Salary Structuring Check: HRA, NPS and the Regime Choice
Ms. Kavya Menon is Senior Vice President (a non-government employee) of a private company in Mumbai. For FY 2024-25 her employer paid basic salary ₹9,60,000, dearness allowance ₹2,40,000 (entirely forming part of salary for retirement benefits), house rent allowance ₹3,60,000 and special allowance ₹2,40,000. She paid rent of ₹25,000 per month for her Mumbai flat, and professional tax of ₹2,500 was deducted by the employer. The company contributed ₹1,68,000 to her National Pension System account, being exactly 14% of basic plus DA. She invested ₹1,50,000 in PPF and paid a mediclaim premium of ₹25,000 for her parents, both senior citizens and dependent on her. She has no business income. The employer deducted TDS on the assumption that she would continue in the old regime, as she did last year. She now asks you, before she files her return for AY 2025-26, whether that assumption was correct.
1. Compute her total income and tax liability under both the old regime and the default regime under section 115BAC, showing every adjustment.
Read the worked answer
Common figures: Salary for HRA and NPS purposes = basic + DA forming part = ₹12,00,000.
OLD REGIME
- Gross salary: 9,60,000 + 2,40,000 + 3,60,000 + 2,40,000 = 18,00,000
- Add: employer NPS contribution in excess of 10% of salary (1,68,000 – 1,20,000) taxable under section 17(2)(vii) = 48,000 → 18,48,000
- Less standard deduction 50,000 → 17,98,000
- Less professional tax (16(iii)) 2,500 → 17,95,500
- Less HRA exemption (24(b)? no – section 10(13A)): least of ₹3,60,000; rent 3,00,000 – 10% of 12,00,000 = 1,80,000; 50% of 12,00,000 = 6,00,000 → 1,80,000 → 16,15,500
- Less 80C 1,50,000 + 80D 25,000 + 80CCD(2) 1,20,000 = 2,95,000
- Total income = ₹13,20,500
- Tax: 12,500 + 1,00,000 + 30% of 3,20,500 (96,150) = 2,08,650 + 4% cess 8,346 = ₹2,16,996
DEFAULT REGIME (115BAC)
- Gross salary 18,00,000 (HRA exemption, professional tax and standard deduction of 50,000 go); the full NPS contribution of 1,68,000 is within the 14% limit, so no addition
- Less standard deduction 75,000 → 17,25,000
- Less 80CCD(2) 1,68,000 (14% of 12,00,000) → Total income = ₹15,57,000
- Tax: 20,000 + 30,000 + 30,000 + 60,000 + 30% of 57,000 (17,100) = 1,57,100 + cess 6,284 = ₹1,63,384
2. Advise which regime she should opt for, quantify the saving, and state the procedural steps she must take, including any consequence of the employer's TDS assumption.
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Recommendation: Opt for the default regime under section 115BAC. Tax under the default regime is ₹1,63,384 against ₹2,16,996 under the old regime – a saving of ₹53,612.
Why the intuition fails: The old regime looks attractive because of HRA, professional tax and Chapter VI-A deductions, but the arithmetic shows otherwise. The forfeited benefits are modest (HRA ₹1,80,000, professional tax ₹2,500), while the default regime gives a larger standard deduction (₹75,000 against ₹50,000) and, critically, allows the employer's NPS contribution up to 14% of salary (₹1,68,000) instead of 10% (₹1,20,000). In the old regime the ₹48,000 excess is itself taxed as a perquisite, so the gap widens on both sides.
Procedure:
- She has no business or professional income, so she is not locked in. She may choose the regime afresh in each year's return; Form 10-IEA is not required (it is needed only to opt out of 115BAC where business income exists, or to re-enter the old regime).
- She should intimate the employer now so that TDS for FY 2025-26 is correctly computed; the employer's current assumption has produced excess TDS for FY 2024-25.
- Any shortfall or excess is settled in the return; if tax remains payable after TDS, interest under sections 234B/234C may apply and must be discharged with the return under section 140A.
- She must retain rent receipts and the NPS contribution record, since the 14% ceiling is tested on basic plus DA forming part of salary.
3. Assume she instead resigns in October 2024 and receives, in March 2025, salary arrears of ₹2,40,000 relating to FY 2022-23 and FY 2023-24. What relief is available and what must she do to claim it?
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Relief under section 89 read with Rule 21A. Arrears of salary are taxed in the year of receipt, but she may claim relief for the extra tax caused by the arrears being clubbed in FY 2024-25.
Mechanics:
- Compute tax on total income including arrears for FY 2024-25.
- Compute tax on total income excluding arrears for FY 2024-25.
- For each of the years to which the arrears relate (FY 2022-23 and FY 2023-24), compute the tax on that year's total income including the arrears pertaining to that year, and the tax excluding them, using that year's rates and that year's regime choice.
- Relief = excess of (2) over (1) attributable to the arrears, i.e. the aggregate of the step-3 differences, subject to the ceiling that relief cannot exceed the step-3 excess.
Procedural condition: She must file Form 10E electronically before filing the return of income for AY 2025-26. If Form 10E is not filed, the relief will be denied even though the computation is correct, and the CPC will raise a demand.
Caution on regime: The comparison for the earlier years must use the regime actually applicable in those years; because she has no business income she can also choose the default regime for FY 2024-25, which will reduce the tax on the arrears and therefore change the relief figure. The relief is computed on the tax finally payable, so the regime choice and the section 89 claim must be worked out together, not in isolation.