The recent budget announcement by Finance Minister Nirmala Sitharaman has brought significant relief to the middle class, allowing individuals to have zero tax liability on taxable income up to ₹12 lakh. However, through strategic investments and reimbursements, it is possible to extend this benefit to a salary of ₹16.5 lakh. Let’s delve into how this works and what calculations are involved.
Understanding the New Tax Regime and Taxable Salary
Under the new tax regime, individuals can optimize their salary structure to minimize taxable income. While the basic exemption limit remains the same, strategic use of deductions, allowances, and reimbursements can effectively bring the tax liability to zero.
How to Reduce Taxable Salary with Allowances and Reimbursements
1. Optimize Leave Travel Allowance (LTA)
Leave Travel Allowance (LTA) helps employees claim tax exemptions on travel expenses incurred while on leave. The key points include:
- Employees can avail LTA twice in a block of four years.
- Covers only domestic travel expenses.
- Typically constitutes 10% of basic salary.
- If the total salary is ₹16.5 lakh, the basic salary is around ₹8.25 lakh.
- This allows an LTA exemption of ₹82,500, reducing taxable income.
2. Leverage Conveyance Reimbursement
Many companies provide a conveyance reimbursement allowance to cover employees’ travel expenses:
- Employees can receive reimbursements up to ₹1.5 lakh annually, exempt from tax.
- If not included in the salary structure, employees can request it to be included.
3. Internet and Telephone Bill Reimbursement
Employers often provide reimbursements for internet and telephone bills as they are necessary for professional use:
- Monthly reimbursements up to ₹1,000, totaling ₹12,000 annually, are non-taxable.
- If an employer provides higher reimbursements, tax-free benefits increase accordingly.
4. Food and Entertainment Reimbursement
Instead of food coupons, companies now offer reimbursement based on actual bills submitted:
- Employees can claim up to ₹2,000 per month, totaling ₹24,000 annually.
- This further lowers the taxable salary component.
5. Other Reimbursements: Uniform, Fuel, and Books
Certain employers provide reimbursements for work-related expenses, including:
- Uniform allowance, fuel reimbursement, and books or magazine allowances.
- If structured well, this can add up to ₹3,000 per month, leading to ₹36,000 annually in tax-free income.
Maximizing Tax Deductions Under the New Tax Regime
1. Standard Deduction of ₹75,000
Every salaried individual is entitled to a standard deduction of ₹75,000 without any conditions.
2. National Pension System (NPS) Employer Contribution
Under Section 80CCD(2), employer contributions to NPS can be claimed as a deduction:
- 14% of basic salary for government employees.
- 10% of basic salary for private sector employees.
- If basic salary is ₹8.25 lakh, an NPS contribution of ₹1,15,500 can be claimed for tax exemption.
Final Tax Calculation for ₹16.5 Lakh Salary
Step 1: Subtract Reimbursements
| Allowance Type | Amount (₹) |
|---|---|
| Leave Travel Allowance (LTA) | 41,250 |
| Conveyance Reimbursement | 1,50,000 |
| Internet Bill Reimbursement | 12,000 |
| Food & Entertainment Reimbursement | 24,000 |
| Other Reimbursements | 36,000 |
| Total Reimbursements | 2,22,000 |
After deducting reimbursements, taxable salary reduces from ₹16.5 lakh to ₹14,28,000.
Step 2: Apply Tax Deductions
| Deduction Type | Amount (₹) |
| Standard Deduction | 75,000 |
| NPS Employer Contribution | 1,15,500 |
| Total Deductions | 1,90,500 |
After applying these deductions, taxable salary further reduces to ₹12,37,500.
Step 3: Apply LTA Exemption
As LTA exemption can be availed twice in four years, the yearly average comes to ₹41,250, further reducing taxable salary to ₹11,96,250.
Step 4: Final Taxable Salary and Tax Liability
Since the new tax regime provides zero tax for income up to ₹12 lakh, this effectively brings down the tax liability to zero.
Conclusion: How to Achieve Zero Tax on ₹16.5 Lakh Salary
By optimizing salary components strategically, individuals can effectively eliminate tax liability on a salary of ₹16.5 lakh per annum. The key takeaways include:
- Utilize all available reimbursements provided by the employer.
- Ensure maximum contributions to NPS for tax exemption.
- Claim LTA exemption as per eligibility.
- Leverage standard deduction and other allowances effectively.
By restructuring the salary package with these elements, salaried individuals can significantly reduce their tax burden to zero while maximizing their take-home income.
