With the start of the fiscal year, many companies are expected to rejig employee salary structures to reflect recent changes to India’s labour and personal income tax laws.
Which components of your salary will change will depend on your income level and more broadly on your organization’s demographics and industry, but largely companies are aiming to keep take-home pay close to the old one. “Cash in hand is always the king in India,” said Rajul Mathur, consulting leader, work and rewards, WTW India, formerly Willis Towers Watson, a global advisory firm.
At the same time, some companies are seeking to increase or introduce certain allowances that could help lower your taxable income, which could help boost your post-tax income.
While some companies are expected to roll out the changes as early as 1 April, others are awaiting government guidance on the new labour laws, so the changes might not come until later in the year. Either way, it’s a good idea for employees to keep themselves informed.
“It’s going to be a massive change,” said Sahil Sharma, chief human resources officer at RateGain Travel Technologies Ltd, a Noida-headquartered software company. While the company is awaiting government rules to finalize its plans, once they do so, Sharma said they plan to hold a town hall for their 800-plus employees to explain what is changing and set up kiosks for one-on-one sessions to address employee concerns and questions.
“We are advising clients to reassess their employment contracts and proactively build a clear communication plan” with their employees, said Mathur.
New wage definition and income tax rules
There are two main driving forces behind the upcoming changes.
One is a new definition of “wages” introduced by the new Code on Wages, which came into effect in November.
Historically, companies in India have kept their basic pay to employees low, say 20% to 40% of overall compensation, with the rest given as allowances. Now, the new law says that “wages” means basic pay plus all allowances given to employees, with a few exceptions, such as house rent allowance, conveyance allowance and overtime allowance.
The new code also stipulates that if excluded allowances exceed 50% of total remuneration, the excess will be treated as wages for statutory purposes.
In short, for calculating wage-linked benefits like gratuity, wages are at least 50% of your total compensation, irrespective of the different allowances you get.
“Companies have to modify their existing salary structure so as to align with the labour code requirements,” said Sudhakar Sethuraman, partner at Deloitte India.
The second phenomenon impacting the salary mix is a changing tax regime.
Increasingly, are opting for the new tax regime, which offers few exemptions for allowances. Companies don’t want to keep bearing the administrative burden of giving an allowance that no one uses. “Most companies are shifting to simpler pay structures, and allowances outside the exclusion list are likely to go,” said Rashmi Pradeep, partner and head southern region at law firm Cyril Amarchand Mangaldas.
At the same time, new draft income tax rules have expanded exemptions under the old tax regime, making some allowances more attractive.
How your salary may change
Here, we look at select components of a salary slip to understand what may change.
Basic pay: While the law doesn’t mandate an increase, some companies are seeking to raise it partly to be closer to the 50% wage requirement. RateGain, for instance, is going to bring it up from 40% to 50%, said Sharma.
It benefits employees in the old tax regime, because a higher basic pay can increase the amount of tax exemption you can get on HRA, as that’s calculated as a percentage of basic pay plus dearness allowance.
On the flip side, a higher basic pay could increase the employees’ provident fund contribution, but that’s optional.
The law requires companies to make a minimum monthly PF contribution of ₹1,800 for employees earning ₹15,000 or more. Any contribution above ₹1,800 is purely the company’s choice, and the new law doesn’t change that minimum.
In practice, many companies contribute 12% of an employee’s basic pay to PF, so if they raise basic pay, it could increase the PF contribution and, ultimately, the monthly take-home salary.
Companies are expected to give employees a choice in this. “If there is a change in basic, companies may give the employees options to contribute to the full basic or just the minimum,” said Preeti Chandrashekhar, independent employee benefits consultant and actuary.
Special allowance: This is a catch-all allowance that also goes by names such as “supplementary allowance” or “flexi-benefit”. The new labour code has clarified that this is an “inclusion” in wages. Most companies that plan to increase their basic pay will likely cut this allowance to maintain the same overall pay. “The other things you can’t change,” said Sharma. Also, companies may, in the future, change this category’s name to ‘general allowance’, according to WTW.
HRA: This is an excluded allowance, which means that it won’t count as “wages”. This is still beneficial for employees who are in the old tax regime. Those living in rented accommodation can avail of a tax exemption on a part of this allowance, so companies are likely to retain it.
In a twist, the draft income tax rules 2026 have somewhat increased the attractiveness of this. The amount of money that is tax-exempt under HRA could be as high as 40% of employees’ basic pay in non-metro cities and 50% in metro cities. The new tax rules have reclassified Bengaluru, Pune, Hyderabad, and Ahmedabad as metro cities, thereby raising the potential exemption limit for employees in these cities.
If more employees are keen to avail this tax break, a company could increase its existing HRA from 40% to 50%, according to Mathur.
Children’s education allowance and meal vouchers/allowance: Exemption limits on these have been increased in the recent draft income tax rules. “These exemption enhancements have given a fresh lease of life to the old tax regime, but it’s not one size that fits all,” said Sethuraman.
The exemption on children’s education allowance has been raised from a mere ₹2,400 per annum for two children to ₹72,000 per annum. Meanwhile, the value of meal vouchers, which are exempt, has been quadrupled from the earlier ₹50 per meal. This could add up to ₹52,000 a year (assuming five meals a week).
Some companies may choose to increase these allowances if they are already part of the compensation structure, said Mathur.
Internet, telephone, books, and periodical allowances: Any fixed allowance for internet, phones, books, and periodicals can be partially deducted under the old tax regime, but not under the new one. For companies whose employees have largely shifted to the new tax regime, organizations would consider phasing these out in time.
Conveyance allowance in lieu of car lease: Buying a car through your company’s car lease programme provides tax benefits that are available even in the new tax regime, so some companies that don’t already have this programme are considering introducing it, according to Mathur.
Under a car lease programme, the monthly lease payment for the car is deducted from an employee’s pre-tax income, reducing taxable income. In addition, if the company provides a conveyance allowance, wherein it reimburses your expenses on running costs and driver salary, and provided you use the car for both office and personal use, this allowance is only partly taxable. Irrespective of the amount the company gives you, the is payable only at a specific perquisite value defined by the income tax rules.
This taxable value was ₹2,700 per month, including a driver’s salary for a sedan or smaller car, but the new draft rules propose increasing it to ₹8,000 per month. While that lowers the exemption, for employees in the , where there are hardly any exemptions available, car lease-tied conveyance allowance remains an attractive option, said Mathur.
In the long run, however, experts believe many of the allowances will be phased out. “Over a period of time, it will be very basic three-four components that will remain,” said Sharma.