The implementation of is set to change how salaries are structured, with potential implications for employees’ tax outgo. Earlier, compensation packages typically included allowances such as house rent allowance (HRA), leave travel allowance (LTA), meal vouchers, and reimbursements that were either partially or fully exempt from income tax.
However, under the revised framework, the introduction of the 50% rule makes it mandatory that basic pay, dearness allowance, and retaining allowance together account for at least half of the total cost to the company (CTC). This effectively reduces the scope of allowances, increasing the taxable portion of salary, according to experts.
As a result, salaried employees who earlier relied heavily on allowances for tax planning may witness a higher tax burden, even if their overall compensation remains unchanged. Here is how your tax liability may change.
Tax-saving benefits from allowances may reduce
Since the new labour codes require basic pay, DA, and retaining allowance to make up at least 50% of total CTC, they are set to dismantle earlier salary structures where allowances could form 70-80% of compensation to optimise tax, said Shreya Sharma, Founder & CEO of Rest The Case.
“If allowances exceed the prescribed limit, the excess is treated as wages. Since most organisations currently keep basic pay below 40% of CTC, this change will require large-scale restructuring across industries,” she said.
Though HRA benefits will continue to be available under the old tax regime, as basic pay rises under the new labour codes, the relative tax-saving benefit from HRA may reduce. LTA also remains exempt for domestic travel, but only if you opt for the old tax regime.
Meanwhile, have witnessed a positive change, with the tax-free limit increased to ₹200 per meal and now available under both regimes. “Reimbursements, however, are constrained due to the overall cap on allowances,” she noted.
How will this impact take-home salary and tax liability?
According to Dinkar Sharma, Company Secretary and Partner at Jotwani Associates, the immediate impact on take-home salary and taxability will be as follows:
- Higher taxable income: This will be basically due to increased basic pay under the revised structure.
- Higher EPF contributions: Both employee and employer contributions will increase, reducing take-home salary as a larger portion of salary will be deducted and deposited into the EPF.
- Lower net in-hand salary: Particularly for mid and senior-level employees, as a greater portion of salary will be deducted.
“While EPF increases long-term savings, in the short term, employees will feel a cash flow squeeze along with a higher tax outgo,” he said.
Who is likely to be impacted the most?
The revised salary structure will hit mid- to senior-level salaried employees the hardest, especially those earning between ₹10 lakh and ₹50 lakh annually. “These employees are likely to see the most impact, particularly in sectors such as IT, BFSI and consulting,” said Shreya Sharma.
“Employees in metro cities who rely heavily on exemptions like HRA, Section 80C and NPS may continue to benefit from the old regime, but the overall advantage is expected to reduce,” she added.
Does this make the new tax regime more attractive?
At a prima facie level, it appears that the government wants taxpayers to adopt the new tax regime at the earliest, and hence it would have been appropriate to assume so, said S R Patnaik, Partner at Cyril Amarchand Mangaldas.
“However, the benefits available as per Income Tax Rules, 2026 has provided certain conflicting signals. If the objective was to encourage all employees to follow new tax regime, there was no need to significantly enhance the tax benefits in respect of various facilities and allowances provided by the employer,” he said, adding that an analysis will have to be carried under both the regimes before deciding on whether to shift to the new tax regime or stay with the old tax regime.
Meanwhile, Dinkar Sharma also said that the shift strengthens the case for the new tax regime, especially since the old regime relies heavily on exemptions and deductions, and the new regime offers lower slab rates but minimal deductions.
“With reduced scope for exemptions under the new wage structure, the relative advantage of the old regime diminishes, making the new regime more competitive and often preferable—especially for younger professionals,” he said.
What are the best ways to reduce taxable income now?
With reduced flexibility in allowances, focus shifts to statutory and investment-based deductions, Dinkar Sharma said. Here are some of the options:
- Section 80C: EPF, PPF, ELSS, life insurance
- Section 80D: Health insurance premium
- NPS [Section 80CCD(1B)]: Additional ₹50,000 deduction
- Home loan interest (Section 24)
- Standard deduction ( ₹50,000 continues)
“However, the employees should evaluate the new vs the old regime annually, since the majority of deductions are not available under the new regime,” he said.