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Contrary to common belief, the new tax regime offers specific ways to save for those earning Rs 20 lakh annually. By leveraging standard deductions, employer NPS contributions, and specific salary perks, employees can effectively lower their tax outgo. However, comparing both tax regimes remains a crucial step for every taxpayer.
What Happened
Many salaried employees often assume the new tax regime eliminates all ways to save tax. However, financial planners and tax experts note that the new regime still allows for meaningful tax optimization. For individuals earning around Rs 20 lakh annually, focusing on specific components within the salary structure can help reduce the final amount paid to the government. While the new regime is often simplified, it is not entirely devoid of tax-saving avenues.
The Standard Deduction Advantage
A major feature of the new tax regime is the standard deduction of Rs 75,000. This is a flat amount that every salaried taxpayer can subtract from their total income before tax is calculated. It does not require any proof of investment or specific expenses. For an earner in the Rs 20 lakh bracket, this deduction provides an immediate reduction in the taxable income base, offering relief without extra paperwork.
Leveraging Employer Contributions
Beyond the standard deduction, certain employer-provided benefits play a key role in tax planning. The National Pension System (NPS) is a prime example. Employer contributions to an employee's NPS account, up to 14% of the salary, are not included in the taxable income under the new regime. This serves as a dual-benefit strategy: it helps build a retirement corpus while simultaneously lowering the current tax burden.
Meal Benefits and Perks
Specific allowances like meal benefits can also be structured to be tax-efficient. Expert commentary suggests that utilizing meal vouchers within prescribed limits can lead to annual savings. Additionally, the company-provided car facility is another area where taxpayers often find relief. By using a company car for professional and personal use, the taxable value of perquisites—which is the extra benefit received on top of salary—can often be lower than if an employee were to receive a cash allowance for the same purpose.
Why The Old Regime Remains Important
While the new regime offers these pathways, it does not mean it is automatically better for everyone. The older tax regime remains highly relevant for those who heavily rely on traditional deductions such as House Rent Allowance (HRA), home loan interest payments, medical insurance premiums, and Section 80C investments like Public Provident Fund (PPF) or Equity Linked Savings Schemes (ELSS). If a taxpayer has significant home loans or high rental expenses, the older system may still result in a lower total tax bill.
How To Approach Tax Planning
For a person earning Rs 20 lakh, shifting to the new regime can sometimes result in an effective tax rate of around 8.5% if the salary is structured optimally with the benefits mentioned above. However, tax planning is personal. An individual with a high home loan EMI might find their tax outgo is lower under the old regime.
What Investors Should Track
Before deciding between the two regimes, taxpayers should calculate their tax liability under both systems. This involves listing all eligible deductions for the old regime and comparing the final tax numbers. Furthermore, individuals should review their salary structure with their HR department to ensure they are taking full advantage of permissible allowances like meal benefits or NPS contributions. The best approach is to run a simple calculation each financial year, as personal financial obligations and income levels can change over time.