New Tax Regime: Salary of ₹20 lakh still tax ‘zero’? Know this amazing formula

New Delhi: There is often a misconception among employed people that choosing the new tax regime means closing all avenues of tax saving. Most people believe that after the abolition of old deductions like Section 80C, any professional earning ₹ 20 lakh annually will have to pay a large portion of his hard-earned money (approximately more than ₹ 1.18 lakh) to the government as income tax.

But, the reality is completely different from this thinking. If you design your salary structure a little cleverly, then even in the new regime, your taxable income can come straight down to ‘zero’ instead of being huge. Let us understand the complete mathematics behind this tax saving.

Salary structure, not investment, is the real game changer

In the old system, people used to invest hurriedly in insurance or PPF at the end of the year to save tax. Now the rules have changed. The new system completely depends on the composition of your CTC. Suppose your annual package is ₹ 20 lakh. If your basic salary is fixed at 50% of CTC i.e. ₹ 10 lakh, then you can include many such tax-friendly components in your package which will completely eliminate the tax burden.

Big base is prepared by small discounts

Tax planning starts with everyday expenses. Take ‘Meal Benefit’ only. If you get ₹200 per mile (twice a day) and 22 working days in a month, your money of about ₹1.05 lakh goes straight tax-free in a year.

After this comes the contribution made by the employer in EPF, which gives additional tax exemption of ₹ 1.2 lakh. Also, the company’s contribution to NPS under section 80CCD(2) gives you another benefit of approximately ₹ 1.4 lakh. These figures may seem small individually, but taken together they lay a strong foundation for tax saving.

The biggest ‘Brahmastra’ to save tax: Car lease

If you really want to save huge tax, then the option of ‘Car Lease’ is most important. If an employee takes a car worth ₹8 lakh on a two-year lease, the annual cost including interest comes to around ₹4.23 lakh. When routed through the salary structure, it is considered a tax-efficient ‘perquisite’ under income tax rules. With just this one step, your total deduction limit jumps from ₹3.65 lakh to ₹7.88 lakh.

How did the tax on Rs 20 lakh become ‘zero’?

According to data from tax filing platform ‘ClearTax’, when all these deductions are deducted from CTC, your net salary comes down to ₹ 12.11 lakh. After this, after getting standard deduction of ₹ 75,000, the taxable income comes to ₹ 11.36 lakh. At this stage, your total tax liability becomes zero due to the rebates available in the new regime.

ClearTax founder Archit Gupta says that if people earning ₹ 20 lakh make proper use of options like car lease, they can bring their taxable income to zero. This also increases the in-hand salary of the employee by about 6%.

Mathematics of making salary tax-free