Are you a salaried employee looking to maximise your tax savings? With the latest provisions in Budget 2025, you can legally pay zero income tax on an annual salary of up to Rs 13.7 lakh. This is possible by leveraging the increased standard deduction and employer contributions to the National Pension System (NPS).
Understanding the Tax-Saving Opportunity
The key to achieving zero tax liability lies in two major benefits:
- Standard Deduction: Increased to Rs 75,000
- NPS Contributions: Up to 14% of the basic salary exempt under Section 80CCD(2)
How It Works
If you are a salaried individual, the Rs 75,000 standard deduction automatically reduces your taxable income. However, the real game-changer is the NPS benefit. Under the revised tax regime, employers can contribute up to 14% of their basic salary to NPS, which remains tax-free.
Previously, under the old tax regime, this exemption was capped at 10% of the basic salary. The recent revision extends the limit, resulting in higher tax savings for employees opting for the new regime.
Example Calculation
Let’s assume you earn Rs 13.7 lakh annually, with 50% of it (Rs 6.85 lakh) as your basic salary. If your employer contributes 14% of your basic salary to NPS, the amount would be Rs 95,900.
Now, when we add the Rs 75,000 standard deduction, your taxable income reduces significantly:
Taxable Income = Rs 13,70,000 – Rs 75,000 (Standard Deduction) – Rs 95,900 (NPS Contribution)
Net Taxable Income = Rs 11,99,100
Since the new regime provides tax exemption up to Rs 12 lakh, you effectively pay zero income tax!
New Tax Regime Benefits Under Budget 2025
Under Section 115BAC, individuals and Hindu Undivided Families (HUFs) can choose to pay lower income tax rates with fewer exemptions. The changes introduced in Budget 2025 further enhance these benefits:
- Higher Standard Deduction: Raised from Rs 50,000 to Rs 75,000
- Family Pension Deduction: Increased from Rs 15,000 to Rs 25,000
- NPS Employer Contribution: Raised from 10% to 14% of basic salary
The Power of NPS
Despite its tax-saving potential, many employees hesitate to invest in NPS due to its lock-in period. However, it comes with significant advantages:
- Diversified Investment Options: Equity, debt, and government securities
- Flexibility: Ability to switch fund managers without tax implications
- Low Management Fees: Only 0.09% per annum, much lower than mutual funds
At retirement, 60% of the accumulated corpus can be withdrawn tax-free, while the remaining 40% is used to purchase an annuity, ensuring a steady post-retirement income.
Why This Matters for Salaried Employees
With the new tax-free threshold set at Rs 12 lakh under the revised regime, effectively reaching Rs 12.75 lakh with the standard deduction, this is one of the most significant tax reliefs introduced in recent years.
Dhirendra Kumar of Value Research highlights, “This tax revision is a timely move, offering middle-class taxpayers increased disposable income, which can help in managing EMIs, education costs, and rising healthcare expenses.”
By optimizing your salary structure and leveraging the tax-saving benefits of NPS, you can significantly reduce your tax burden and enhance your financial security. If your employer offers NPS as part of your compensation package, this is the perfect time to make the most of this benefit and maximize your savings.
