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Salaried individuals who opt for the new tax regime don’t have to pay any tax if their annual salaried income is Rs 12,00,000. Beyond this threshold, the Income Tax Department gives them a standard deduction of Rs 75,000 under Section 115BAC(1A)(iii) of the Income Tax Act, 1961. If their income exceeds the Rs 12,75,000 limit, they have to pay tax.
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However, if they benefit from the Employees’ Provident Fund (EPF) and the National Pension System (NPS) employer contribution exemption, they can keep their income of Rs 14.66 lakh tax-free under the new tax regime. But for this to work, their employer must be part of the EPFO and NPS, respectively, and allow them to contribute to EPF and NPS.
If the employer offers EPF tax benefits to the employee but is not part of NPS, then also, under the new tax regime, an employee can make their Rs 13.56 lakh salary tax-free. Want to know how?
Tax benefits on EPF contributions in new tax regime
Gaurav Makhijani, Managing Partner, Makhijani Gera & Associates LLP, explains that for an individual who has opted for the new tax regime, employee contributions to EPF are not eligible for deduction under Section 80C of the Income Tax Act, 1961, as against the old tax regime, where such deductions under Section 80C are available.
“Here, employer’s contribution continues to be exempt up to 12% of the basic salary plus dearness allowances under both the old as well new regime (subject to the overall 7.5 lakh limit applicable for both old and new tax regime),” says Makhijani.
Tax benefits on NPS contribution in new tax regime
Makhijani explains for NPS, employee contributions are not tax deductible under the new tax regime (contrary to the old regime), whereas employer’s contribution (up to 14% of basic salary plus dearness allowances) are exempt for both old and new tax regime.
Are EPF contributions from employer’s side mandatory?
Chartered accountant Milin Bakhai, Partner, Direct Tax, N.A. Shah N.A. Shah Associates LLP, says contributions to EPF is dependent on the whether an employer is required to register itself to EPF.
“The tax exemption in case of employer’s contribution would, however, be restricted to the amount contributed by the employer subject to the maximum limit provided in the Income tax Act,” says Bakhai.
Are NPS contributions from employer side mandatory?
Bakhai further explains contributions to NPS are not dependent on the employer.
“An employee may open a voluntary NPS account and start making contributions to the said account without any corresponding and matching contribution by the employer. However, in new regime only employer contribution is allowed as deduction and any contribution to NPS by employee on its own is not eligible for deduction,” said Bakhai.
How can you make your Rs 14.66 lakh salary tax-free in the new tax regime?
The calculations below illustrate the example of a salaried individual whose basic pay is 50% of their total salary. Option 1 shows how he can make his Rs 14.66 lakh annual salaried income tax-free in the new tax regime through the employer’s NPS and EPF contributions.
Option 2 shows even if he gets just EPF tax benefits from his employer contributions, how he can make his Rs 13.56 lakh salaried income tax-free in the new tax regime.
| NPS/ EPF Exemption Calculation (under new regime) | |||
| Particulars | Option 1 – Utilisation of both EPF and NPS | Option 1 – Utilisation of only EPF | Remarks |
| Basic Salary | 732,759 | 678,191 | Equivalent to 50% of total CTC |
| Employer’s contribution to EPF | 87,931 | 81,383 | @ 12% of basic salary |
| Employer’s contribution to NPS | 102,586 | – | @ 14% of basic salary |
| Other allowances and perquisites | 542,241 | 596,809 | Remainder of CTC |
| Total Salary | 1,465,517 | 1,356,383 | |
| Utilisation of both EPF and NPS | |||
| Gross Total Income (after considering standard deduction) | 1,390,517 | 1,281,383 | After considering standard deduction of INR 75,000 |
| less: EPF exemption (own contribution – under section 80C) | – | – | Not allowed under new tax regime |
| less: EPF exemption [employer contribution -under section 10(11)] | -87,931 | -81,383 | |
| less: NPS exemption [under section 80CCD(2)] | -102,586 | – | |
| Total Income | 1,200,000 | 1,200,000 |
Calculations source: CA Milin Bakhai, Partner, Direct Tax, N.A. Shah
NPS, EPF contributions can create substantial retirement corpus
An employee can use NPS and EPF as investment instruments not just to save tax, but also to create a substantial retirement corpus in the long run.
For example, if a 25-year-old starts contributing Rs 10,000 per month in NPS, increases their amount by 5% every year, continues their contribution till 60 years, and gets 12% annualised return on their contributions, they can create a Rs 8.62 crore corpus.
Even at a 10% annualised return, their NPS corpus will be Rs 5.71 crore.
Similarly, if a 25-year starts contributing Rs 10,000 per month to their EPF corpus, increases the amount by 5% every year and gets a 8.25% interest on it, they can generate approximately Rs 4.05 crore corpus.
So, making NPS and EPF part of their smart investment planning can not only help one save tax but can also enable them to create a sizeable retirement corpus.
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