How to Pay Zero Tax on ₹18 Lakh Salary Under the New Tax Regime (FY 2025-26)

Short Intro:
Discover how to legally reduce your income tax liability to zero on a ₹18 lakh salary under India's New Tax Regime for FY 2025-26. Learn smart tax planning strategies, salary structuring tips, and more.

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Introduction

The Indian government has introduced significant changes to the tax structure for the Financial Year 2025-26, aiming to simplify the tax system and provide relief to middle-income earners. With the New Tax Regime becoming more attractive due to increased rebate limits and standard deductions, salaried individuals have an opportunity to optimize their tax liabilities effectively.

This article explores how an individual earning ₹18 lakh annually can potentially reduce their tax liability to zero under the New Tax Regime by leveraging available deductions and structuring their salary efficiently.

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Understanding the New Tax Regime for FY 2025-26

Revised Tax Slabs

Under the New Tax Regime for FY 2025-26, the income tax slabs are as follows:

• Up to ₹4,00,000: Nil
• ₹4,00,001 – ₹8,00,000: 5%
• ₹8,00,001 – ₹12,00,000: 10%
• ₹12,00,001 – ₹15,00,000: 15%
• Above ₹15,00,000: 20%

Note: The basic exemption limit has been increased from ₹3 lakh to ₹4 lakh under the new tax regime.

Enhanced Rebate Under Section 87A

The rebate under Section 87A has been increased to ₹60,000 for individuals with taxable income up to ₹12 lakh. This means that if your taxable income does not exceed ₹12 lakh, you can avail a rebate of up to ₹60,000, effectively reducing your tax liability to zero.

Standard Deduction

A standard deduction of ₹75,000 is now available to salaried individuals under the New Tax Regime.

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Strategic Tax Planning for ₹18 Lakh Salary

To reduce your tax liability to zero on a ₹18 lakh salary, consider the following strategies:

1. Standard Deduction

• Amount: ₹75,000
• Taxable Income After Deduction: ₹18,00,000 - ₹75,000 = ₹17,25,000

2. Employer's Contribution to NPS (Section 80CCD(2))

• Assumption: Employer contributes 10% of Basic Salary to NPS
• Basic Salary: Assuming 40% of CTC = ₹7,20,000
• Employer's Contribution: ₹72,000
• Taxable Income After Deduction: ₹17,25,000 - ₹72,000 = ₹16,53,000

3. Home Loan Interest Deduction (Section 24(b))

• Interest Paid: ₹2,00,000
• Taxable Income After Deduction: ₹16,53,000 - ₹2,00,000 = ₹14,53,000

4. Salary Restructuring for Tax-Free Allowances

Incorporate the following components into your salary structure:

• Food Coupons: ₹36,000
• Mobile/Internet Reimbursement: ₹24,000
• Work-from-Home Allowance: ₹50,000
• Total: ₹1,10,000
• Taxable Income After Deduction: ₹14,53,000 - ₹1,10,000 = ₹13,43,000

5. Voluntary NPS Contribution (Section 80CCD(1B))

• Contribution: ₹50,000
• Taxable Income After Deduction: ₹13,43,000 - ₹50,000 = ₹12,93,000

6. Additional Allowances and Perks

Consider including the following:

• Leave Travel Allowance (LTA): ₹50,000
• Taxable Income After Deduction: ₹12,93,000 - ₹50,000 = ₹12,43,000

7. Marginal Relief

If your taxable income slightly exceeds ₹12 lakh, marginal relief ensures that the additional tax payable does not exceed the amount by which the income exceeds ₹12 lakh. This provision prevents a sudden spike in tax liability for marginal increases in income.

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Final Tax Computation

• Gross Salary: ₹18,00,000
• Total Deductions:
  • Standard Deduction: ₹75,000
  • Employer's NPS Contribution: ₹72,000
  • Home Loan Interest: ₹2,00,000
  • Tax-Free Allowances: ₹1,10,000
  • Voluntary NPS Contribution: ₹50,000
  • LTA: ₹50,000
• Total Deductions: ₹5,57,000
• Taxable Income: ₹18,00,000 - ₹5,57,000 = ₹12,43,000

After applying marginal relief, the effective tax liability can be reduced to zero.

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Conclusion

With strategic planning and efficient salary structuring, it's possible to reduce your tax liability to zero on a ₹18 lakh salary under the New Tax Regime for FY 2025-26. Key steps include maximizing deductions through NPS contributions, home loan interest, and tax-free allowances. Always consult with a tax professional to tailor these strategies to your specific financial situation.

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Note: The information provided is based on current tax laws as of April 2025 and is subject to change. Always consult with a tax professional for personalized advice.