How to save tax by claiming standard and NPS deductions

Income taxpayers in India face a choice between two tax systems while filing their returns, one providing exemptions and deductions, and the other, known as the new tax structure, which limits these benefits. Recent efforts have been made to provide exemption on annual income up to Rs 7 lakh to individuals adopting the new income tax regime. Salaried employees who opt for this system can still avail certain deductions.

Under the new tax system, income taxpayers can benefit from two major deductions – a standard deduction and a deduction for employer’s NPS (National Pension System) payments. Availing of these deductions can significantly reduce the tax liability for individuals, with the possibility of eliminating income tax for some if their annual income is Rs 8 lakh.

The standard deduction allows employed individuals a tax deduction of up to Rs 50,000, while family pensioners get a deduction of Rs 15,000. For example, if a salaried individual has an annual income of Rs 8 lakh and they avail the full standard deduction of Rs 50,000, the tax calculation will be based on Rs 7,50,000 instead of the entire Rs 8 lakh. Notably, there is no need to submit any additional documents to claim this deduction.

Another way of deduction under the new tax system is related to the amount deposited in the National Pension System (NPS). Employed individuals can benefit from standard deduction on NPS deposits, provided certain conditions are fulfilled. The employer must deposit this amount in the employee’s Tier-1 NPS account, and for those in the private sector this amount should not exceed 10% of the employee’s salary (14% for government employees). This deduction comes under Section 80CCD (2) of the Income Tax Act. This is shown in Part B of Form 16.

By combining these two deductions, a salaried individual earning Rs 8 lakh annually can potentially make his income tax-free. After deducting the standard deduction of Rs 50,000, the taxable income comes to Rs 7.5 lakh. If the employer deposits another Rs 50,000 in the employee’s Tier-1 NPS account, the taxable income reduces to Rs 7 lakh, allowing them to enjoy tax-free status under the new tax system.