Income taxpayers in India face a choice between two tax systems when filing their returns, with one providing exemptions and deductions, and the other, known as the new tax structure, limiting these benefits. Recent efforts have been made to grant individuals adopting the new income tax regime an exemption on annual income up to Rs 7 lakh. Salaried workers opting for this system can still avail a couple of deductions.

Under the new tax system, income taxpayers can benefit from two key deductions—a standard deduction and a deduction for the employer’s NPS (National Pension System) payment. Leveraging these deductions can significantly reduce the tax liability for individuals, with the potential for some to eliminate income tax if their annual income is Rs 8 lakh.

The standard deduction allows employed individuals a tax deduction of up to Rs 50,000, while family pensioners receive a deduction of Rs 15,000. For example, if a salaried person’s annual income is Rs 8 lakh and they avail the full standard deduction of Rs 50,000, the tax calculation will be based on Rs 7,50,000 instead of the entire Rs 8 lakh. Notably, no additional documents need to be submitted to claim this deduction.

Another avenue for deduction under the new tax system is related to the amount deposited in the National Pension System (NPS). Employed individuals can benefit from a standard deduction on the NPS deposit, provided certain conditions are met. The employer must deposit this amount into the employee’s Tier-1 NPS account, and the deposit should not exceed 10% of the employee’s salary for those in the private sector (14% for government employees). This deduction falls under Section 80CCD (2) of the Income Tax Act. It is reflected in Part B of Form 16.

By combining these two deductions, a salaried individual earning Rs 8 lakh annually can potentially make their income tax-free. After subtracting the standard deduction of Rs 50,000, the taxable income becomes Rs 7.5 lakh. If the employer further deposits Rs 50,000 into the worker’s Tier-1 NPS account, the taxable income drops to Rs 7 lakh, allowing them to enjoy tax-free status under the new tax system.

Source By: news18

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