How to Reduce Taxable Income Below Rs 12 Lakh Threshold to Maximize Tax Benefits?

Salaried employees earning a Cost to Company (CTC) of Rs 14.65 lakh can potentially pay zero income tax by strategically utilizing deductions such as the standard deduction, employer contributions to the Employees’ Provident Fund (EPF), and the National Pension System (NPS). By understanding how these deductions work, employees can effectively lower their taxable income below the rebate limit.

Tax-Free Income Calculation

For an employee with a CTC of Rs 14.65 lakh, the breakdown is as follows:

• Basic Pay: Rs 7,32,500 (50% of CTC)
• Standard Deduction: Rs 75,000
• Employer’s EPF Contribution: Rs 87,900 (12% of Basic Pay)
• Employer’s NPS Contribution: Rs 1,02,550 (14% of Basic Pay)

After applying these deductions, the taxable income is Rs 11,99,550, which qualifies for a zero tax liability since it falls below the Rs 12 lakh threshold.

Deductions Available

To benefit from this tax advantage, employees must ensure that their salary structure includes both NPS and EPF contributions. This is crucial for those looking to maximize their tax benefits under the new tax regime.

Understanding NPS and EPF

• National Pension System (NPS): A government-backed retirement scheme offering market-linked returns and tax benefits. Only employer contributions are tax-deductible under the new regime.
• Employees’ Provident Fund (EPF): A retirement savings plan where both employees and employers contribute. Similar to NPS, only the employer’s contribution is tax-deductible in the new tax regime.

Comparison of NPS and EPF

| Feature | National Pension System (NPS) | Employees’ Provident Fund (EPF) | |———|——————————-|———————————-| | Tax-Free Annual Income Limit | ₹13.7 lakh | ₹12 lakh | | Standard Deduction | ₹75,000 | ₹75,000 | | Employer Contribution Limit | Up to 14% of basic salary | Up to 12% of salary | | Employee Contribution Deduction | Not deductible | Not deductible | | Interest Rate | Market-linked | Fixed-rate of 8.25% | | Management Fees | 0.09% per year | Not applicable | | Flexibility | High | Low | | Withdrawal Taxation | Taxable | Taxable |

New Tax Regime Slabs

For the financial year 2025-26, the income tax slabs are structured as follows:

• Income up to Rs 4,00,000: Nil
• Income from Rs 4,00,001 to Rs 8,00,000: 5%
• Income from Rs 8,00,001 to Rs 12,00,000: 10%
• Income from Rs 12,00,001 to Rs 16,00,000: 15%
• Income from Rs 16,00,001 to Rs 20,00,000: 20%
• Income from Rs 20,00,000 to Rs 24,00,000: 25%
• Income above Rs 24,00,000: 30%

Finally

Employees with a CTC of Rs 14.65 lakh can avoid income tax by leveraging available deductions, primarily through employer contributions to NPS and EPF. Understanding the nuances of these retirement schemes and the new tax regime is essential for maximizing tax efficiency. By structuring their salary accordingly, employees can significantly reduce their taxable income and take full advantage of the tax benefits available to them.