the net salary reduces to approximately ₹12.11 lakh. Subsequently, applying a standard deduction of ₹75,000 brings the taxable income down to approximately ₹11.36 lakh.
At this level, the tax liability becomes virtually zero due to the rebate available under the new tax regime.
Conversely, if the car lease option is not availed, the taxable income remains at approximately ₹15.59 lakh, resulting in a tax liability of about ₹1.18 lakh.
What is the Takeaway for Salaried Individuals?
While traditional deductions may have been curtailed under the new tax regime, it is still possible to save on taxes through various components provided by the employer.
Tax planning is no longer merely about making last-minute investments; rather, it entails intelligently structuring one’s salary package. Components linked to basic salary contributions—as well as options such as car leasing—play a pivotal role in this process. A salary of ₹20 lakh does not necessarily mean you are destined to pay a hefty tax bill; however, without proper planning, that could certainly become the reality.
According to Archit Gupta, Founder and CEO of ClearTax: “Individuals earning ₹20 lakh can effectively reduce their taxable income to zero by utilizing the car lease option. This results in tax savings equivalent to approximately 6 percent of their total CTC and boosts their in-hand salary—all without imposing any additional financial burden on the company.”
