The Income Tax Department has set certain rules for taxpayers across the country. In the Union Budget 2025–26, the Ministry of Finance increased the Income Tax Deduction Limit to ₹12 lakh. However, under the new tax structure, individuals earning up to ₹19 lakh per year will now not have to pay any income tax. Let’s understand the complete calculation behind this.
Budget 2025–26 Implementation
The Union Budget 2025–26 was presented on 1 February 2025, and its provisions came into effect from 1 April 2025. In this budget, the central government made income up to ₹12 lakh tax-free. But due to certain deductions and exemptions, even individuals earning up to ₹19 lakh annually can avoid paying any tax at all — leading to substantial savings.
Annual Savings on Income Tax
Every year, taxpayers can choose between two systems when filing their Income Tax Returns (ITR):
- Old Tax Regime
-
New Tax Regime
Government’s Objective
The central government aims to encourage more taxpayers to opt for the New Tax Regime. For this reason, income up to ₹12 lakh per year has been made tax-free under this regime. Additionally, a Standard Deduction of ₹75,000 has also been introduced.
Income Level Exempt from Tax
If your annual income or salary is ₹12.75 lakh, you will not have to pay any income tax.
Previously, under the New Tax Regime, income up to ₹7 lakh was tax-free.
The New Tax Regime has been implemented starting from 1 April 2025, as announced by Finance Minister Nirmala Sitharaman in the Union Budget.
Investment in NPS for Extra Benefits
If your annual income is around ₹19.20 lakh, you can still avoid paying tax by investing in the National Pension System (NPS).
By investing in NPS, your taxable income decreases, and you can enjoy complete tax exemption. This means that with smart planning, you can save tax on income up to ₹19.20 lakh.
Adjusting Your Salary Structure
If your annual CTC (Cost to Company) is ₹19,20,000, your entire salary won’t be paid as in-hand income. The breakup may look like this:
- Basic Pay : ₹6,00,000
- Personal Allowance : ₹5,50,000
- PF Contribution : ₹21,600
- Gratuity : ₹28,800
- Variable Pay : ₹96,000
-
Flexi Pay (Tax-Free Components) : ₹6,23,600
Hence, the total CTC = ₹19,20,000.
Standard Deduction of ₹75,000
Under the New Tax Regime, the government offers a standard deduction of ₹75,000.
So, from your total CTC of ₹19.20 lakh, after subtracting ₹75,000, your taxable income becomes ₹18,45,000.
Benefit from NPS Investment
If you opt for the National Pension System (NPS), you are eligible for a 14% deduction on your basic salary under the new tax regime.
For a basic pay of ₹6 lakh, 14% equals ₹84,000.
After subtracting this from ₹18,45,000, your taxable income becomes ₹17,61,000.
Additional Tax-Free Components
Under the salary structure, several flexi pay components are tax-free. Based on this example, these may include:
- Conveyance Allowance : ₹2,85,600
- Books & Magazine Allowance : ₹1,08,000
- Entertainment Allowance : ₹2,40,000
-
Uniform Allowance : ₹90,000
In total, these tax-free components amount to ₹6,23,600.
Now, subtracting this from ₹17,61,000 leaves ₹11,37,400 as taxable income.
Final Tax Calculation
Since the government has made income up to ₹12 lakh tax-free under the New Tax Regime, the person earning ₹19.20 lakh annually will not have to pay any income tax after applying all eligible deductions and exemptions.