Income Tax on 40 Lakh Salary

Understanding income tax implications for a salary of Rs. 40 lakh under the new tax regime for 2025-26 can be daunting. With evolving tax policies, it is crucial to stay informed to optimise your tax liability effectively. The new regime offers simplified slabs and reduced complexities, making it an attractive option for many taxpayers.

Let's break down the tax implications for a Rs. 40 lakh salary under the new regime, compare it with the old regime, and provide actionable insights on how to save taxes efficiently.

What is the Budget 2025 update on the income tax?

The Union Budget 2025 introduced several changes to the income tax structure, focusing on simplifying tax calculations and offering benefits to taxpayers who opt for the new regime. Here are the key updates:

• Simplified tax slabs: 

The new regime continues with its streamlined tax slabs, eliminating exemptions and deductions to simplify compliance.

• Standard deduction: 

For salaried individuals, a standard deduction of Rs. 50,000 has been retained under the new regime.

• Reduced surcharge for high-income earners: 

The surcharge for individuals earning over Rs. 5 crore has been reduced from 37% to 25%, making the new regime more appealing for high-income earners.

• Focus on voluntary compliance: 

The government aims to promote voluntary compliance by reducing complexities and broadening the tax base.

These updates make the new regime particularly beneficial for individuals earning Rs. 40 lakh, especially if they do not have significant deductions to claim.

While the new regime introduces simplified slabs, certain aspects of the old regime remain unchanged:

• Exemptions and deductions: 

The old regime still allows taxpayers to claim exemptions and deductions under sections like 80C, 80D, and 24(b).

• Higher tax rates for high-income earners: 

The old regime continues to impose higher tax rates for individuals earning above Rs. 10 lakh, along with surcharges for incomes exceeding Rs. 50 lakh and Rs. 1 crore.

• Complex calculations: 

Taxpayers opting for the old regime need to account for multiple deductions and exemptions, which can complicate tax planning.

For a salary of Rs. 40 lakh, the decision to choose between the old and new regime depends on the availability of deductions and exemptions.

Key budget highlights for high-income earners

The Budget 2025 introduced several measures impacting high-income earners. Here is a summary of the most relevant points:

• Reduced surcharge: 

As mentioned earlier, the reduction in surcharge for incomes above Rs. 5 crore is a significant relief for high-income earners.

• No exemptions in new regime: 

The new regime continues to disallow exemptions and deductions, making it ideal for taxpayers who prefer simplified compliance.

• Standard deduction retained: 

Salaried individuals can still claim the Rs. 50,000 standard deduction under the new regime.

Example:

For a salary of Rs. 40 lakh under the new regime, the tax liability is calculated based on the applicable tax slabs without exemptions. In contrast, the old regime allows deductions under sections like 80C (up to Rs. 1.5 lakh) and 80D (up to Rs. 25,000), which can significantly reduce taxable income.

Tax-saving strategies are crucial for individuals earning Rs. 40 lakh or more. Here are some actionable tips:

1. Opt for the right tax regime:

Evaluate your eligibility for deductions and exemptions under the old regime. If you cannot claim substantial deductions, the new regime may be more beneficial.

2. Invest in tax-saving instruments:

Consider investments that offer tax benefits under the old regime, such as:

• Public Provident Fund (PPF): Offers tax-free returns and deductions under Section 80C.
• Unit Linked Insurance Plans (ULIPs): ULIP combines investment and insurance benefits with tax exemptions.
• National Pension System (NPS): Provides additional deductions under Section 80CCD(1B).

3. Health insurance premiums:

Claim deductions for health insurance premiums paid for yourself and your family under Section 80D.

4. Home loan benefits:

If you have a home loan, claim deductions on principal repayment under Section 80C and interest payment under Section 24(b).

5. Charitable donations:

Donations to eligible organisations can be claimed as deductions under Section 80G.

Income tax slabs under old vs. new income tax regime

Understanding the difference between the old and new tax regimes is key to making an informed decision. Below is a comparison table for income tax slabs applicable to a Rs. 40 lakh salary:

Key takeaway:

The new regime offers lower tax rates but does not allow exemptions and deductions. For individuals earning Rs. 40 lakh, the new regime is advantageous if deductions under the old regime are minimal.

Tax optimisation requires careful planning. Here are some tools and strategies tailored for a Rs. 40 lakh salary:

1. Use tax calculators:

Online calculators can help you compare tax liabilities under the old and new regimes.

2. Invest in life insurance:

Premiums paid for life insurance policies are eligible for deductions under Section 80C.

3. Diversify investments:

Explore options like Equity-Linked Savings Schemes (ELSS) and NPS to maximise tax savings.

4. Utilise employer benefits:

Check if your employer offers tax-saving components like Leave Travel Allowance (LTA) or House Rent Allowance (HRA).

Conclusion

Choosing the right tax regime and planning your taxes effectively is essential for individuals earning Rs. 40 lakh. The new regime, with its simplified slabs, is often advantageous for taxpayers who do not have significant deductions to claim. However, the old regime remains beneficial for those who can leverage exemptions and deductions.

By understanding the nuances of both regimes and utilising tax-saving instruments, you can optimise your tax liability and retain more of your hard-earned income.