Finance Minister Nirmala Sitharaman gave a big relief to the general public in the budget. She made annual income up to Rs 12 lakh tax free. This will especially benefit the middle class. Also, with good planning, you can save tax on income above 12 lakh. Tax experts believe that CTC (Cost to Company) of Rs 14.65 lakh can be easily made tax free.
How will income of Rs 14.65 lakh be tax free
Now suppose your annual salary is Rs 14.65 lakh. Out of this, half the money i.e. 50 percent goes in the basic salary. Whereas, the remaining 50 percent comes in the form of other items and allowances. We will further calculate the tax deduction according to the amount of basic salary.
Complete calculation of tax exemption
If the company contributes 12% of the basic salary to the Employees Provident Fund, then tax deduction can be claimed on it. This will be Rs 87,900. At the same time, tax exemption is also available on the company’s contribution to the National Pension System (NPS). This contribution will be 14% of the basic salary i.e. Rs 1,02,550. Also, you get a standard deduction of Rs 75,000 in the new tax regime. That is, this amount will be directly reduced from your taxable income.
After taking advantage of all these exemptions, your net taxable income will be Rs 11,99,550 lakh. The government has made income up to Rs 12 lakh tax free, so this means that you will not have to pay a single rupee tax. But, you have to keep in mind that this system will come into effect from the next financial year i.e. 2025-26.
How much tax will be saved in total
If the government did not make income up to Rs 12 lakh tax free and did not give the benefit of tax deduction on EPS and NPS, then an annual income of Rs 14.65 lakh would have to pay heavy tax. According to the new tax regime, 5 percent tax (Rs 20 thousand) will be levied on income of Rs 4 to 8 lakh.
While 10% tax (Rs 40,000) will be levied on income between Rs 8 lakh and Rs 12 lakh, 15% tax will be levied on income between Rs 12 lakh and Rs 14.65 lakh. If the standard deduction of Rs 75,000 is removed, then 15% tax i.e. Rs 28,500 will be levied on Rs 1.90 lakh. In this way, the total tax liability will be Rs 88,500, which you can easily save.
The role of EPS and NPS is important
Tax exemption is available on Employee Pension Scheme (EPS) under section 80CCD(1) of Income Tax and on contribution to NPS under section 80CCD(2). However, in the new tax regime, this exemption is available only on the company’s contribution, as it is considered as your direct income. Therefore, you are allowed to claim tax exemption on it.
NPS i.e. National Payment System is a retirement plan. Those who join this government scheme get pension after retirement. In this, the contribution is invested in the market and the return received from it is given as pension. NPS was started in 2004. It was opened for the general public in 2009.
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