Salaried? Know Your Deductions, Rebates & the Zero-Tax Income Limit!
Summary: The article explains the tax benefits available to salaried taxpayers under both the New Tax Regime and the Old Tax Regime, highlighting the importance of understanding standard deduction, rebate under Section 87A, and available deductions. Under the New Regime, salaried individuals receive a Rs. 75,000 standard deduction, and with the Section 87A rebate of up to Rs. 60,000, those earning up to Rs. 12.75 lakh (including the standard deduction) can have nil income tax. Under the Old Regime, the Rs. 50,000 standard deduction and the Section 87A rebate make salary up to Rs. 5.50 lakh tax-free, while deductions under Sections 80C, 80CCD(1B), 80D, 24(b), 80E, 80TTA/80TTB, HRA, and LTA can significantly reduce taxable income. The article also explains marginal relief for incomes slightly above Rs. 12 lakh under the New Regime and advises taxpayers to compare both regimes annually to determine which provides the greater tax benefit.
Arjuna (Fictional Character): Krishna, salaried taxpayers get confused every year at tax time. Everyone talks about “standard deduction,” “rebate,” and “tax-free income,” but no one explains it simply. How much can a salaried person earn without paying any tax, and which deductions can actually be claimed?
Krishna (Fictional Character): Arjuna, the salaried person is the most honest taxpayer of all, tax is deducted from their salary even before it reaches their hands! Yet many salaried people end up paying more tax than required, simply because they do not know their rights. Under the Income Tax Act, there are two options — the New Tax Regime (the default) and the Old Tax Regime and each gives different benefits.
Arjuna (Fictional Character): Krishna, first what exactly is this “Standard Deduction” that every salaried person keeps talking about?
Krishna (Fictional Character): Arjuna, the Standard Deduction is the simplest and most beautiful benefit for a salaried person. It is a flat deduction from salary income in which no bills, no proofs, and no investment are required. Under the New Tax Regime, it is ₹75,000, and under the Old Tax Regime it is ₹50,000. Pensioners too get this benefit against their pension income. So, the very moment a person becomes salaried, ₹75,000 (or ₹50,000) is straightaway reduced from taxable income.
Arjuna (Fictional Character): Krishna, now the question every salaried person wants answered is up to what income is NO tax payable at all?
Krishna (Fictional Character): Arjuna, this is where the Rebate under Section 87A works its magic. Under the New Tax Regime, if total taxable income is up to ₹12,00,000, a rebate of up to ₹60,000 brings the tax down to NIL; adding the ₹75,000 standard deduction, a salaried person earning up to ₹12,75,000 pays zero income tax. Under the Old Tax Regime, if total taxable income is up to ₹5,00,000, a rebate of up to ₹12,500 makes the tax NIL; with the ₹50,000 standard deduction, salary up to ₹5,50,000 is tax-free and this limit can be pushed much higher by claiming deductions like 80C, 80D and home loan interest.
For Example: Now take Mr. A, a salaried employee with a gross salary of ₹12,75,000. After reducing the ₹75,000 standard deduction, the taxable income is ₹12,00,000. The tax on this works out to ₹60,000 i.e., 5% on the ₹4–8 lakh slab (₹20,000) plus 10% on the ₹8–12 lakh slab (₹40,000). But the Section 87A rebate of ₹60,000 wipes this out completely, so Mr. A’s final tax is NIL. He takes home the entire ₹12.75 lakh salary without paying a single rupee of income tax!
Arjuna (Fictional Character): Krishna, but what if someone’s income is just slightly above ₹12 lakh? Does that person suddenly get hit with a huge tax bill?
Krishna (Fictional Character): Arjuna, this is a very common fear, but the law is fair here. The government gives “Marginal Relief.” If income crosses ₹12,00,000 by only a small margin, the tax cannot exceed the amount by which income has crossed ₹12,00,000. For example, if taxable income after standard deduction is ₹12,10,000, the income above ₹12 lakh is only ₹10,000 so the tax is restricted to roughly ₹10,000 (plus cess), not the full slab tax of about ₹61,500. This ensures a taxpayer earning just ₹1 more does not suddenly lose ₹60,000.
Arjuna (Fictional Character): Krishna, in the New Tax Regime most deductions are gone. Is there anything a salaried person can still claim, apart from the standard deduction?
Krishna (Fictional Character): Arjuna, yes, the New Regime is not entirely empty! A salaried person can still claim the employer’s contribution to NPS under Section 80CCD(2), up to 14% of salary (Basic + DA); this is a powerful benefit, because whatever the employer contributes to the employee’s NPS is deducted from taxable income even in the New Regime. A contribution to the Agniveer Corpus Fund under Section 80CCH is also allowed, along with certain specified allowances such as transport allowance for differently abled employees and conveyance incurred for official duty.
Arjuna (Fictional Character): Krishna, and which deductions make the Old Tax Regime worthwhile?
Krishna (Fictional Character): Arjuna, the Old Regime rewards those who invest and spend wisely. Its major deductions for a salaried person are:
- Section 80C — up to ₹1,50,000: EPF, PPF, ELSS mutual funds, life insurance premium, principal repayment of home loan, children’s tuition fees, 5-year tax-saving FD, NSC and Sukanya Samriddhi.
- Section 80CCD(1B) — an extra ₹50,000 for investment in NPS, over and above the 80C limit.
- Section 80D — health insurance: up to ₹25,000 for self and family, plus up to ₹50,000 for senior-citizen parents.
- Home Loan Interest (Section 24b) — up to ₹2,00,000 on a self-occupied house.
- HRA and LTA: House Rent Allowance for those living in rented homes, and Leave Travel Allowance for domestic travel.
- Sections 80TTA / 80TTB and 80E: savings-bank interest up to ₹10,000 (₹50,000 for senior citizens), and full interest on an education loan.
A salaried person claiming all of these can make even ₹10–12 lakh of income highly tax-efficient under the Old Regime.
Arjuna (Fictional Character): Krishna, so how does a salaried person decide whether New Regime or Old Regime should be opted?
Krishna (Fictional Character): Arjuna, the golden rule is simple. If the taxpayer’s total deductions and exemptions are LOW, the New Regime is better the ₹75,000 standard deduction and zero tax up to ₹12.75 lakh are very hard to beat. But if the deductions are HIGH a home loan, large insurance premiums, rent paid (HRA) and full 80C investment then both regimes should be computed, and the Old Regime may save more. Consider Mr. B, with a gross salary of ₹18,00,000. Under the New Regime, after only the ₹75,000 standard deduction his taxable income is ₹17,25,000, and the tax (with 4% Health and Education Cess) comes to about ₹1,50,800. Under the Old Regime, suppose he claims the ₹50,000 standard deduction, ₹1,50,000 under 80C, ₹50,000 under 80CCD(1B), ₹25,000 under 80D and ₹2,00,000 of home-loan interest deductions of ₹4,75,000 in all. His taxable income then falls to ₹13,25,000, but the tax (with cess) is about ₹2,18,400. So here the New Regime saves Mr. B nearly ₹67,600. However, if Mr. B also claimed a large HRA living on high rent in a metro the Old Regime figure could drop below the New Regime. That is why every salaried taxpayer must run both calculations before choosing.
Arjuna (Fictional Character): Krishna, what should salaried taxpayers finally learn from all this?
Krishna (Fictional Character): Arjuna, every salaried taxpayer should remember that a rupee saved through a legitimate deduction is a rupee earned. Both regimes should be compared every year, investment proofs should be kept ready, and the return must be filed on time. A taxpayer should not invest only to save tax; investments should serve real financial goals, with the tax saving as a welcome bonus.
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