Union Finance Minister Nirmala Sitharaman during her Budget speech on February 1, 2025, announced that individuals with an annual income of up to Rs 12 lakh will be exempt from paying income tax under the new tax regime. Furthermore, she said that this exemption can go up to Rs 12.75 lakh for salaried individuals with Rs 75,000 as standard deductions under the new tax regime.
However, National Pension Scheme (NPS) and Employees Provident Fund (EPF) can help salaried individuals to pay zero income tax for the annual CTC (cost to company) of up to Rs 14.65 lakhs. Let’s delve into the details.
Income Tax: How To Make Rs 14.65 Lakhs Per Year Tax-Free?
Under section 80CCD (2) of the income tax, up to 14% of an employee’s basic salary invested in the NPS is tax-deductible under the new tax regime. However, in old tax regime this benefit is lower at 10%. Furthermore, a tax deduction can be claimed on the 12% contribution made by the company towards the Employees’ Provident Fund (EPF), based on the employee’s basic salary.
Salary Calculation: If an individual earn Rs 14.65 lakhs per year and his/her basic salary is 50% of the total pay. He/she is entitled to get Rs 7,32,500 lakhs per year as basic pay. At the basic pay component of Rs 7,32,500 lakhs per year, NPS contribution at 14% rate would be Rs 1,02,550.
Moreover, EPF contribution at 12% rate, in this case would be Rs 87,900. These compiled with Rs 75,000 (standard deduction) can make incomes up to Rs 14.65 lakhs tax-free for salaried individuals.
Here’s the calculation:
- Income: Rs 14.65 Lakhs
- Basic Salary: Rs 7,32,500
- NPS Contribution (at 14% rate): Rs 1,02,550
- EPF Contribution (at 12% rate): Rs 87,900
- Standard Deduction: Rs 75,000
- Taxable Income: Rs 11,99,550 Lakhs
- Tax Liability: Nill
Notably, this is only possible if the employer offers the above given benefits as part of the CTC. Employees can’t opt this by themselves.
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