Make the best of income tax gains: Revise your salary structure for better tax saving and simpler tax filing
Suresh Surana
Practising Chartered Accountant
Effective from the current financial year 2025-26, individuals opting for the new regime would be entitled to a full tax rebate of up to Rs. 60,000 under Section 87A of the Income-tax Act if their net taxable income does not exceed Rs. 12,00,000. This will result in zero tax liability for taxpayers opting for new tax regime.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} This structural change offers a unique opportunity for employers to redesign pay packages to further lower taxes under the new tax regime. This can be done by eliminating the deductible allowances, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA) under the old regime, and adding reimbursement components to reduce the documentation requirements for both the employer and employee.
Growing Preference for the New Tax Regime
Income tax return (ITR) filing statistics from the previous year indicate that:Around 16.5% of individual ITR filers (approximately 1.24 crore out of 7.54 crore) reported total taxable income exceeding Rs 10 lakhThe remaining 83.5% (approximately 6.30 crore ITR filers) have income up to Rs 10 lakh.These statistics emphasise that most of the Indian taxpayers fall within income brackets that are more favourably taxed under the new tax regime.
Comparison of income tax slabs under old and new tax regime for FY 2025-26
Here is a comparison of income tax slab rates under old and new tax regime:a:hover{text-decoration:none;} .liveEventMain_widget{margin-top:15px;padding-top:24px;border-top:2px solid #000;position:relative;font-family:Montserrat;} .liveEvent_slider{position:relative;overflow:hidden;} .liveEvent_slider ul{white-space:nowrap;list-style:none;margin-top:12px;} .liveEvent_slider ul.sliderContainer{margin-bottom:30px;} .liveEvent_slider ul li{white-space:normal;width:282px;vertical-align:top;display:inline-block;margin-right:12px;border-radius:12px;box-shadow: 0px 4px 12px 0px #2407461F;background-color:#fff;overflow: hidden;} .images_wrap{position:relative;} .images_wrap .cover_img{object-fit:cover;object-position:center;border-top-left-radius:4px;border-top-right-radius:4px;} .images_wrap .author_img{position:absolute;left:10px;top:13px;border-radius:10px;} .images_wrap::before{background-image: linear-gradient(180deg, rgba(11, 11, 46, 0) 20.31%, rgba(11, 11, 46, .6) 61.46%, #0b0b2e);content: "";height: 100%;left: 0;position: absolute;right: 0;width: 100%;} .liveEventMain_widget .details{padding:12px;} .liveEventMain_widget .category{font-size:12px;line-height:14px;font-weight:700;color:#6a11b0;margin-bottom:8px;} .liveEventMain_widget .course_name{font-size:16px;line-height:20px;font-family:Faustina;-webkit-line-clamp:2;overflow:hidden;height:40px;display:-webkit-box;-webkit-box-orient:vertical;font-weight:600;color:#000;} .liveEventMain_widget .details .author_name{font-size:13px;line-height:16px;color:#333;font-weight:400;margin-top:4px;-webkit-line-clamp:2;overflow:hidden;height:32px;display:-webkit-box;-webkit-box-orient:vertical;} .liveEventMain_widget .view{border: 1.5px solid #D51131; display: block; padding: 8px 0; text-align: center; border-radius: 4px; font-size: 14px; line-height: 16px; color: #D51131; margin-top: 12px; width: 100%; font-family: Montserrat; font-weight: 600; cursor: pointer;} .liveEventMain_widget .view span{display: inline-block; width: 6px; height: 6px; border-top: 1.5px solid #ed193b; border-left: 1.5px solid #ed193b; transform: rotate(90deg); position: relative; left: 5px; top: -2px;} .liveEventMain_widget .view span::after{content: ''; display: inline-block; width: 11px; border-top: 1.5px solid #ed193b; transform: rotate(45deg); position: absolute; top: 3px; left: -2px;} .liveEventMain_widget .arrow_btn{width: 26px; height: 25px; position: absolute; z-index: 11; background-size: 312px; cursor: pointer;} .liveEventMain_widget .nextprev-btn{display:inline-block;width: 100%; position: absolute; top: 59%;} .liveEventMain_widget .prev-btn{background-position: -212px -2px;left: -12px;} .liveEventMain_widget .next-btn{background-position: -241px -2px; right: -3px;left:unset;} .liveEventMain_widget .arrow_btn.disable{opacity:0.5;} .liveEventMain_widget .ts-dots{display:inline-block;position:absolute;top:34px;right:10px;} .liveEventMain_widget .ts-dots ul{display:inline-block;} .liveEventMain_widget .ts-dots li{width:7px;height:7px;border-radius:50%;background-color:#cdcdcd;margin:0 2px;display:inline-block;} .liveEventMain_widget .ts-dots li span{display:none;} .liveEventMain_widget .ts-dots li.active{background-color:#ed193b;} .liveEventMain_widget .topContain { display: flex; align-items: center; gap: 6px; } .liveEventMain_widget .topContain .imgBox { max-width: 40px; } .liveEventMain_widget .topContain .logoTitle { font-family: "Montserrat", "Verdana"; font-weight: 700; font-size: 20px; line-height: 100%; } .liveEventMain_widget .topContain .logoSubTitle{ position: relative; font-size: 18px; font-weight: 500; line-height: 1.2; color: #747474; margin-left: 24px; } .liveEventMain_widget .topContain .logoSubTitle:before{ content:''; position: absolute; left: -13px; top: 0; width: 1px; height: 100%; background-color: #838383; } .liveEventMain_widget .liveEvent_slider .liveEventCardContainer{ } .liveEventMain_widget .liveEvent_slider .liveEventCardContainer .liveEventCard{ display: flex; } .liveEventMain_widget .liveEvent_slider .liveEventCardContainer .liveEventCoverImg{ }
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Slab Rates – Old Tax Regime – Financial Year (FY) 2025-26**Rate of Tax
Recalibrated Slab Rates – New Tax Regime – Financial Year (FY) 2025-26**
Rate Of Tax
0 – 250,000
0%
0 – 400,000 (NIL)
0%
250,001 – 500,000
5%
400,001 – 800,000
5%
500,001 – 10,00,000
20%
800,001 – 12,00,000
10%
Above 10,00,000
30%
12,00,001 – 16,00,000
15%
16,00,000 – 20,00,000
20%
20,00,001-24,00,000
25%
Above 24,00,000
30%
**Subject to available rebate
Tax Savings Comparison: Old vs. New Tax Regime
The table below provides a comparison of income tax liabilities under the old and new tax regimes for various income levels and the tax savings under the new regime and the deductions required under the old regime to achieve parity.Tax Liability (Rs.) (including surcharge and education cess)
Net Taxable Salary/ Annual Income (Rs.)
As per old tax regime
As per New tax regime
Benefit under New Tax Regime
Maximum Eligible deduction under old tax regime to break-even
5,00,000
-
-
-
-
7,50,000
65,000
-
65,000
2,50,000
8,50,000
85,800
-
85,800
3,50,000
9,50,000
1,06,600
-
1,06,600
4,50,000
10,50,000
1,32,600
-
1,32,600
5,50,000
11,50,000
1,63,800
-
1,63,800
6,50,000
12,00,000
1,79,400
-
1,79,400
7,00,000
18,00,000
3,66,600
1,50,800
2,15,800
6,91,667
24,00,000
5,53,800
2,92,500
2,61,300
8,37,500
50,00,000
13,65,000
10,99,800
2,65,200
8,50,000
Optimising the Pay Structure under the New Tax Regime
It becomes imperative for employers to review and possibly realign the Cost to Company (CTC) structures for employees. This restructuring involves consolidating fragmented allowances and proof-based reimbursements (like HRA, LTA, and medical) into a fixed, straightforward salary structure, reducing the dependency on documentation and verification.Employees enjoy higher liquidity and zero tax liability, while employers benefit from ease of compliance, as there would be no requirement for collecting and verifying investment proofs, rent receipts, or other similar documentation.
A simplified salary structure with fixed allowances and minimal conditional components reduces administrative workload, mitigates the risk of TDS defaults, and streamlines payroll operations.
Illustration 1 - Assuming a Cost to Company (CTC) of Rs. 12,75,000
For instance, the illustrative restructuring of the compensation structure is as under:Basic Salary
6,37,500
6,37,500
House Rent Allowances
51,000
2,55,000
Leave Travel Assistance
-
63,750
Conveyance Reimbursement
18,000
18,000
Training Reimbursement
-
20,000
Mobile/ Telephone Reimbursement
21,000
21,000
Special Allowance
2,62,250
-
Performance Bonus
1,19,500
1,19,500
Employer's contribution to Provident Fund
76,500
76,500
Employer's Contribution to NPS
89,250
(14% of Basic)
63,750
(10% of Basic)
Gross Salary
12,75,000
12,75,000
Cost to the Company
12,75,000
12,75,000
Less:- Exemptions / Deductions
Conveyance Reimbursement
18,000
18,000
Training Reimbursement
-
20,000
Mobile/ Telephone Reimbursement
21,000
21,000
Employer's contribution to Provident Fund
76,500
76,500
House Rent Allowances
-
2,55,000
Leave Travel Assistance
-
63,750
Standard Deduction
75,000
50,000
Total Exemptions / Deductions
1,90,500
5,04,250
Gross Total Income
10,84,500
7,70,750
Less:- Deduction under section 80C (Including Employee Contribution to PF)
-
1,50,000
Less:- Deduction under section 80CCD(1B)
-
50,000
Less:- Deduction under section 80D
-
75,000
Less:- Deduction under section 80CCD(2)
89,250
63,750
Net Total Income
9,95,250
4,32,000
Income-Tax
39,525
9,100
Rebate u/s 87A
(39,525)
(9,100)
Surcharge
-
-
Education Cess @ 4%
-
-
Total Tax Liability
-
-
Illustration 2 - Assuming a Cost to Company (CTC) of Rs. 20,00,000
Cost to Company (including PLI)20,00,000
Particulars
New Tax Regime
Old Tax Regime
FY 25-26
FY 25-26
(Rs.)
(Rs.)
Basic Salary
10,00,000
10,00,000
House Rent Allowances
4,00,000
4,00,000
Children Education Allowance
2,400
2,400
Hostel Expenditure Allowance
7,200
7,200
Training Reimbursement
-
25,000
Work from Home Reimbursement
-
21,000
Leave Travel Assistance
1,50,000
1,50,000
Conveyance Reimbursement
22,000
22,000
Mobile/ Telephone Reimbursement
20,000
20,000
Food coupons
-
26,400
Festival Gift Coupons
-
4,750
Employer's contribution to Provident Fund
1,20,000
1,20,000
Business Development Reimbursement
-
34,343
Employer's Contribution to NPS
1,40,000
(14% of Basic)
1,00,000
(10% of Basic)
Special Allowance
1,38,400
66,907
Gross Salary
20,00,000
20,00,000
Cost to Company
20,00,000
20,00,000
Less:- Exemptions / Deductions
Children Education Allowance
-
2,400
Hostel Expenditure Allowance
-
7,200
Work from Home Reimbursement
-
21,000
Leave Travel Assistance
-
1,50,000
Training Reimbursement
-
25,000
Conveyance Reimbursement
22,000
22,000
Mobile/ Telephone Reimbursement
20,000
20,000
Food coupons
-
26,400
Festival Gift Coupons
-
4,750
Employer's contribution to Provident Fund
1,20,000
1,20,000
Business Development Reimbursement
-
34,343
Standard deduction
75,000
50,000
Total Exemptions / deductions
2,37,000
4,83,093
Gross Taxable salary
17,63,000
15,16,907
Less: Deduction under section 24(b) - Interest on Home Loan
-
(2,00,000)
Gross Total Income
17,63,000
13,16,907
Less : Deduction under section 80C of the Act (including employee contribution to PF)
-
1,50,000
Less:- Deduction under section 80CCD(1B) - NPS
-
50,000
Less : Deduction under section80D of the Act
-
75,000
Less : Deduction under section80G of the Act
-
50,000
Less : Deduction under section80CCD(2) of the Act - NPS
1,40,000
1,00,000
16,23,000
8,91,907
Less : Income-Tax
1,24,600
90,881
Rebate u/s 87A
-
-
Surcharge
-
-
Education Cess @ 4%
4,984
3,635
Total Tax
1,29,580
94,520
Illustration 3 - Assuming a Cost to Company (CTC) of Rs. 39,00,000
Cost to Company (including PLI)
39,00,000
Particulars
New Tax Regime
Old Tax Regime
FY 25-26
FY 25-26
(Rs.)
(Rs.)
Basic Salary
19,50,000
19,50,000
House Rent Allowances
7,80,000
7,80,000
Children Education Allowance
2,400
2,400
Hostel Expenditure Allowance
7,200
7,200
Training Reimbursement
-
55,000
Work from Home Reimbursement
-
31,000
Leave Travel Assistance
1,95,000
1,95,000
Conveyance Reimbursement
32,000
32,000
Mobile/ Telephone Reimbursement
25,000
25,000
Food coupons
-
37,600
Festival Gift Coupons
-
4,750
Employer's contribution to Provident Fund
2,34,000
2,34,000
Business Development Reimbursement
-
44,000
Employer's Contribution to NPS
2,73,000
(14% of Basic)
1,95,000
(10% of Basic)
Special Allowance
4,01,400
3,07,050
Gross Salary
39,00,000
39,00,000
Cost to Company
39,00,000
39,00,000
Less:- Exemptions / Deductions
Children Education Allowance
-
2,400
Hostel Expenditure Allowance
-
7,200
Work from Home Reimbursement
-
31,000
Leave Travel Assistance
-
1,95,000
Training Reimbursement
-
55,000
Conveyance Reimbursement
32,000
32,000
Mobile/ Telephone Reimbursement
25,000
25,000
Food coupons
-
26,400
Festival Gift Coupons
-
4,750
Employer's contribution to Provident Fund
2,34,000
2,34,000
Business Development Reimbursement
-
44,000
Standard deduction
75,000
50,000
Total Exemptions / deductions
3,66,000
7,06,750
Gross Taxable salary
35,34,000
31,93,250
Less: Deduction under section 24(b) - Interest on Home Loan
-
(2,00,000)
Gross Total Income
35,34,000
29,93,250
Less : Deduction under section 80C of the Act (including employee contribution to PF)
-
1,50,000
Less:- Deduction under section 80CCD(1B) - NPS
-
50,000
Less : Deduction under section80D of the Act
-
75,000
Less : Deduction under section80G of the Act
50,000
Less : Deduction under section80CCD(2) of the Act - NPS
2,73,000
1,95,000
32,61,000
24,73,250
Less : Income-Tax
5,58,300
5,54,475
Rebate u/s 87A
-
-
Surcharge
-
-
Education Cess @ 4%
22,332
22,179
Total Tax
5,80,630
5,76,650
Note: The above are only illustrative instances of the salary structure under alternative regimes and are not intended for tax planning purposes.
If the difference in income tax liability between both tax regimes is not significant then going for new tax regime may be more convenient for the taxpayers. They can get similar results with new tax regime without the corresponding paperwork required in the old tax regime. Overall, in case if the compensation structure is reviewed and recalibrating (refer illustration above), there could be significant reduction in the overall documentation requirements for both employer (to collect and retain documents) and to the employee (to submit eligible investment proofs).
It is pertinent to note that the rebate u/s 87A is available only on income taxed at normal slab rates under the new regime. Income subject to special tax rates such as short-term capital gains under Section 111A, long-term capital gains under Section 112A, or income from lotteries and betting, etc is not eligible for the rebate. Further, it is advisable to keep some cushion as the rebate is based on taxable income which includes not only salary income but other incomes such as dividend income, interest income, rental income, etc.
Conclusion
The liberalised tax framework introduced through the recalibrated New Tax Regime in Finance Act, 2025 presents a unique opportunity for both employers and employees to simplify salary structuring and enhance disposable income. With the increased rebate limit under Section 87A making net taxable income up to Rs. 12 lakhs completely tax-free, a well-aligned compensation strategy can eliminate the need for TDS deduction, reduce compliance overhead, and improve employee liquidity.(The article is written by Dr Suresh Surana, a practising chartered accountant.
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This story originally appeared on: India Times - Author:Faqs of Insurances
