If your annual salary package is ₹20 lakh, a smart salary structure, a car lease, a proper mix of PF and NPS can reduce your tax to zero. Learn how to easily protect your hard-earned money from the tax claws.

New Tax Regime: Employed individuals often assume that the new tax regime means the closure of all avenues for tax savings. It's a common misconception that with the elimination of old deductions like Section 80C, any professional earning ₹20 lakh annually will have to pay a significant portion of their hard-earned income (more than ₹1 lakh) as income tax. However, the reality is quite different. If you design your salary structure with a little smartness, your taxable income can be reduced to zero even under the new regime, rather than being exorbitant. Let's understand this math in detail.

Salary structure, not investment, is the real game changer

Under the old system, people used to rush to invest in insurance or PPF at the end of the financial year to save taxes. Now, the rules have changed. The new system depends entirely on the composition of your CTC. Suppose your annual package is ₹20 lakh. In this situation, if your basic salary is fixed at 50% of your CTC, i.e. ₹10 lakh, you can include several tax-friendly components in your package that will significantly reduce your tax burden.

This is how a large base is created with small discounts

Tax planning starts with everyday allowances. Take the example of meal benefits. If you receive ₹200 per meal, twice a day, for 22 working days a month, then approximately ₹1.05 lakh per year becomes directly tax-free.

Next comes the employer's contribution to the EPF. This amounts to 12 percent of the basic salary, providing an additional tax deduction of ₹1.2 lakh. Furthermore, the company's contribution to the NPS under Section 80CCD(2) (which can be up to 14 percent of the basic salary) provides an additional benefit of approximately ₹1.4 lakh. These figures may seem modest on paper, but when added together, they create a strong tax savings base.

The biggest 'Brahmastra' to save tax

If you're truly looking to save significant tax, the car lease option plays a crucial role. If an employee leases a car worth ₹8 lakh for two years, the annual cost, including interest, comes to approximately ₹4.23 lakh. When this significant expense is routed through the salary structure, it's considered a tax-efficient perquisite under income tax rules.

Just this one step increases your total deduction limit from ₹3.65 lakh to ₹7.88 lakh. Those who own personal cars can also legally claim tax exemptions on driver and fuel expenses by maintaining a proper logbook.

How did the tax on Rs 20 lakh become 'zero'?

A look at the data from the tax filing platform ClearTax makes the picture crystal clear. When all the deductions mentioned above are subtracted from your CTC, your net salary comes down to Rs 12.11 lakh. A standard deduction of Rs 75,000 is then applied, bringing your taxable income to Rs 11.36 lakh. At this point, your tax liability becomes almost negligible due to the rebates available under the new regime. If you opt out of car leasing, this same taxable income would become Rs 15.59 lakh, and you would have to pay a hefty tax of Rs 1.18 lakh.

Archit Gupta, founder and CEO of ClearTax, explains this change: "Professionals earning ₹20 lakh can reduce their taxable income to zero if they utilize options like car leasing wisely. This doesn't put any additional financial pressure on the company, but it directly increases the employee's in-hand salary by 6 percent of their CTC."

How to make salary tax-free

Note: The monthly cost of a car lease (₹8 lakh for 24 months) comes to ₹35,200 (including interest); thus the annual outgo comes to ₹4.23 lakh.

Source: ClearTax