Tax Relief for High Earners: How Rs 20 Lakh Salary Can Emerge Tax-Free Under New Tax Regime
Tax Savings Opportunities Emerge Under New Income Tax Regime
The introduction of the new income tax regime has led many to believe that tax savings are no longer possible. However, a closer examination of the fine print reveals that certain employer-backed benefits can still provide significant tax relief.
Understanding the Shift in the New Regime
Unlike the old tax regime, which relied heavily on individual investments under sections like 80C, the new regime focuses on salary structuring. This shift means that the onus is now on designing the cost-to-company (CTC) to maximize tax savings, rather than relying on individual investments post-salary.
Breaking Down the Deductions
For a Rs 20 lakh CTC, assuming 50 percent is allocated to basic salary (Rs 10 lakh), several tax-efficient components can be built into the structure. Meal benefits, calculated at Rs 200 per meal for two meals across 22 working days, translate into an annual tax-exempt component of Rs 1.05 lakh. The employer's contribution to EPF, capped at 12 percent of basic salary, adds another Rs 1.2 lakh to the exemption pool. Additionally, employer contributions to NPS under Section 80CCD(2), up to 14 percent of basic salary, provide a further Rs 1.4 lakh deduction.
| Deduction Type | Annual Exemption |
|---|---|
| Meal Benefits | Rs 1,05,000 |
| EPF Contribution | Rs 1,20,000 |
| NPS Contribution | Rs 1,40,000 |
The Role of Car Lease in Reducing Tax
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The most significant impact comes from the car lease component. If an employee opts for a car worth Rs 8 lakh leased over two years, the annual lease cost works out to approximately Rs 4.23 lakh, including interest. When this expense is routed through the employer as part of the salary structure, it is treated as a tax-efficient perquisite.
What the Final Numbers Look Like
According to ClearTax, after accounting for these deductions, the net salary comes down to around Rs 12.11 lakh. Applying the standard deduction of Rs 75,000 further reduces taxable income to approximately Rs 11.36 lakh. At this level, the tax liability effectively becomes zero due to the rebate available under the new tax regime.
| Scenario | Taxable Income | Tax Liability |
|---|---|---|
| With car lease | Rs 11,36,000 | Rs 0 |
| Without car lease | Rs 15,59,000 | Rs 1,18,000 |
Implications for Salaried Individuals
The comparison highlights an important takeaway: while the new tax regime limits traditional deductions, it still offers scope for optimisation through employer-driven components. For salaried individuals, tax planning is no longer about last-minute investments. Instead, it is about engaging with employers to structure compensation in a tax-efficient manner, particularly by leveraging contributions linked to basic salary and perquisites like leasing.
According to Archit Gupta, Founder & CEO, ClearTax, anyone earning Rs 20 lakh can use the car lease option to reduce their taxable income to zero, effectively saving 6 percent of total CTC in taxes.
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