Tax saving tips: How you can legally pay zero tax on Rs 13.7 lakh salary

 Finance Ministry’s new tax measures proposed during Budget 2025 now allow you to pay zero income tax on an annual salary of up to Rs 13.7 lakh. The key to unlocking this tax benefit lies in two powerful tools: the Rs 75,000 standard deduction and contributions to the National Pension System (NPS).

 

What’s the catch?

Here’s how it works: If you are a salaried employee, you can claim a Rs 75,000 standard deduction from your taxable income, reducing the amount on which tax is levied. But the real game-changer comes with the NPS. Under Section 80CCD(2), up to 14% of an employee's basic salary invested in NPS can be tax-deductible, offering significant savings for those earning higher salaries.

 

 

This is a notable improvement from the old tax regime, where the NPS tax benefit was capped at 10% of the basic salary.

 

Let’s take an example. Suppose you earn Rs 13.7 lakh annually. Assuming your basic salary is 50% of your total salary, that would be Rs 6.85 lakh. If your employer offers the NPS benefit (as part of your cost-to-company package), you can contribute 14% of Rs 6.85 lakh, which equals Rs 95,900.

 

Now, adding the standard deduction of Rs 75,000 to that, your taxable income reduces significantly. This means, despite earning Rs 13.7 lakh, you won’t have to pay any taxes at all! This can result in a tax saving of approximately Rs 96,000. 

Rajarshi Dasgupta, Executive Director-Tax, AQUILAW explails this in detail:

The new regime under Section 115BAC gives individuals and HUF taxpayers an option to pay income tax at lower rates with fewer exemptions and deductions to claim. Section 115BAC - the new tax regime system came into force from FY 2020-21 (AY 2021-22). The new tax regime introduced concessional tax rates with reduced deductions and exemptions. Section 115BAC was amended in the Budget 2023, and the new regime was made the default regime from FY 2023-24. Vide the Union Budget, 2025, under the new regime, no income tax for income up-to Rs. 12 Lakhs. This is because of rebate applicable to new regime, has been raised to Rs. 60,000. Further, the following additional benefits have been extended to the taxpayers who opt for new regime for FY 2024-25 (AY 2025-26):

 

• Limit of Standard Deduction against salaried income has been increased from Rs. 50,000 to Rs. 75,000.

 

• Limit of maximum Deduction under Family Pension has been increased from Rs. 15,000 to Rs. 25,000. 

 

• The deduction on employers contribution to pension Scheme as per Section 80CCD (2) has been increased from 10% of salary to the 14% of basic salary. 

 

Thus if someone contributes, 14% of basic salary towards NPS Contribution, then such contribution may add up to the tax benefit. Now, it depends, how much a salaried persons plans up its salary structure. 

 

Now, if we assume that a salaried person, has 50% of his salary attributable to basic salary, then under such circumstances, for a salaried person having a total salary of 13.70 lakh, will contribute Rs 95,900 towards NPS Contribution (being 14% of the basic salary). 

 

Under such circumstances, a salaried person with Rs 13.7 lakh salary will not pay any income tax (1370000 minus 75000 towards standard deduction minus 95900 towards NPS Contribution = 11,99,100 – being not entitled to Income Tax)

   

The NPS Advantage

While many are aware of the NPS, few actually take advantage of its potential. One of the major deterrents is the lock-in period. Funds in the NPS cannot be withdrawn until retirement, with exceptions only in extraordinary circumstances. At maturity, 60% of the corpus can be withdrawn, but the remaining 40% must be invested in an annuity to provide a lifelong pension.  "The success of the National Pension System demonstrates that well-designed investment products can serve individual and national interests without compromising the simplicity of the tax structure. The challenge lies in creating mechanisms that can replicate the behavioural benefits of tax-linked savings while maintaining the advantages of a streamlined system," said Dhirendra Kumar of Value Research.

 

Apart from the tax-saving benefits, NPS offers a number of attractive features:

 

Choice of asset mix: You can choose your own asset allocation—equity, debt, or government securities.

Flexibility in switching funds: You can change your fund choices and even switch pension fund managers without any tax implications.

Low fund management fees: NPS boasts of the lowest charges in the industry—just 0.09% per year, compared to 1-1.5% charged by mutual funds. This keeps your investment costs lower and helps your money grow more effectively. 

Over time, the returns from NPS have consistently outperformed many mutual funds, making it an appealing choice for long-term investors.

 

If you’re a salaried employee, you could be saving up to Rs 96,000 in tax annually, all thanks to the NPS and standard deduction. However, to take full advantage of this benefit, your employer must offer the NPS as part of your salary package. This tax-saving opportunity makes it an ideal time to review your salary structure and consider enrolling in NPS if you haven’t already.

 

The Finance Minister's announcement of raising the tax-free income threshold to Rs 12 lakh under the new regime, effectively Rs 12.75 lakh with the standard deduction for salaried individuals, represents the most significant tax relief in living memory.

 

"This substantial change comes at a crucial time when the middle class has been battling uncertainties, making it a particularly welcome move that will boost consumer spending and economic growth. The impact will be significant - millions of taxpayers will see their disposable income rise substantially, allowing them to meet the rising costs of education, healthcare, and daily essentials with greater ease. For a family paying EMIs on a home loan or planning their children's higher education, this additional cash flow could make a meaningful difference to their monthly budgeting. The timing couldn't be better as urban households grapple with elevated inflation in the education and healthcare sectors," said Dhirendra Kumar of Value Research.