Tax-Free Income: In the new tax system, the government has definitely made income up to Rs 12 lakh tax free, but for employed people, there is also a way open in it, due to which there is no need to pay tax even on salary up to Rs 13.70 lakh.
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Zero Tax: If you still believe that the tax-free income limit in Budget 2025 is limited to only ₹12 lakh, you’re stuck on half the information. The real picture goes a little further. In the new tax system, the government has certainly exempted income up to ₹12 lakh from tax, but it also opens up a way for salaried individuals to avoid paying taxes even on salaries up to ₹13.70 lakh. This isn’t magic, but rather the correct use of two rules within the system.
Standard Deduction
Most deductions have been eliminated in the new tax system. However, salaried individuals still receive a standard deduction of ₹75,000. This means that if your salary is up to ₹12.75 lakh, your taxable income will be ₹12 lakh, and you won’t have to pay any tax.
The Wonders of Employer NPS
NPS is often overlooked in tax planning, yet it plays a crucial role in the new tax regime. Under Section 80CCD(2) of the Income Tax Act, any amount deposited by an employer into NPS for an employee is exempt from tax. This limit is set at 14% of the basic salary for both government and private sector employees. This amount is part of the employee’s salary, but does not directly reach them. The company deposits it into the NPS account, and therefore, income tax is not levied on this amount. As a result, taxable income is reduced and tax savings automatically increase.
How will income above ₹13.70 lakh be tax-free?
Under the new tax regime, salaried individuals receive a standard deduction of ₹75,000, which directly reduces their total salary. Furthermore, if the company offers Employer NPS, up to 14% of their basic salary can be invested in NPS, which is not included in the tax calculation. Thus, when the standard deduction and employer NPS are combined, approximately ₹1.70 lakh is excluded from taxable income.
After subtracting these two exemptions, a salary of ₹13.70 lakh is reduced to just under ₹12 lakh. Since the new tax regime provides a rebate on income up to ₹12 lakh, the tax liability is completely eliminated in this situation.
What do you need to do to avail this exemption?
Most large companies offer Employer NPS. You can contact your company’s HR department for information. It’s important to note that NPS investments are made from your basic salary. This will slightly reduce your monthly salary, but the tax savings at the end of the year will be substantial.
