Income Tax: Each year, taxpayers must submit an Income Tax Return. Many taxpayers are concerned about tax deductions. If you’re working and anxious about the deductions from your salary, you can relax. We’re here to explain how, by opting for the new tax regime, you can bring your income tax down to zero even with a CTC (Cost to Company) of up to Rs 14 lakh.
There are two tax regimes available for taxpayers: the Old Tax Regime and the New Tax Regime. Taxpayers have the option to select either one. The New Tax Regime allows for no tax on annual income up to Rs 12 lakh (around $1.2 million in 2019). Moreover, a standard deduction of Rs 75,000 is provided. In contrast, the Old Tax Regime permits no tax on annual income up to Rs 2.5 lakh (approximately $2 million in 2019). However, there are many deductions available under the Old Tax Regime.
You can protect your substantial salary
By engaging in effective tax planning, you will not only save on taxes now but also create a significant fund for the future. Even if your CTC is Rs 1.4 million, you can make your entire salary tax-exempt. This is not done through any deceitful means, but by wisely utilizing the government’s new tax regulations, standard deductions, and specific legal exemptions.
Under the new tax regime, tax deductions are limited to employer contributions to EPF and NPS. These contributions can be strategically used to lower your tax burden. It’s important to note that an employee’s investment in EPF or NPS is not deductible under the new regime. According to current regulations, employer contributions to EPF (12% of the basic salary) and employer contributions to NPS (14% of the basic salary for private sector employees, deductible under Section 80CCD(2)) are tax-exempt.
Discover the full details of tax-saving strategies here
In the updated tax framework, salaried individuals can achieve a tax-free CTC of up to Rs 14 lakh by utilizing the right mix of standard deductions and tax-exempt employer contributions (EPF and NPS). For instance, if the CTC is Rs 14 lakh and the basic salary is Rs 7 lakh, the employer contributes 12% of the basic (which amounts to Rs 84,000) to EPF and 14% of the basic (totaling Rs 98,000) to NPS. Both of these contributions are exempt from tax. The employee is eligible for a standard deduction of Rs 75,000. With this setup, the taxable income is reduced to Rs 12 lakh or less, meaning no tax is owed. In fact, if the taxable income is Rs 12 lakh or lower, one can benefit from the exemption under Section 87A, resulting in a zero tax liability.
Lower your tax burden with these deductions
1. Total CTC: Rs 14,00,000
2. Standard deduction: Rs 75,000
3. Employer EPF (12% of basic): Rs 84,000
4. Employer NPS (14% of basic): Rs 95,000
5. Taxable income: Rs 11,43,000
What should you do if your employer does not provide NPS?
If your employer does not offer NPS, the only available tax-saving methods under the new tax regime are the standard deduction and the employer’s EPF contribution. This situation may compel the employee to either incur some tax or revert to the old tax regime. If your employer only provides EPF, you can still maintain a salary of up to Rs 13.56 lakh without tax. It’s important to note that under the old regime, deductions such as 80C (EPF/PPF, ELSS), 80D (health insurance), and 80CCD (1B) (an additional Rs 50,000 on NPS) are accessible. These deductions can greatly lower your taxable income.
Effects of CTC structure changes on tax and retirement
With the recent updates to the Labour Code, many organizations are raising the basic salary component (for example, to at least 50% of CTC), which in turn boosts both the employer’s EPF and NPS contributions as well as the retirement fund. While this may lead to a slight decrease in take-home pay due to the reduction of non-essential allowances, the overall tax savings will increase as a result of the lower taxable income.
By raising the base salary (while cutting allowances), employees can save on taxes and grow a more substantial retirement fund. However, this does lead to a slight decrease in take-home pay.
You can achieve millionaire status through NPS and EPF
The power of NPS comes from compounding and tax benefits. If a 25-year-old invests Rs. 10,000 each month and increases this amount by 5% annually, they could accumulate a fund of Rs. 8.62 crore by age 60, assuming a 12% annual return. EPF also serves as a solid foundation for the future. Investing Rs. 10,000 monthly in EPF from age 25, at an interest rate of 8.25%, could lead to approximately Rs. 4.05 crore by retirement.
Anticipate tax relief in Budget 2026
In the previous budget, the government eliminated taxes on income up to Rs 12 lakh under Section 87A, providing considerable relief to the average citizen. This time, there is a chance that the tax-free income threshold may be raised further. The middle class is hopeful that this limit could be increased to Rs 15 lakh.
Additionally, there has been a persistent call for an increase in the standard deduction for salaried individuals. If this occurs, the middle class will have more disposable income. In the last budget, this deduction was raised to Rs 75,000 under the new tax regime. Now, considering inflation and rising costs, it is anticipated that the standard deduction could be increased to Rs 1 lakh in Budget 2026. If this takes place, the tax burden will lessen without requiring any investments, leading to an increase in take-home pay.