Income Tax Act New Salary Rule 2026: The month of April is just a few days away. Starting from the new financial year, a new Income Tax Act and a new Labour Code are set to come into force.
Salary Structure Changes from April 1st: This is significant news for salaried individuals. The new financial year begins on April 1st. During this period, salaried employees may observe certain changes in their payslips. Specifically, starting April 1, 2026, the new Income Tax Act 2025 and the new Labour Code are scheduled to be implemented. Consequently, you will witness some significant changes in your salary structure and your 'take-home' salary.
What Will the Changes Be?
According to the new Labour Code, your Basic Salary must constitute 50 percent of your total CTC (Cost to Company). Currently, many companies keep the Basic Salary low to save on taxes, while inflating allowances—such as HRA (House Rent Allowance), Travel Allowance, and Special Allowance—to as much as 70–80 percent of the total package. However, under the new regulations, companies will no longer be permitted to let the combined total of all allowances exceed 50 percent of the total salary.
Since the calculation of your PF (Provident Fund) and Gratuity is based on your Basic Salary, an increase in your Basic Pay will automatically lead to an increase in your retirement fund corpus as well as your personal contribution towards it.
The impact of higher PF deductions will be felt in your take-home salary. Increased PF deductions may result in a slight reduction in the actual cash-in-hand salary you receive. However, the extent of this impact will also depend on the company's existing salary structure. In other words, the effect of mandating a 50 percent Basic Pay component will be determined by the current proportion of Basic Salary set by your employer. For instance, if your current CTC is ₹50,000 and your Basic Pay is ₹25,000 (which is 50 percent), the new rule will have no impact on you; your in-hand salary will remain unchanged. Yes, if your total salary is ₹50,000 and, for the purpose of tax savings, the company is providing you with only ₹10,000 (20%) as basic pay while allocating the remaining ₹40,000 to various allowances, then, in this scenario, the company will be required to increase your basic pay.
An increase in basic salary may, in certain instances, lead to a higher tax liability. According to Income Tax regulations, the House Rent Allowance (HRA) exemption you receive is based on your basic salary. As your basic salary rises, the portion deducted from your actual rent paid (which is 10% of your basic pay) will also increase. Consequently, the tax exemption available under HRA will be reduced. It is important to note here that the old tax regime has not yet been discontinued. Individuals with an annual income between ₹10 lakh and ₹30 lakh—particularly those residing in metropolitan cities who incur high rental costs or have substantial home loan deductions—can continue to utilize schemes such as Section 80C and the NPS to avail of tax-saving benefits.
For those opting for the new tax regime, the risk of an increased tax burden is minimal, as income up to ₹12.75 lakh is tax-free under this framework. The new regime does not offer exemptions on HRA or other allowances. Under this system—which includes a standard deduction of ₹75,000—individuals earning an annual income of ₹12.75 lakh are liable to pay zero tax. Therefore, in such cases, an increase in your basic salary will not have any adverse impact on your tax calculations.
