New tax slab 2025 impact: In her Budget statement on February 1, Finance Minister Nirmala Sitharaman introduced a major tax relief for middle-class salaried taxpayers in the latest income tax regime. During the presentation of the Union Budget 2025-26, FM Sitharaman revealed a raise in the personal income tax exemption limit to Rs 12 lakh. As a result, individuals with annual earnings of up to Rs 12 lakh will be exempt from paying any income tax.
But how a taxpayer earning Rs Rs 13.7 lakh salary can also pay zero tax? Here's the breakup :
How much tax do I have to pay? Calculate now
If you are a salaried individual, you may enjoy a tax-free annual income of up to Rs 13.70 lakh compared to Rs 12 lakh for others. This is due to the Rs 75,000 standard deduction and investments in the National Pension System (NPS). The NPS proves to be a significant advantage in tax savings under the New Tax Regime more than the Old Tax Regime.
In accordance with Section 80CCD(2) introduced in the Union Budget 2024, employees can deduct up to 14% of their basic salary invested in NPS. This is a notable increase from the previous 10% allowed under the Old Tax Regime.
By participating in the NPS, individuals earning Rs 13.7 lakh annually can potentially reduce their tax burden by as much as Rs 96,000. However, it is important to note that this benefit is only accessible if the employer includes NPS as part of their cost to company package; employees cannot independently opt for this tax-saving opportunity.
Here's the calculation
Assuming an annual income of Rs 13.7 lakh, with a basic salary of Rs 6.85 lakh (50% of total salary), you can potentially contribute Rs 95,900 towards the National Pension System (NPS) through your employer's cost-to-company package. By also considering the standard deduction of Rs 75,000, your taxable income decreases significantly, resulting in potential tax savings of around Rs 96,000 even with an income of Rs 13.7 lakh.
Therefore, an individual receiving a salary of Rs 13.7 lakh would be exempt from paying income tax. This exemption is calculated as follows: Rs 1370000 minus Rs 75000 for standard deduction minus Rs 95900 for NPS Contribution, resulting in a total of Rs 11,99,100. Consequently, the individual is not liable for income tax.
Savings under New Tax Regime
Rajarshi Dasgupta, Executive Director-Tax, AQUILAW, explained the next tax system as per Section 115BAC offers individuals and HUF taxpayers the choice to pay income tax at reduced rates by availing fewer exemptions and deductions. This new tax regime, effective from FY 2020-21 (AY 2021-22), features concessional tax rates with limited deductions and exemptions. Amendments to Section 115BAC were made in Budget 2023, making the new regime the default option from FY 2023-24 onwards.
Dasgupta said: The Union Budget, 2025, under the new regime, no income tax for income up-to Rs. 12 Lakhs. This is because of rebate applicable to new regime, has been raised to Rs. 60,000. Thus, if someone contributes, 14% of basic salary towards NPS Contribution, then such contribution may add up to the tax benefit. Now, it depends, how much a salaried persons plans up its salary structure. "
The taxpayers who choose the new regime for FY 2024-25 (AY 2025-26) will enjoy the following enhanced benefits:
The Standard Deduction limit for salaried income has been raised from Rs. 50,000 to Rs. 75,000. The maximum deduction under Family Pension has been increased from Rs. 15,000 to Rs. 25,000. The deduction on employers' contribution to the pension Scheme under Section 80CCD (2) has been increased from 10% of salary to 14% of basic salary.
NPS and tax savings
NPS offers additional benefits such as the flexibility to select asset allocation, switch between funds, and change pension fund managers without incurring tax implications. With fund management charges as low as 0.09% per year, compared to 1-1.5% charged by the most cost-effective mutual funds, NPS funds have outperformed mutual funds in the same category, making them a favorable option for long-term retirement planning.
The National Pension System (NPS) presents a range of attractive features:
> Asset Allocation Options: Investors have the freedom to select their preferred asset mix, whether it be equity, debt, or government securities. > Fund Switching Flexibility: NPS allows for seamless switching of funds and pension fund managers without incurring any tax implications. > Low Fund Management Fees: With a minimal fee of just 0.09% per year, NPS stands out for its cost-effectiveness compared to mutual funds charging 1-1.5%. This leads to lower investment costs and enables your funds to grow more efficiently. > Consistent Performance: Historically, NPS has consistently delivered higher returns than many mutual funds, making it an appealing choice for investors with long-term objectives.