New Income Tax Regime Calculations: How NPS contribution can make your Rs 13,75,000 income nearly tax-free
New Income Tax Regime Calculations: Taxpayers following the new tax regime can get tax benefit of up to a maximum of 14 per cent of their dearness allowance (DA) and basic pay from the employer's side. The limit for private sector employees is 10 per cent of the employer contribution. If one takes a tax benefit from this contribution, they can make their Rs 1,375,000 annual income tax-free in the proposed new tax regime.
New Income Tax Regime Calculations: From April 1, 2025, the proposed new tax regime is set to be implemented. Taxpayers will be able to file their income tax under the proposed new tax regime for the Financial Year 2025-26. The annual income up to Rs 12,00,000 for non-salaried individuals will be tax-free. Salaried individuals with a salary up to Rs 12,75,000 won't have to pay any tax on their income. But they can make income up to Rs 13,75,000 nearly tax-free if they use NPS contributions from the employer's side to the maximum. Know how this tactic may work—
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(Disclaimer: This is not financial advice. Do your own due diligence or consult an expert for financial planning.)
What will be different tax slabs in proposed new tax regime?
| Proposed Tax Regime | |
| Income Tax Slabs | Tax Rate |
| Upto Rs. 4,00,000 | NIL |
| Rs. 4,00,001 - Rs. 8,00,000 | 5% |
| Rs. 8,00,001 - Rs. 12,00,000 | 10% |
| Rs. 12,00,001 - Rs. 16,00,000 | 15% |
| Rs. 16,00,001 - Rs. 20,00,000 | 20% |
| Rs. 20,00,001 - Rs. 24,00,000 | 25% |
| Above Rs. 24,00,000 | 30% |
What are main changes in proposed tax regime?
In the existing new tax regime, income up to Rs 7,00,000 is tax-free. The limit has been increased to Rs 12,00,000 in the proposed new tax regime.
The limit for the salaried-class individuals is Rs 12,75,000.
A new tax slab of 25 per cent has been introduced, which will apply for taxpayers with income from Rs 20 lakh to Rs 24 lakh.
The third major change is that the 30 per cent tax bracket now starts from Rs 24 lakh income.
What is NPS?
National Pension System (NPS) is a central government-run pension scheme for Indians. NPS account holders contribute to their NPS account at any frequency. At the retirement age of 60, they can withdraw a 60 per cent lump sum amount and 40 per cent as an annuity to get the monthly pension.
Can all NPS contribution provide tax benefits?
NPS contributions made only in NPS Tier I account provide tax benefits to old and new tax regime taxpayers, primarily because there is a lock-in period in Tier 1 accounts. NPS contributors in NPS Tier II accounts don't get any tax benefit.
Are NPS tax benefits applicable only for government employees?
Government and private sector employees, and all other individuals who contribute to the NPS Tier I account, can get tax benefits under different sections of the Income Tax Act, 1961.
Privilege for private and government employees in NPS tax benefits
Private and government sector employees can get tax benefits on the employer contribution under old and new tax regimes.
Tax benefits on NPS contribution to private, government sector employees
New tax regime taxpayer salaried individuals get tax benefits under Section 80CCD (2) of the Income Tax Act, 1961.
Both private and government employees get tax benefits only on the employer contribution in the new tax regime. The tax benefit range is different for both sector employees.
NPS tax benefit ranges for private and government sector employees
Private sector employees can get tax benefits up to 10 per cent (basic + DA) with employer contribution.
For government sector employees, it is up to 14 per cent (basic + DA) with employer contribution.
How Rs 13,75,000 income can be nearly tax-free
Suppose a government employee with a Rs 1,375,000 annual salary gets a 14 per cent NPS contribution of their basic salary and DA from the government's side.
On a salary of Rs 13,75,000, we are considering Rs 6,87,500 as the basic salary.
What will be employer NPS contribution?
At 14 per cent of the basic salary and DA, the employer contribution for an employee with a Rs 6,87,500 basic salary and DA will be Rs 96,250.
What will be tax liability?
A person with a Rs 13,75,000 salary will get a standard deduction of Rs 75,000. Their taxable income will reduce to Rs 13,00,000. On a deduction of Rs 96,250 NPS contribution from this amount, the taxable income will be Rs 12,03,750.
Marginal relief on Rs 12,03,750 income
On this income, the taxpayer will get a marginal relief and a rebate of Rs 60,000. Marginal relief is given to taxpayers whose income exceeds Rs 12 lakh by a small margin. They do not have to pay more tax than their incremental income.
Marginal relief on Rs 12,03,750 income
As per tax slabs, the income tax on Rs 12,03,750 will be Rs 60,712, which also has a 4 per cent cess on education and health. But after marginal relief and rebate, the tax liability on this income will be Rs 3,900, which will make the Rs 13,75,000 nearly tax-free.