Union Finance Minister Nirmala Sitharaman emphasized the importance of democracy, demography, and demand in driving India’s growth in her Budget speech on February 1, 2025. She also acknowledged the vital role of the middle class in the growth of the country. In a significant announcement, She 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, 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) can help salaried individuals to pay zero income tax for the annual incomes up to Rs 13.7 lakhs. Let’s delve into the details.
Income Tax: How To Make Rs 13.7 Lakhs Per Year Tax-Free?
Under section 80CCD (2) of the income tax, up to 14% of an employee’s salary invested in the NPS is tax-deductible under the new tax regime. However, in old tax regime this benefit is lower at 10%.
Salary Calculation: If an individual earn Rs 13.7 lakhs per year and his/her basic salary is 50% of the total pay. He/she is entitled to get Rs 6.85 lakhs per year as basic pay. At the basic pay component of Rs 6.85 lakhs per year, NPS contribution at 14% rate would be Rs 95,900. This compiled with Rs 75,000 (standard deduction) can make incomes up to Rs 13.7 lakhs tax-free for salaried individuals.
Here’s the calculation:
- Income: Rs 13.7 Lakhs
- Basic Salary: Rs 6.85 Lakhs
- NPS Contribution (at 14% rate): Rs 95,900
- Standard Deduction: Rs 75,000
- Taxable Income: Rs 11.99 Lakhs
- Tax Liability: Nill
Notably, this is only possible if the employer offers the NPS benefits under the CTC (cost to company). Employees can’t opt this by themselves.
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