Budget 2025: Based on media reports and social media discussions, it appears that FM Sitharaman has won the hearts of most salaried individuals by raising the tax-free annual income limit to Rs 12 lakh. Many in the middle class, who previously felt ignored and overtaxed by the government, are now happy that the government at last heard them.
Speaking about tax-free income under the new tax regime, the FM stated in her speech that individuals earning up to Rs 12 lakh will now pay no tax. However, when factoring in the standard deduction of Rs 75,000, the effective tax-free limit increases to Rs 12.75 lakh.
What are the deduction benefits available under new tax regime to save taxes?
To make the new tax regime more appealing, the government has been adjusting tax slabs and introducing benefits since its launch in Budget 2020. Two major changes were announced in last year’s Budget: an increase in the standard deduction limit from Rs 50,000 to Rs 75,000 and a higher tax deduction limit on the employer’s contribution to the National Pension System (NPS).
Also read: Budget 2025: Rs 12 lakh annual income tax-free but you can’t include THESE incomes for benefit
When it comes to NPS, this is a significant provision. However, its implementation at the corporate level remains limited, as most companies do not yet offer this facility to their employees. Last year, the government increased the tax deduction limit on the employer’s contribution to NPS from 10% to 14% of the basic salary. This move brought private sector employees on par with their government counterparts, who were already entitled to a 14% deduction.
Surprisingly, despite this NPS provision, millions of taxpayers are not able to use this opportunity. The NPS benefit was introduced nearly a decade ago, yet only a small number of employees have taken advantage of it. Few corporates have implemented the NPS benefit, and even fewer employees have opted to enroll in it. So chances are that if you are working in a private company, you probably cannot opt for it on your own, despite the government announcing it in the budget.
Now, let’s assume that corporate India widely offers this benefit to its employees. In that case, we will analyse through calculations how the tax-free limit of Rs 12.75 lakh under the new regime can be further increased using the NPS benefit.
If you are a salaried individual, you can achieve a tax-free annual income of up to Rs 13.7 lakh under the new tax regime by utilising the standard deduction and employer contributions to the NPS.
How does this work?
The tax-free limit of Rs 12.75 lakh, as announced in Budget 2025, includes the Rs 75,000 standard deduction. However, if your employer contributes to NPS under Section 80CCD(2), you can claim an additional tax benefit. The government allows up to 14% of your basic salary as a tax-free deduction when invested in NPS by your employer.
Tax savings calculation:
Annual salary: Rs 13.7 lakh
Assumed basic salary (50% of total): Rs 6.85 lakh
Employer’s NPS contribution (14% of Rs 6.85 lakh): Rs 95,900
Standard deduction: Rs 75,000
Total deductions (NPS + Standard deduction): Rs 1,70,900
Taxable income: Rs 13.7 lakh – Rs 1,70,900 = Rs 11,99,100
As the net taxable amount comes to less than Rs 12 lakh, it becomes tax-free.
Conclusion:
While the tax-free limit officially stands at Rs 12.75 lakh, one can leverage NPS contributions from employers to extend this benefit to Rs 13.7 lakh.