How to Make Your Salary Tax-Free in the New Tax Regime
Are you a salaried individual navigating the complexities of the new tax regime in India? Understanding how to optimize your income tax liability can significantly impact your financial well-being. Here’s a simple breakdown of how you can effectively make up to Rs 14.66 lakh of your salary tax-free, alongside some valuable insights on Employees’ Provident Fund (EPF) and National Pension System (NPS).
Understanding The Tax Threshold
Under the new tax regime, salaried individuals with an annual income of up to Rs 12,00,000 are not required to pay any income tax. If your salary slightly exceeds this limit, specifically if it falls between Rs 12,00,001 and Rs 12,75,000, you’ll benefit from a standard deduction of Rs 75,000 under Section 115BAC(1A)(iii) of the Income Tax Act, 1961.
But here’s the catch: for those who are eligible for EPF and NPS benefits, you still have the potential to reduce your taxable income and keep your earnings nearly tax-free!
The Role of EPF and NPS
If your employer is a member of both EPF and NPS and contributes to these on your behalf, you can seamlessly make your salary almost fully tax-free. However, if your employer doesn’t participate in NPS but provides EPF benefits, you can still keep your earnings up to Rs 13.56 lakh tax-free under the new regime. Let’s delve deeper into how these contributions work.
NPS/ EPF Exemption Calculation (under new regime)
| Particulars | Option 1 – Utilisation of both EPF and NPS | Option 1 – Utilisation of only EPF | Remarks |
| Basic Salary | 732,759 | 678,191 | Equivalent to 50% of total CTC |
| Employer’s contribution to EPF | 87,931 | 81,383 | @ 12% of basic salary |
| Employer’s contribution to NPS | 102,586 | – | @ 14% of basic salary |
| Other allowances and perquisites | 542,241 | 596,809 | Remainder of CTC |
| Total Salary | 1,465,517 | 1,356,383 |
Utilisation of both EPF and NPS
| Gross Total Income (after considering standard deduction) | 1,390,517 | 1,281,383 | After considering standard deduction of INR 75,000 |
| less: EPF exemption (own contribution – under section 80C) | – | – | Not allowed under new tax regime |
| less: EPF exemption [employer contribution -under section 10(11)] | -87,931 | -81,383 | |
| less: NPS exemption [under section 80CCD(2)] | -102,586 | – | |
| Total Income | 1,200,000 | 1,200,000 |
Tax Benefits Of EPF Contributions
Gaurav Makhijani, Managing Partner at Makhijani Gera & Associates LLP, points out an important detail: under the new tax regime, employee contributions to EPF aren’t tax-deductible. This is a significant shift from the previous tax regime, where you could claim deductions under Section 80C.
However, the good news is that your employer’s contribution remains tax-exempt—up to 12% of your basic salary plus dearness allowances. This remains consistent between both tax regimes, with an overall limit of Rs 7.5 lakh applicable.
Tax Benefits Of NPS Contributions
When it comes to the National Pension System (NPS), employee contributions are also not tax-deductible under the new tax regime. However, your employer’s contribution is exempted up to 14% of your basic salary plus dearness allowances in both regimes.
Are Employer Contributions Mandatory?
The question often arises: are contributions from the employer mandatory? Chartered Accountant Milin Bakhai clarifies that EPF contributions depend on your employer’s registration with the EPFO. Meanwhile, contributions to NPS are flexible; you can independently open a voluntary NPS account, making your own contributions without needing employer input. However, only the employer’s contributions qualify for deductions under the new regime.
Making Your Salary Tax-Free
Here’s how you can maximize your income:
- Employer Contributions: Ensure that your employer contributes to both EPF and NPS. This can substantially increase your tax exemptions.
- Salary Structure: If your basic salary constitutes 50% of your total salary, you can strategically optimize your contributions to reach the maximum tax-free limit.
- Financial Planning: Consider your long-term retirement goals. For instance, if a 25-year-old starts with a contribution of Rs 10,000 per month to their NPS, increasing it by 5% annually until retirement at age 60, they could amass a staggering corpus of Rs 8.62 crore, assuming a 12% annual return. Similarly, consistent contributions to an EPF account can yield approximately Rs 4.05 crore.
Conclusion
Integrating EPF and NPS into your investment strategy is not just about tax saving; it’s a pathway to building a secure financial future. By understanding the ins and outs of the new tax regime and leveraging the benefits of your employer’s contributions, you can significantly reduce your tax burden and create a robust retirement corpus.
Invest smartly, plan wisely, and let your money work for you!