Unlocking substantial tax savings, even under India’s New Tax Regime, is more achievable than many salaried professionals realize. A real-world example demonstrates how a strategic approach can lead to significant tax relief without impacting your take-home pay.
Rs 3.75 Lakh Tax Savings for a Rs 50 Lakh CTC Earner
A tax professional, Sujit Bangar, shared a compelling case study of an individual with a Rs 50 lakh Cost-to-Company (CTC) who managed to slash their tax bill by Rs 3.75 lakh. This remarkable saving was achieved through two simple, yet effective, actions: salary restructuring and smarter investment choices.
The Salary Restructuring “Hack”: Leveraging NPS
The key to the salary-related tax saving lies in optimizing the CTC structure. While the total CTC remained at Rs 50 lakh, the individual’s taxable income saw a notable reduction. This was done by adding an employer contribution of Rs 3.5 lakh annually to the National Pension System (NPS), funded by trimming the “special allowance” component of the salary. Crucially, other benefits like Provident Fund (PF) and House Rent Allowance (HRA) remained untouched.
This strategic tweak brought down the total taxable income from Rs 53.25 lakh to Rs 49.75 lakh. Consequently, the tax payable under the new regime dropped from Rs 13.47 lakh (including surcharge and cess) to just Rs 9.71 lakh, resulting in a direct saving of Rs 3.75 lakh.
The legality of this saving stems from Section 80CCD(2) of the Income Tax Act. This often-overlooked provision allows a deduction for employer contributions to NPS—up to 14% of the employee’s basic salary—even under the new tax regime. It creates a powerful avenue for tax deductions when the salary structure is intelligently designed.
Smarter Investments: FDs vs. Equity Mutual Funds
The second pillar of this tax-saving strategy involves making more tax-efficient investment choices.
Consider a Rs 1 crore investment:
- Fixed Deposits (FDs): An FD generating Rs 7 lakh in annual interest would be fully taxable at the individual’s slab rate (30% in this case), leading to a tax liability of Rs 2.1 lakh.
- Equity Mutual Funds: The same Rs 1 crore invested in equity mutual funds, yielding Rs 7 lakh in Long-Term Capital Gains (LTCG), would incur significantly less tax. Under Section 112A, LTCG on equity mutual funds is taxed at just 12.5% on gains above Rs 1.25 lakh. This would result in a tax of only Rs 71,875 on the Rs 7 lakh gain—a substantial reduction from the FD’s tax hit.
While the article focuses on the Rs 3.75 lakh saving from salary restructuring, the shift to tax-efficient equity mutual funds offers additional, significant savings on investment returns.
Busting the Myth: New Regime is Tax-Friendly with Smart Planning
This real-world example directly challenges the myth that the new tax regime is inflexible and offers no scope for deductions. It highlights how intelligent financial planning, coupled with knowledge of lesser-used provisions like 80CCD(2), can unlock sizable tax benefits. The new tax regime isn’t a roadblock to savings; it’s a framework that rewards smarter financial decisions and strategic optimization.
New Tax Regime Slabs (FY 2025-26)
For your reference, here are the income tax slab rates under the New Tax Regime for FY 2025-26:
- Up to Rs 4 lakh: NIL
- Rs 4 lakh – Rs 8 lakh: 5%
- Rs 8 lakh – Rs 12 lakh: 10%
- Rs 12 lakh – Rs 16 lakh: 15%
- Rs 16 lakh – Rs 20 lakh: 20%
- Rs 20 lakh – Rs 24 lakh: 25%
- Above Rs 24 lakh: 30%
Remember, a standard deduction of Rs 75,000 applies to salaried individuals, and a rebate under Section 87A up to Rs 60,000 means income up to Rs 12 lakh (or Rs 12.75 lakh for salaried individuals including the standard deduction) is tax-free.
Are you re-evaluating your approach to tax planning under the New Tax Regime based on this information?