In her Budget speech, Finance Minister Nirmala Sitharaman announced that individuals earning up to ₹12 lakh annually are now exempt from income tax. However, for salaried taxpayers, the threshold is slightly higher at ₹12.75 lakh due to a standard deduction of ₹75,000. Additionally, by making use of the National Pension System (NPS), salaried individuals can legally increase their tax-free income to ₹13.7 lakh.
A salaried individual with an annual income of ₹13.7 lakh can lower their tax liability by approximately ₹96,000 through contributions to the pension scheme. However, this benefit is available only if the employer includes NPS as part of the cost-to-company (CTC) structure, as employees cannot independently enrol in it.
Under Section 80CCD(2) of the Income Tax Act, up to 14% of an employee’s basic salary contributed to NPS by the employer is tax-deductible. In contrast, under the old tax regime, this benefit was limited to 10% of the basic pay. This allows employees to lower their taxable income significantly.
For instance, if an individual earns ₹13.7 lakh annually, the following deductions apply:
Salary Component | Amount (₹) |
Basic Salary | 6,85,000 |
NPS Employer Contribution | 95,900 |
Other Salary Components | 5,89,100 |
Total Salary | 13,70,000 |
Less: Standard Deduction | -75,000 |
Less: NPS Contribution | -95,900 |
Taxable Salary | 11,99,100 |
With these deductions, the taxable salary falls below ₹12 lakh, ensuring that no income tax is payable. However, this benefit is only applicable if the employer includes NPS as part of the cost-to-company (CTC) structure.
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Published on: Feb 4, 2025, 3:45 PM IST
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