Income Tax Planning: How You Can Pay Zero Tax On Rs 16 Lakh Salary Under New Regime in FY26

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For many salaried individuals, the thought of earning a high income is often accompanied by the worry of hefty tax deductions. However, according to experts, a person with an annual salary of Rs 16 lakh may be able to bring their tax liability down to zero under the new tax regime for FY2025-26. This is possible by using a combination of available deductions, contributions to retirement schemes and employer-linked benefits. Here’s a closer look at how it works.

Understanding the New Tax Slabs for FY26

Before diving into exemptions, it is crucial to know the slab rates that apply from 2025-26 onwards. Under the revised structure, income up to Rs 4 lakh remains tax-free. Earnings between Rs 4 lakh and Rs 8 lakh attract a 5 per cent tax, while income above that is taxed progressively at higher rates. The slab of Rs 12,00,001 to Rs 16,00,000 is charged at 15 per cent. This means that without exemptions, a salary of Rs 16 lakh would result in a sizeable outgo.

Standard Deduction for Salaried Employees

One of the simplest reliefs available is the standard deduction, currently set at Rs 75,000. Applied directly on salary income, this immediately reduces the taxable amount from Rs 16 lakh to Rs 15.25 lakh. While this alone does not significantly cut the tax bill, it sets the stage for further reductions.

Contribution to the National Pension System

Employers’ contributions towards the National Pension System (NPS) can further lower taxable income. Under the new regime, employees can claim up to 14 per cent of their basic pay as tax-free when the contribution comes from the employer. Assuming half of the gross salary (Rs 8 lakh) is the basic pay, the eligible deduction amounts to Rs 1.12 lakh. After this adjustment, the taxable salary drops to about Rs 14.13 lakh.

Tax Relief Through Provident Fund

In addition to NPS, employees benefit from their employer’s contribution to the Employees’ Provident Fund (EPF). This is calculated as 12 per cent of basic pay, which in this scenario works out to Rs 96,000. After including this deduction, the taxable income reduces to around Rs 13.17 lakh.

Additional Savings via Small Schemes

Taxpayers also have the option of using long-term savings instruments such as the Public Provident Fund (PPF) and Sukanya Samriddhi Account. Investing in these schemes under eligible provisions can provide further deductions. For example, putting Rs 1 lakh into Sukanya Samriddhi and Rs 1.5 lakh into PPF could yield a tax saving worth Rs 17,500 in this case, bringing the taxable income closer to Rs 12.99 lakh.

Leveraging Reimbursements and Allowances

According to experts, certain reimbursements made by employers towards official expenses can also be adjusted to lower taxable income. These may include entertainment, fuel, travel and communication allowances, provided they are incurred for professional purposes. If such reimbursements total around Rs 1.5 lakh in a year, the taxable figure falls further to about Rs 11.49 lakh.

Once all the above deductions and exemptions are applied, the revised income stands below Rs 12 lakh. This puts the taxpayer in the lower slab where the effective liability can be brought down to nil under the new regime. While the figures vary depending on salary structure and actual claims, careful planning with employer-linked contributions and government-approved investments can help significantly reduce the tax burden.

Key Takeaways

• Even on a Rs 16 lakh salary, tax liability can potentially fall to zero with structured planning.

Contributions to NPS and EPF play a central role in reducing taxable income.

Additional relief through PPF, Sukanya Samriddhi and official reimbursements adds further savings.

The actual benefit depends on salary structure, eligibility and investments, so professional advice is recommended.

Disclaimer: This article is for information purposes only. Tax planning should always be undertaken after consulting a qualified financial adviser or chartered accountant to ensure compliance with the Income Tax Act and to tailor strategies to your individual financial situation.