As India approaches the new financial year, significant changes are set to impact employee salaries across the country. From 1 April, 2026, the implementation of the New Income Tax Act 2025 alongside the New Labour Code is expected to alter how salary components are structured.
One of the most noticeable shifts will be in salary break-ups rather than overall earnings. While the total Cost to Company (CTC) is likely to remain unchanged for most employees, the composition of basic pay and allowances will undergo a reset. Organisations will need to align compensation structures with the new rule mandating that basic salary must constitute at least 50 per cent of the total CTC.
Currently, many companies optimise salary structures by keeping the basic component low and increasing allowances such as house rent, travel, and special pay. In some cases, allowances account for up to 70–80 per cent of total salary. This approach will no longer be viable, as the revised framework caps allowances at 50 per cent, forcing employers to raise the basic pay component.
This restructuring will have a direct impact on statutory benefits. Since Provident Fund and gratuity calculations are linked to basic salary, a higher basic component will increase retirement savings over time. However, this may also lead to a slight reduction in monthly take-home pay due to higher PF contributions.
The tax impact will vary based on the regime an employee opts for. Under the old tax regime, a higher basic salary could affect exemptions such as HRA, potentially increasing taxable income. Meanwhile, under the new regime, where exemptions are minimal and income up to Rs 12.75 lakh is tax-free including the standard deduction, the effect is expected to be limited.
Employees are advised to review their revised salary structures closely and consult HR teams to understand the implications. While short-term take-home pay may dip for some, the long-term gains in retirement benefits could offer a meaningful advantage.
