'Zero' income tax up to 13.7 lakhs..!? How?

In the Union Budget, Finance minister Nirmala Sitharaman unexpectedly announced zero income tax under the new income tax system with tax rebates up to 12.00 lakhs. The Finance minister has given statistics that with this announcement, 1 crore people will no longer have to pay income tax. Although it has been announced that there is no income tax up to 12.00 lakhs, there are many benefits beyond that under the new income tax system, through which monthly salary earners and those earning an annual salary of up to 13.7 lakhs will no longer have to pay a single rupee as income tax. How is this..? There is an opportunity for monthly salaried people to significantly reduce their income tax burden called NPS (National Pension Scheme). Through this, monthly salaried people can avoid paying taxes up to Rs. 13.7 lakhs per year under the new income tax system. This is considered a huge profit compared to the Rs. 12 lakhs that non-salaried individuals get. This additional tax exemption is available through two main things: the standard deduction of Rs. 75,000 and investment in NPS. Everyone is talking only about the tax exemption of up to Rs. 75,000 through standard deduction beyond 12 lakhs. However many have forgotten the benefits available through NPS investment.
Investment made in NPS is tax-exempt under Income Tax Section 80CCD(2). Many people do not know that an amount of up to about 14% of a person's basic salary is tax-exempt under the new income tax system. This is 4 percent more than the 10% exemption provided under the old tax system. For example, let's say a person with an annual income of Rs. 13.7 lakhs receives 50 percent of the basic salary, and if he invests 14% of this Rs. 6.85 lakhs, which is Rs. 95,900, in NPS, then this entire income will be tax exempt. However, this NPS service has to be provided by the company you work for, if you invest it yourself, it will not be accepted, and therefore many people do not talk about the benefits available through NPS. So first find out if your company has NPS service and calculate this. In this incentive structure, let's say a person with an annual income of Rs. 13.7 lakhs receives a basic salary of Rs. 6.85 lakhs (50% of the total salary). With 14% of his basic salary, which is Rs. 95,900, invested in NPS, and a fixed income tax deduction of Rs. 75,000, his entire income will be tax-exempt.

Despite the huge tax benefits of this structure, only a small number of people avail the benefits of NPS. The NPS scheme, which was launched almost 10 years ago, has only 22 lakh subscribers. There are two main reasons for this low participation of people: There is a long lock-in period for NPS contributions, and there are also restrictions on withdrawal of the maturity amount. This is not the case with other investments.
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Sowmiya Sriram

03/02/2025 10:56 AM