NPS Tax Benefits: Maximizing Tax Savings Under Budget 2025
In a major relief to taxpayers, Union Finance Minister Nirmala Sitharaman has announced in Budget 2025 that no income tax will be applicable on salaries up to Rs 12 lakh. This decision has been welcomed with enthusiasm by salaried individuals. But did you know that you can actually make your salary tax-free even up to Rs 13.7 lakh? Yes, by leveraging the standard deduction and National Pension System (NPS) contributions, salaried employees can enjoy zero tax liability. Let’s break down the calculation.
How to Save Tax on Salary Up to Rs 13.7 Lakh?
Under Section 87(A) of the new tax regime, individuals earning up to Rs 12 lakh are exempt from income tax. However, if your salary is Rs 13.7 lakh, you can still avoid tax by making use of the following deductions:
- Standard Deduction: Rs 75,000
- NPS Contribution (80CCD(2)): Employers can contribute up to 14% of the basic salary to NPS, which is tax-free.
For instance, if your total salary is Rs 13.7 lakh and your basic salary amounts to Rs 6.85 lakh, a 14% contribution to NPS equals Rs 95,900. After accounting for the standard deduction and NPS contribution, your taxable income effectively reduces to Rs 11.99 lakh—keeping you within the tax-free limit under the new tax slab.
Tax Calculation for Salaries Up to Rs 16 Lakh
For those earning beyond Rs 13.7 lakh, tax liabilities can still be minimized through strategic investments and deductions. Below is an overview of how much tax one might have to pay for salaries up to Rs 16 lakh while incorporating NPS benefits and the standard deduction.
| Basic Income (Rs Lakh) | Basic Salary (Rs Lakh) | NPS Contribution (14% of basic) (Rs) | Taxable Income# (Rs Lakh) | Total Tax** (Rs Lakh) |
| 13.7 | 6.85 | 95,900 | 11.99 | NIL |
| 16 | 8 | 1.12 lakh | 14.13 | 91,950 |
| 24 | 12 | 1.68 lakh | 21.57 | 2.39 lakh |
| 32 | 16 | 2.24 lakh | 29.01 | 4.50 lakh |
| 48 | 24 | 3.36 lakh | 43.89 | 8.97 lakh |
Why NPS Is a Smart Tax-Saving Option
Despite being a tax-saving tool for nearly a decade, only 22 lakh individuals have enrolled in NPS. The primary reasons include its long lock-in period and restrictions on premature withdrawals. Additionally, upon maturity, only 60% of the corpus can be withdrawn as a lump sum, while the remaining 40% is mandatorily converted into a pension.
However, NPS offers several advantages, including:
- Low Fund Management Fees
- Flexibility to Switch Funds
- Higher Returns Due to Long-Term Investment Approach
For those planning their retirement and seeking long-term wealth growth, NPS remains a valuable investment avenue. With the latest tax reforms, it becomes even more attractive for salaried individuals looking to optimize their tax outgo.
By leveraging these provisions, employees can effectively reduce their taxable income and enhance their retirement savings simultaneously.
