India Inc salary restructuring: How new labour codes and income tax rules will impact take-home pay and retirement savings

TeamLease Services, a staffing solutions firm.

Moreover, every state will draft and notify rules covering procedural aspects such as wage ceilings, dispute resolution timelines, inspector authority and exemptions for smaller establishments. “States cannot alter or contradict core substantive provisions. Uniformity is mandated by Section 9 of each code, with central government oversight,” says Alay Razvi, Managing Partner with law firm, Accord Juris.

Since labour is a concurrent subject, state-level notifications are essential for full implementation. “As a result, many employers are deferring formal restructuring to avoid multiple iterations. Some are even preparing to implement changes with retrospective effect once the rules are finalised,” says chartered accountant Bhavesh Shah, Senior Partner, Hasmukh Shah & Co LLP, a firm providing outsourced accounting and tax services, including payroll processing.

“Some organisations have started the process of revising compensation structure and aligning with the new labour codes as well as income tax rules,” adds Malathi K.S., Director, Rewards and Consulting, Products and Global Mobility Practice, Mercer, an employee benefits and consulting company.

As per the rules, employers have to take into account 50% of an employee’s CTC to compute social security benefits–employees’ provident fund, gratuity, and employees’ state insurance component, will be linked to this figure. If remuneration is not revised upward, higher gratuity and EPF contributions can reduce the take-home pay. . “One of the key shifts under the labour codes is the expanded definition of ‘wages’, which effectively requires a larger portion of compensation to be treated as fixed pay. While this is often interpreted as a 50% threshold for basic wages, in practice it operates as a compliance principle that limits the excessive use of allowances,” says Sachin Biraj, General Counsel, Legal and Regulatory Affairs, Randstad India, a talent company.

New salary breakup

New income tax rules in play

Add to this mix the new income tax rules that came into effect from 1 April, and it is clear why the appraisal season this time round is not business as usual. “Organisations are viewing this as an opportune time to look at compensation design as, along with the labour codes, certain income tax provisions and changes to perquisite rules have already come into effect from 1 April, prompting them to evaluate the payroll in the new tax year 2026-27,” says Parizad Sirwalla, Partner and National Head – Tax, Global Mobility Services KPMG in India.

The new tax regime has gained a clear upper hand since Budget 2025, but the recent changes to the income tax rules have brought the old regime back into focus. This is because the rules have raised the tax-exempt limit on multiple allowances, including children’s education (Rs.3,000 per month per child; maximum two children) and hostel fees (up to Rs.9,000 per month per child), which are available only under the old regime. Meal benefit (up to Rs.200 per meal) is now available under both regimes. Apart from this, taxpayers living on rent in Bengaluru, Ahmedabad, Pune and Hyderabad are now eligible to claim house rent allowance exemption of up to 50% of basic, up from 40%.

Negotiate with care

If, after careful comparison of the two regimes and labour codes impact, you find that the old regime will be beneficial overall, you can negotiate with your employer to incorporate children’s education and hostel allowance into your pay package, your employer’s policies permitting.

“Employees can also explore reimbursement- based components (such as fuel reimbursements), wherever feasible, subject to company policies,” says Shah. Look at three specific numbers: likely revised take-home salary post-labour codes implementation, annual tax outgo under both regimes, and retirement contributions.

“Focus on higher total CTC and useful benefits, not salary breakup, because the room to play with structure is much smaller now,” adds Sarbojit Mallick, Co-founder, Instahyre, a job search platform.

To start with, estimate your expected gross income during the financial year, and identify the allowances and exemptions that can reduce your taxable income. “Compare your tax liability under both the old and new tax regimes and choose the one that results in lower overall tax outflow. Based on this, negotiate the structure of your salary components,” says Gupta of ClearTax.