Designing a tax-efficient salary structure in India has become both more strategic and more nuanced with the rise of the new tax regime as the default, revised slabs, higher standard deduction, enhanced rebate thresholds, and evolving rules for perquisites and allowances. For HR, payroll, and compensation teams, the challenge is to align CTC design with compliance (wage code, PF, gratuity), employee preferences (new vs old regime), and organizational goals (retention, cost predictability, simplicity) while optimizing tax outcomes within the law. This guide lays out a comprehensive, practical framework to craft tax-efficient salary structures for Indian corporates under current rules for FY2025–26/AY2026–27, with emphasis on both regimes, compliant structuring guidelines, and actionable playbooks for different pay bands.

Why Salary Structuring Needs a Rethink

1. The new tax regime under Section 115BAC is now the default, with revised slabs, higher basic exemption, a larger standard deduction, and a substantially higher rebate threshold that can make incomes effectively tax-free up to certain levels under specific conditions.

2. Many traditional exemptions and deductions (HRA, LTA, 80C, 80D, 80G, etc.) are not available under the new regime, though some allowances and employer-side benefits remain permissible, and a standard deduction is available under both regimes from AY2024–25 onward.

3. Practical implication: Organizations should simplify salary structures, minimize conditional allowances that don’t yield tax benefits in the new regime, and maximize components that remain advantageous across regimes (e.g., standard deduction, employer NPS contributions, PF compliance, and selective perquisite design).

Core Components of a Compliant Salary Structure

Understanding the foundational building blocks helps HR design structures that are both tax-aware and operationally sound across roles and grades.

Basic Salary: Typically the anchor of salary; influences PF, gratuity, and HRA computation where applicable; often recommended at ~40–50% of CTC, aligning with wage code principles that limit allowances to ≤50% of total compensation.

Dearness Allowance (DA): Applicable in certain industries and unionized contexts; counts toward PF base and HRA.

House Rent Allowance (HRA): A key tax-saving component under the old regime, generally up to 50% of basic+DA in metro cities and 40% in non-metro, subject to exemption rules; not available as an exemption under the new regime.

Provident Fund (PF): Statutory contribution at 12% of basic+DA by both employer and employee in most cases; impacts take-home but builds retirement corpus; must be integrated with wage code allowance limits.

Special Allowance: Balancing figure to reach the agreed CTC; taxable in full unless replaced by compliant, tax-favored components.

Professional Tax / ESI / LWF: State-dependent statutory deductions/contributions; must be accounted in payroll design and CTC communication.

Gratuity: Statutory benefit linked to basic pay and tenure; higher basic increases gratuity provisioning and long-term benefits.

Other allowances/perquisites: Such as LTA, meal benefits, telephone reimbursement, car policy, rent-free accommodation, and more—each with differing tax treatments depending on regime and rules.

New vs Old Tax Regime: What Actually Changes for Structuring

A modern salary structure should be regime-agnostic where possible, yet flexible enough to adapt to individual taxpayer choices.

New Tax Regime (Section 115BAC):

Default option with revised slabs and higher basic exemption; standard deduction is allowed, but many traditional exemptions/deductions are disallowed (e.g., HRA, LTA, 80C, 80D, 80G).

Select allowances and deductions remain, including standard deduction, transport allowance for specially-abled, certain conveyance/job-related allowances, and employer-side NPS contribution deduction in the employee’s return (subject to limits and rules).

Rebate threshold enhancements and slab changes materially reduce tax for middle-income earners under the new regime, with effective zero tax up to higher income limits under specific conditions.

Old Tax Regime:

Retains HRA, LTA, 80C (PPF, ELSS, PF employee contribution), 80D (medical insurance), home loan interest for self-occupied up to ₹2 lakh, 80G donations, and more, plus standard deduction.

Beneficial for employees with significant rent, investments, home loan interest, and deductible expenditures who can document claims effectively.

Decision principle: Facilitate choice by providing payroll flexibility and transparent tax computation support so the employee can opt regime annually based on individual facts.

Current Slabs, Standard Deduction, and Rebate Signals

Under the new regime for FY2025–26 (AY2026–27), slabs start with NIL tax up to ₹4 lakh, scaling up through defined bands, with tax rates rising across slabs; these revised slabs make the new regime attractive by default for many salaried taxpayers.

A standard deduction is available under both regimes; under Budget 2025 communications and related guidance, the standard deduction in the new regime is set at ₹75,000 for salaried taxpayers, improving net take-home and lowering tax incidence.

The effective tax-free threshold under the new regime has been raised significantly through a higher rebate, with some guides indicating no tax up to ₹12 lakh–₹12.75 lakh under specified assumptions, especially when the standard deduction is factored in, improving the case for a simplified structure under the new regime.

Implication for structuring: Reduce legacy tax-exemption-heavy allowances for most employees, and build in employer-side contributions and compliant perquisites that remain effective under the new regime, while still enabling an old-regime-optimized variant for those who benefit from HRA and 80C/24(b)/80D claims.

Statutory and Policy Anchors for HR and Payroll

Wage Code orientation: Keep allowances at ≤50% of total compensation so basic (and DA, if applicable) is at least 50%; this aligns with compliance, boosts social security base, and improves transparency in CTC communication.

PF provisioning: Ensure 12% of basic+DA from employer and employee, and reflect the impact on take-home versus long-term savings; PF remains a cornerstone and interacts with wage code thresholds.

Gratuity: Recognize that elevating basic increases gratuity liabilities; structure grade-wise to balance retention value and cash flow.

Professional Tax/ESI/LWF: Incorporate state-specific statutory deductions and eligibility limits into payroll setup and employee communications to avoid surprises.

Perquisites governance: Understand taxable versus exempt perquisites under Section 17(2) and associated rules; design high-value, compliant perquisite menus for mid- to senior-level talent without creating tax friction.

What Still Works Under the New Regime

Even with many traditional exemptions curtailed, several levers remain for tax efficiency and employee value creation.

Standard Deduction: Built-in reduction to taxable income for salaried individuals under both regimes; higher at ₹75,000 under the new regime per FY2024–25/AY2025–26 and continuing guidance.

Employer Contribution to NPS (Section 80CCD(2)): Deductible in the employee’s return under new regime subject to limits; a powerful, tax-efficient benefit for retirement savings, often capped as a percentage of salary and overall limit with other employer retirement contributions.

Select Allowances: Transport allowance for specially-abled employees remains, and certain job-related conveyance/travel allowances may be permitted as exemptions/reimbursements; validate documentation and policy wording.

Perquisites with Specific Rules: Some reimbursements and facility-based benefits can be structured efficiently if they meet rule-based conditions; however, general allowances are typically fully taxable under the new regime.

Simplified Fixed Pay: Given reduced scope for exemptions, a cleaner fixed pay structure reduces administration and disputes while aligning with new regime benefits.

What Works Best Under the Old Regime

For employees with high deductible expenses or investments, a parallel “old-regime-optimized” structure can materially reduce tax outgo.

HRA: Exemption based on the least of (i) actual HRA received, (ii) rent paid minus 10% of Basic+DA, and (iii) 50% of Basic+DA in metro or 40% in non-metro, subject to documentation; central for renters in high-cost cities.

LTA: Exemption for domestic travel expenses per rules and periodicity, subject to employer policy and evidence; an effective component for eligible travel plans.

80C: Employee PF contribution, PPF, ELSS, life insurance premiums, home loan principal, and others up to ₹1.5 lakh; foundational pillar for individual tax planning under old regime.

80D: Health insurance premiums for self/family/parents within limits; encourages risk protection with tax efficiency.

Home Loan Interest (Section 24): Up to ₹2 lakh for self-occupied property interest; strong incentive for homeowners under old regime.

80G and Others: Donations and education loan interest (80E) enhance tax planning for applicable employees who prefer old regime.

Designing Dual-Ready Salary Structures

A dual-ready salary structure means one common CTC framework with two calibrated variants—one optimized for the new tax regime (default) and one optimized for the old tax regime—selected by the employee before declaration and payroll freeze.

New Regime-Optimized Template:

Basic (≥50% of fixed pay to comply with wage code orientation) with DA where applicable.

Minimal conditional allowances; consolidate into fixed pay to reduce complexity.

Employer PF as per statute; explore employer NPS contribution within policy limits for additional tax efficiency under the new regime.

Streamlined perquisite menu: corporate health insurance, compliant communication/IT reimbursements, meal benefits via cards/vouchers where permissible, and role-based travel reimbursement strictly for business (with documentation).

Annual total rewards using performance bonus/retention bonus; note that bonuses are fully taxable, but align with business outcomes and employee expectations.

Old Regime-Optimized Template:

Maintain HRA component with accurate city classification and documentation protocol for rent receipts/PAN of landlord when required.

Include LTA per policy with clear claim cycles and eligible expenses (fares only).

Encourage 80C-friendly components like employee PF and access to savings instruments (outside payroll) through education; payroll cannot force 80C but can facilitate awareness.

Offer medical insurance options that support 80D eligibility for employees and family; clarify tax claim mechanics.

Keep allowances meaningful but compliant; avoid bloated special allowance where tax efficiency could be achieved through legitimate components.

Grade-Wise Structuring Guidelines

1. Entry-Level/Lower Mid-Income (CTC up to ~₹12–15 lakh):

New regime often yields lower taxes due to enhanced rebate and standard deduction; simplify structure and reduce conditions.

Keep basic+DA at ≥50% of fixed pay; PF compulsory; consider employer NPS (modest) for those opting new regime.

Provide an option to switch to old regime structure for those with significant rent or planned 80C/80D/24 benefits.

2. Mid-Income (CTC ~₹15–30 lakh):

Run side-by-side tax simulations for both regimes; the old regime can be superior for renters/homeowners with large deductions, while the new regime with higher standard deduction and revised slabs is appealing for those without big tax shields.

Introduce voluntary NPS (employee-side) and employer NPS (policy permitting) with education on limits and liquidity trade-offs under new regime.

Use a balanced perquisite menu tailored to roles (e.g., communication, WFH reimbursements, travel reimbursements on actuals) with documentation rigor.

3. Senior Management (CTC >₹30 lakh):

Craft flexible perquisite packages: company car policies, driver salary reimbursements per rules, telecommunication, club memberships, and executive health check-ups; ensure valuation rules are well-understood and payroll can compute perquisite value correctly.

Evaluate employer NPS contributions within aggregate retirement benefit caps; model marginal tax impact under both regimes to guide optimal choice.

Consider rent-free accommodation versus HRA trade-offs; perquisite valuation rules for employer-provided accommodation differ from HRA and can change the optimal choice.

Practical Playbook: Steps to Implement

1. Policy Baseline and Compliance

Update salary policy to reflect the new regime as default, while allowing old regime selection via annual declaration before the first payroll of the financial year.

Align with wage code orientation: ensure basic+DA is ≥50% of fixed pay; recalibrate legacy structures to avoid non-compliance and disputes.

Confirm PF, ESI, gratuity, and state levies are correctly parameterized in the payroll engine based on grade and location.

2. Create Two Paybooks in Payroll

New regime-optimized: Fixed-heavy, minimal conditional allowances, employer NPS (if offered), and limited perquisites with clear documentation.

Old regime-optimized: HRA included with city classification, LTA enabled with claim rules, and communication to employees on documenting 80C/80D/24 claims outside payroll.

3. Build an Employee Tax Simulator

Provide a calculator that compares both regimes based on employee inputs: rent, home loan interest, insurance premiums, planned investments, etc., using current slabs, standard deduction, and rebate thresholds.

Default to the new regime if no input is provided, but nudge employees to simulate before locking their choice for the year.

4. Optimize Employer-Side Contributions

Maintain statutory PF; consider employer NPS contributions where feasible, especially valuable under the new regime; communicate vesting/liquidity factors and long-term benefits.

Offer group medical insurance as part of CTC and optional top-ups; clarify tax treatment and how employees can claim 80D if they pay personally for family covers (old regime).

5. Perquisites and Reimbursements Governance

Catalogue perquisites and categorize as taxable, exempt, or conditionally exempt; set documentation requirements and cut-off timelines to ensure clean payroll processing.

For business reimbursements (travel, communication, WFH), insist on bills and purpose documentation to keep them out of taxable perquisite buckets and avoid disputes.

6. Communication and Change Management

Issue annual communication summarizing slab changes, standard deduction, and rebate thresholds; highlight how the default new regime affects take-home and compliance.

Train HRBPs and payroll teams on regime differences, perquisite valuation rules, and documentation standards; keep FAQs ready for employees during declaration windows.

Specific Components: How to Tune Them

Basic and DA

Set basic (and DA, if part of policy) so that basic+DA ≥50% of fixed pay; this increases PF and gratuity base while ensuring wage code alignment.

HRA

Use HRA only in the old-regime-optimized structure; set at 40%/50% of basic+DA depending on city; ensure rent documentation to support exemption; note that under the new regime, HRA doesn’t confer tax relief.

LTA

Keep LTA enabled only for old-regime-optimized employees, with a clear claim cycle and coverage restricted to domestic travel fares; ensure proof rigor and record-keeping.

Special Allowance

Minimize special allowance in both structures by allocating into meaningful, compliant components; special allowance is fully taxable and erodes tax efficiency.

Communication/Internet/Telephone

Treat genuine business expense reimbursements as non-taxable with documentation; otherwise, allowances may be taxable under either regime.

Meal Benefits

Consider electronic meal cards within permissible limits and policy; ensure compliance with valuation rules and actual usage conditions.

Company Car and Driver

Senior roles may receive cars; apply perquisite valuation rules correctly (engine capacity, driver expenses) and communicate the taxable value to employees for informed choice.

Rent-Free Accommodation

For relocation or senior roles, compare HRA versus employer-provided accommodation under perquisite valuation rules; the optimal choice depends on city, rent levels, and slab position.

NPS (Employer Contribution)

Powerful under the new regime when within prescribed limits; coordinate with finance to cap employer NPS and integrate with other retirement benefits; educate employees on liquidity and EEE characteristics under current rules.

Bonuses and Variable Pay

Fully taxable in both regimes; build timing of payouts thoughtfully to manage surcharge thresholds and to align with performance cycles.

Handling Perquisites: Key Tax Concepts for Payroll

Perquisites broadly include rent-free accommodation, concessional rent, company cars, ESOPs, utilities, club memberships, and more, many of which are taxable with specific valuation methods under Section 17(2) and rules.

Budget 2025 proposals referenced adjustments to section 17 thresholds for general amenities and overseas travel for medical treatment based on salary limits, with authority to prescribe limits—payroll should monitor notifications to update perquisite handling.

Good governance: Maintain a perquisite register, compute monthly taxable values where applicable, and reflect in Form 16; document exceptions (e.g., business use) robustly.

Comparing Tax Outcomes: The Decision Engine

The salary structure should be supported by a regime decision engine that factors in:

New regime slabs, standard deduction, and rebate thresholds for FY2025–26.

Old regime deductions/exemptions: HRA eligibility and rent levels, 80C investments (ELSS/PPF/EPF employee contribution), 80D premiums, Section 24 interest on home loan, donations under 80G, and education loan interest under 80E.

Employer NPS contribution and PF interactions; estimate incremental benefit under the new regime from employer contributions subject to limits.

Fringe/perquisite valuations for senior roles (car, accommodation), as these can materially alter the net tax position.

Provide employees with a year-start and mid-year “what-if” tool; lock regime choice per law’s timelines and payroll capabilities.

Payroll Governance: Controls that Sustain Tax Efficiency

1. Documentation Discipline:

Rent receipts, landlord PAN (as required), LTA travel bills, business travel approvals, and communication bills; lack of proofs converts potential exemptions to taxable income.

2. System Configuration:

Maintain two structure templates and switch rules at the start of the FY; map perquisite codes to valuation logic; update slabs and standard deduction/rebate each year.

3. Employee Education:

Publish an annual tax primer with key changes, regime pros/cons, and timelines; provide calculator access and helplines during declaration periods.

4. Audit and Reporting:

Quarterly reviews of perquisite valuation, reimbursement approvals, and exception logs; reconcile with Form 16 and statutory returns to prevent downstream issues.

Common Pitfalls and How to Overcome Them

Over-engineered Allowance Menus: In the new regime, many allowances don’t reduce tax; keep them minimal to improve clarity and reduce admin effort.

Ignoring Wage Code Orientation: Allowances exceeding 50% can trigger compliance risks and distort PF/gratuity bases; maintain basic+DA at ≥50%.

One-Size-Fits-All: Employees vary; renters, homeowners, heavy investors, and minimalists will prefer different regimes—offer choice and a simulator.

Poor Perquisite Accounting: Misvalued company cars, accommodation, and reimbursements lead to payroll corrections and employee dissatisfaction; apply Section 17(2) rules diligently.

Missed Employer NPS Opportunity: A powerful lever under the new regime for mid to senior bands; formalize a clear policy and limits.

Action Checklist for HR and Payroll Leaders

1. Refresh salary policy to include two standardized structures (new-regime-first; old-regime-optional) with clear selection windows.

2. Recalibrate Basic+DA to ≥50% of fixed pay across grades; update PF and gratuity projections accordingly.

3. Approve an employer NPS policy with caps tied to grade; align with retirement benefit limits and communicate tax treatment.

4. Publish an annual tax changes note covering slabs, standard deduction, and rebate thresholds; embed a simulator for employee decisions.

5. Tighten perquisite and reimbursement SOPs with documentation checklists and audit trails; train finance/payroll teams on current rules.

6. Run comparative tax analytics at the org level to understand how many employees benefit from each regime and tailor communications accordingly.

Wrapping-up: Build for Simplicity, Flexibility, and Compliance

The direction of travel in India’s personal tax system favors a simpler default path via the new tax regime - higher standard deduction, revised slabs, and elevated rebate thresholds reduce the payoff from complex allowance structures and shift advantage to clean fixed pay, statutory benefits, and selective employer-side retirement contributions. Yet, the old regime remains valuable for specific employee profiles with significant rent, investments, insurance, or home loan interest; ignoring it can leave money on the table for such cohorts.

A best-in-class corporate salary architecture in 2025–26 is therefore dual-ready: default simplicity and compliance for most, with a well-supported old-regime alternative for those who need it, all underpinned by clear policies, robust documentation, accurate perquisite valuation, and an employee-first communication strategy. Organizations that execute this playbook will not only enhance take-home pay legitimately and reduce disputes, but also elevate trust and transparency in total rewards - key drivers of attraction and retention in a competitive talent market.

How to Design a Tax-Efficient Salary Structure for Employees