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Budget 2025-26 brought great relief for the middle class, as Finance Minister Nirmala Sitharaman announced that income up to ₹12 lakh will now be tax-free under the new tax regime. Additionally, if you maximize your investments and reimbursements, you can legally reduce your taxable salary and pay zero tax even on an income of ₹16.5 lakh.
Here’s a detailed breakdown of how you can achieve zero tax liability on your salary.
1. Optimize Your Salary Structure for Tax Savings
At the start of the financial year, many companies allow employees to modify their salary structure. This means you can allocate a portion of your salary as reimbursements instead of taxable income. The key components to focus on include:
Conveyance
Leave Travel Allowance (LTA)
Food Coupons or Entertainment
Internet and Mobile Bills
Fuel & Other Allowances
Using these non-taxable components, you can significantly reduce your taxable income.
2. Maximize Leave Travel Allowance (LTA) for Tax Exemption
LTA allows employees to claim tax-free travel expenses for domestic trips twice in four years.
Usually, 10% of your basic salary is allocated as LTA.
If your total salary is ₹16.5 lakh, your basic salary would be ₹8.25 lakh.
Based on this, your LTA would be around ₹82,500.
Since LTA is claimed twice in four years, its annual tax exemption averages ₹41,250.
Tax Benefit: If you're in the 30% tax bracket, this means your travel tickets become 30% cheaper!
3. Use Reimbursements to Reduce Taxable Income
Many companies offer reimbursements for various expenses, which are not taxable. Here’s how you can use them:
| Reimbursement Type | Monthly Exemption (₹) | Annual Exemption (₹) |
|---|---|---|
| Conveyance Allowance | ₹12,500 | ₹1,50,000 |
| Internet & Mobile Bills | ₹1,000 | ₹12,000 |
| Food & Entertainment | ₹2,000 | ₹24,000 |
| Fuel, Books, Uniforms, etc. | ₹3,000 | ₹36,000 |
| Total Tax-Free Reimbursement | ₹18,500 | ₹2,22,000 |
Tax Benefit: These amounts are not counted as taxable income, reducing your overall tax liability.
4. Take Advantage of Standard Deduction & NPS Contribution
The new tax regime allows two major deductions:
Standard Deduction: ₹75,000
This is automatically deducted from your salary, reducing taxable income.
NPS Contribution (80CCD(2)): ₹1,15,500
- Employer contributions to NPS (National Pension System) are tax-exempt.
- You can contribute up to 14% of your basic salary under 80CCD(2).
- If your basic salary is ₹8.25 lakh, you can claim ₹1,15,500 as tax-exempt.
Tax Benefit: These two deductions reduce taxable income by ₹1,90,500.
5. Tax Calculation: How Salary Up to ₹16.5 Lakh Becomes Tax-Free
Now, let’s calculate your final taxable income:
| Category | Amount (₹) |
|---|---|
| Total Salary | ₹16,50,000 |
| Total Reimbursements (Tax-Free) | ₹2,22,000 |
| Leave Travel Allowance (LTA) | ₹41,250 |
| Standard Deduction | ₹75,000 |
| NPS Contribution (80CCD(2)) | ₹1,15,500 |
| Total Tax-Free Amount | ₹4,53,750 |
| Final Taxable Income | ₹11,96,250 |
Since the new tax regime allows zero tax on income up to ₹12 lakh, your final taxable income of ₹11,96,250 falls within this tax-free limit, meaning you don’t have to pay any tax!
Key Takeaways: How to Achieve Zero Tax
Use reimbursements to reduce taxable income.
Claim LTA benefits for travel-related tax savings.
Maximize deductions like Standard Deduction & NPS Contribution.
Plan your salary structure wisely at the beginning of the financial year.
By following these strategies, you can legally reduce your taxable salary and enjoy tax-free earnings up to ₹16.5 lakh under the new tax regime!
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