Just Got a Salary Hike? Talk to a TaxBuddy Advisor
- Nimisha Panda
- Aug 25
- 9 min read
Updated: Aug 25
A salary hike can bring much-needed financial relief, but it can also lead to a shift in your tax liabilities. While an increase in income is always a welcome change, it also means you may move to a higher income tax slab, potentially facing higher tax deductions. Let us explore how a salary hike can affect your tax liabilities, and provide an in-depth analysis of the revised income tax slabs for FY 2025-26. We’ll also evaluate whether the new tax regime might be a better option after a salary hike and explore key tax benefits for salaried individuals. Finally, we’ll guide you through how you can leverage certain tax-saving provisions like NPS and Section 87A, and avoid common mistakes when filing your tax returns. With TaxBuddy’s assistance, you can easily navigate the complexities of tax filing after a salary hike, ensuring you optimize your tax savings.
Table of Contents
How a Salary Hike Affects Your Tax Liabilities
When you receive a salary hike, your taxable income increases, which could potentially push you into a higher income tax bracket. The Indian income tax system is progressive, meaning the more you earn, the higher your tax rate. This increase in your taxable income could mean more deductions from your paycheck towards income tax, leading to a reduction in your take-home salary.
For instance, if your annual salary exceeds ₹5 lakh, you could find yourself paying a higher tax rate under both the old and new tax regimes. Additionally, a salary hike may make you ineligible for some exemptions or deductions that you previously claimed, which could result in a higher overall tax liability. Therefore, it’s essential to reassess your tax situation after a salary hike and make necessary adjustments to your tax-saving investments.
Understanding the Revised Income Tax Slabs for FY 2025-26
For FY 2024-25 (AY 2025-26) under the new tax regime:
Income Range (₹) | Tax Rate |
Upto 3,00,000 | Nil |
3,00,001 to 7,00,000 | 5% |
7,00,001 to 10,00,000 | 10% |
10,00,001 to 12,00,000 | 15% |
12,00,001 to 15,00,000 | 20% |
Above 15,00,000 | 30% |
For FY 2025-26 (AY 2026-27), the new tax regime slabs are revised to:
Income Range (₹) | Tax Rate |
Up to 4,00,000 | Nil |
4,00,001 to 8,00,000 | 5% |
8,00,001 to 12,00,000 | 10% |
12,00,001 to 16,00,000 | 15% |
16,00,001 to 20,00,000 | 20% |
20,00,001 to 24,00,000 | 25% |
Above 24,00,000 | 30% |
The old tax regime slabs for these years remain unchanged with the standard deductions and exemptions applicable.
Is the New Tax Regime the Best Option After Your Salary Hike?
When deciding between the old and new tax regimes after a salary hike, it's essential to evaluate the impact of your new salary on both tax options. The new tax regime offers lower tax rates but eliminates exemptions and deductions that are available under the old regime.
For individuals with a substantial salary hike, the new tax regime could be more beneficial if they do not rely heavily on exemptions like HRA or deductions under Section 80C (for investments). However, if you have significant deductions, such as home loan interest or NPS contributions, the old regime may be more advantageous despite the higher tax rates.
A comprehensive tax analysis, considering your new salary, deductions, and exemptions, will help you decide which regime minimizes your tax liability.
Key Tax Benefits for Salaried Individuals Post-Hike
After a salary hike, it's important to maximize your tax savings. Here are some key benefits you can take advantage of:
House Rent Allowance (HRA): If you're paying rent, HRA can help reduce your taxable income under the old tax regime.
NPS (National Pension Scheme): Contributing to NPS can lower your taxable income by up to ₹50,000 under Section 80CCD(1B).
Tax-saving Investments under Section 80C: Investments in PPF, EPF, NSC, and life insurance premiums can help you save taxes by reducing your taxable income up to ₹1.5 lakh.
Health Insurance under Section 80D: You can also claim deductions for premiums paid on health insurance under Section 80D.
By utilizing these benefits, you can significantly reduce your tax burden after a salary hike.
How to Leverage NPS and Section 87A Rebate After a Salary Hike
National Pension Scheme (NPS): After a salary hike, contributing to NPS can provide additional tax benefits under Section 80CCD(1B), which offers a deduction of up to ₹50,000. This is in addition to the ₹1.5 lakh limit under Section 80C. NPS contributions help in saving tax while building retirement funds.
Section 87A Rebate:
For FY 2024-25 (old regime), rebate of ₹12,500 if total taxable income is up to ₹5 lakh.
For FY 2024-25 (new regime), rebate increased to ₹25,000 for income up to ₹7 lakh.
For FY 2025-26, rebate under Section 87A is significantly enhanced up to ₹60,000 for taxpayers with income up to ₹12 lakh under the new tax regime, meaning no tax liability up to this limit.
Common Tax Filing Mistakes After a Salary Hike
When your salary increases, you may overlook some essential aspects during tax filing. Here are some common mistakes:
Overlooking the Impact of HRA: If your salary hike includes a higher HRA component, ensure that you account for the correct exemption.
Failure to Update Form 16: After a salary hike, your Form 16 may be updated, but it’s important to ensure that the correct details are reflected in your ITR filing.
Not Recalculating Deductions: With a salary hike, you may be eligible for higher tax-saving options, so make sure to revisit your Section 80C and NPS contributions.
By avoiding these mistakes, you ensure your return is accurate, helping you maximize tax savings.
How to File Your Tax Return Efficiently with TaxBuddy’s Help
Filing your tax return after a salary hike can be overwhelming, especially with the changes in your income and deductions. TaxBuddy simplifies the process with its AI-powered platform, offering both self-filing and expert-assisted plans. The platform helps you accurately calculate your tax liabilities, optimize deductions, and file your return seamlessly. With TaxBuddy’s assistance, you can ensure that you’re compliant with tax laws and minimize any chances of error, making the process hassle-free.
Conclusion
A salary hike can affect your tax liabilities in various ways, from pushing you to a higher income tax slab to making you eligible for additional tax-saving options. By understanding the revised tax slabs, leveraging available tax benefits like HRA, NPS, and Section 87A, and avoiding common filing mistakes, you can optimize your tax position. With TaxBuddy’s AI-powered platform, you can navigate these complexities effortlessly and file your returns with confidence. It’s important to make the right decisions post-hike to ensure maximum tax savings while staying compliant with the law. For a simplified, secure, and hassle-free experience, it is highly recommended to download theTaxBuddy mobile app.
FAQs
Q1: Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy provides both self-filing and expert-assisted plans, giving you flexibility based on your level of comfort with the tax filing process. Self-filing is ideal for those who are familiar with the ITR process and want to file their returns independently using the platform’s intuitive tools. Expert-assisted plans are for taxpayers who want professional help to ensure their returns are accurate and compliant. Whether you prefer to do it yourself or seek expert guidance, TaxBuddy caters to both needs.
Q2: Which is the best site to file ITR?
The best site for ITR filing depends on your preferences and needs. TaxBuddy is a great option for most taxpayers as it offers an easy-to-use platform with AI-driven tools, self-filing options, and professional assistance. It simplifies the tax filing process and ensures accuracy, offering peace of mind to its users. The official Income Tax Department portal is also a valid choice but may be more complex and less user-friendly, especially for those who need help navigating the tax forms.
Q3: How can I save taxes after a salary hike?
After a salary hike, you can maximize your tax savings by utilizing various exemptions, deductions, and investment options. Consider claiming HRA (House Rent Allowance) if applicable, contributing to the NPS (National Pension Scheme) for additional deductions, investing under Section 80C (e.g., PPF, ELSS, Life Insurance Premiums), and paying for health insurance premiums under Section 80D. These strategies will help reduce your taxable income and minimize your tax liability after a salary increase.
Q4: Should I switch to the new tax regime after a salary hike?
The decision to switch to the new tax regime after a salary hike depends on the number of exemptions and deductions you currently claim. The new regime offers lower tax rates but removes most exemptions and deductions, including HRA, NPS contributions, and deductions under Section 80C. If you have significant exemptions or deductions, sticking to the old tax regime might be more beneficial. You should calculate the tax payable under both regimes to make an informed choice.
Q5: Can I claim both HRA and NPS deductions after a salary hike?
Yes, you can claim both HRA (House Rent Allowance) and NPS (National Pension Scheme) deductions after a salary hike. HRA can be claimed under Section 10, which provides tax benefits if you live in a rented accommodation. On the other hand, NPS contributions are eligible for additional deductions under Section 80CCD(1B), allowing you to claim up to ₹50,000 over and above the ₹1.5 lakh limit under Section 80C. These deductions can be used simultaneously to reduce your overall tax liability.
Q6: How do I file my tax return efficiently after a salary hike?
Filing your tax return after a salary hike can be efficient with the right tools. TaxBuddy helps streamline the process by allowing you to calculate your tax liabilities accurately, optimize deductions, and file your return on time. The platform automatically updates based on your revised salary structure, ensuring that all the necessary changes are reflected in your return. Additionally, you can opt for expert assistance if you need further help in managing your filing efficiently.
Q7: What are the common mistakes to avoid after a salary hike?
After a salary hike, taxpayers often make mistakes that can lead to incorrect filings. Common errors include not updating the HRA component in your tax calculations, failing to adjust your deductions based on the new salary structure, and neglecting to update Form 16 from your employer. It’s crucial to ensure that all the new figures are incorporated correctly into your ITR to avoid discrepancies and penalties. Platforms like TaxBuddy help reduce such mistakes by guiding you through the process and ensuring accuracy.
Q8: How does my salary hike affect my tax slab?
A salary hike can move you into a higher income tax bracket, potentially increasing your tax liability. In the tax system, higher income levels are taxed at higher rates, so an increase in salary may push you into the next tax slab. After a salary hike, it’s essential to reassess your tax situation and explore available exemptions and deductions to minimize the impact. Planning ahead, such as contributing to NPS or utilizing HRA, can help offset the additional tax burden.
Q9: How does NPS help reduce tax liabilities
NPS (National Pension Scheme) is an excellent way to reduce your tax liabilities. Under Section 80CCD(1B), contributions to NPS qualify for an additional deduction of up to ₹50,000, over and above the ₹1.5 lakh limit under Section 80C. This deduction is available even if you have already maxed out your Section 80C limit. NPS contributions help reduce your taxable income, which lowers your overall tax liability. Additionally, NPS also provides long-term financial security for your retirement.
Q10: Can I file a revised return after a salary hike?
Yes, you can file a revised return if you realize there were errors or missed deductions after your initial filing, even after a salary hike. If, for example, you did not account for the higher salary or missed out on claiming additional deductions, you can correct this by filing a revised return before the end of the assessment year. This process ensures that your return is accurate and prevents penalties.
Q11: Can I claim a rebate under Section 87A after a salary hike
Yes, you can still claim a rebate under Section 87A if your total taxable income is below the specified threshold after your salary hike. For FY 2024-25, the rebate under Section 87A provides a tax reduction of up to ₹12,500 if your taxable income is up to ₹5 lakh under the old tax regime, and up to ₹25,000 for income up to ₹7 lakh under the new tax regime. For FY 2025-26, the rebate has been enhanced significantly under the new regime, allowing a rebate of up to ₹60,000 for taxpayers with income up to ₹12 lakh. Therefore, after a salary increase, it is important to assess your total taxable income and tax regime to determine your eligibility for this rebate.
Q12: How can TaxBuddy help me with tax filing after a salary hike?
TaxBuddy helps simplify the tax filing process after a salary hike by offering both self-filing and expert-assisted options. The platform ensures that all salary-related changes are reflected in your return, calculates your tax liabilities accurately, and helps you maximize available deductions like HRA, NPS, and others. TaxBuddy’s tools guide you through every step, whether you prefer to file independently or need assistance from a tax expert. This helps ensure that your return is filed correctly, reducing the risk of penalties and delays.
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