New Wage Rules to Increase Basic Pay Share, Reduce Tax Benefits

Apr 15 (BNP): The implementation of India’s new labour codes is expected to change how employee salaries are structured, with possible impacts on take-home pay and tax liability.

Under the revised rules, basic pay, dearness allowance, and retaining allowance must together form at least 50% of an employee’s total cost to company (CTC). This is expected to reduce the share of tax-free allowances in salary packages.

Earlier, companies often structured salaries with higher allowances such as HRA, LTA, and reimbursements to optimise tax benefits. Experts say the new framework will limit this flexibility and increase the taxable portion of income.

While benefits like HRA and LTA exemptions will continue under existing tax regimes, their overall advantage may reduce as basic pay increases.

Experts also indicate that employees may see higher EPF contributions, which could reduce monthly in-hand salary, especially for mid and senior-level professionals.

Overall, the new labour codes aim to bring greater transparency in salary structures, while also changing how compensation and taxation are balanced for salaried employees.