How to structure your employees' salary

You've agreed on a number. The candidate is happy, you're happy, the offer is out. Then someone asks: what's the basic, what's the HRA, how much goes to PF? And suddenly the single figure on the offer letter needs to become a structure.

Getting that structure right matters more than most employers realise. It determines how much tax your employees pay, how much goes toward their retirement, and whether your payroll survives an audit. And the rules underneath it have moved more in the last year than in the decade before: the Labour Codes are now in force, India has a brand-new Income Tax Act, and the PF wage ceiling has finally gone up. This is a walkthrough of how to get it right, as things stand today.

If you're short on time

A lot has shifted in the past year. Here's the quick version; the rest of this piece walks through each change.

Why the structure matters more than the number

Until a few years ago, salary structures in India were mostly mechanical. Basic, HRA, conveyance, special, tax. Almost every company copied the same template. The form was filled in, payroll was processed, and nobody asked too many questions.

That has shifted. Employees today read their payslips. They compare offers component by component. They ask why their tax differs from a friend's, why their take-home looks lower than the headline number, why their PF balance is what it is. The rest of the world (banking, healthcare, even electricity bills) has trained people to expect transparency, and salary is no exception.

And now the law expects it too. Since November 2025, there's a single definition of what counts as "wages", and it applies to almost every statutory calculation on the payslip.

Which makes a thoughtful structure less of a finance task and more of an act of trust.

The fixed foundation

Every Indian salary structure starts with Basic Salary. It's the anchor that everything else is calculated against.

For years, most employers set basic somewhere between 40% and 50% of CTC, and the choice was largely theirs. Two things pull it in opposite directions. A higher basic increases contributions to provident fund, gratuity, and other retirement components, which is good for the employee long-term but raises the cost of every payroll. A lower basic leaves more room for tax-friendly allowances in the short term, but shrinks the retirement corpus over time.

That choice has narrowed. India's four Labour Codes came into force on 21 November 2025, and the final central rules followed in May 2026. (States are still finalising their own.)

The Code on Wages, 2019 (which you can read on the Ministry of Labour & Employment website) brings in one definition of "wages" across all four codes. Wages are basic pay, dearness allowance, and retaining allowance. Almost everything else (HRA, conveyance, bonus, overtime, commission) is an exclusion.

Here's the part that matters for your structure. Those exclusions can't add up to more than 50% of total remuneration. If they do, the excess is simply added back to wages.

In practice, that means keeping basic below half of total pay doesn't save you anything anymore. The law treats the shortfall as wages anyway, and your PF and gratuity calculations follow. Setting basic (plus DA) at 50% or more of total remuneration is no longer just a sensible default. It's the cleanest way to stay compliant.

Dearness Allowance (DA) sits next to basic in many traditional structures, primarily in government and PSU pay. Most private employers in India don't separately pay DA, but if you do, it counts as wages alongside basic for every statutory calculation.

Allowances that earn their place

Allowances are where structure gets interesting. They are the components that, used well, reduce an employee's tax outgo without raising your cost. Just remember that, along with your other excluded components, they now have to fit inside that 50% cap.

A few worth knowing well:

House Rent Allowance (HRA)

Probably the single most useful allowance in the Indian structure. Most employers set it at 40% to 50% of basic, depending on city. It's partially exempt from tax for employees who live in rented accommodation, under Section 11 of the Income Tax Act, 2025 (it was Section 10(13A) under the old Act).

The exempt amount is the lowest of three figures:

• the actual HRA received
• 50% of basic plus DA in a metro (40% elsewhere)
• rent paid minus 10% of basic plus DA

The big change is the metro list. From 1 April 2026, it has grown from four cities to eight: Delhi, Mumbai, Kolkata and Chennai are now joined by Bengaluru, Hyderabad, Pune and Ahmedabad. If a good part of your team works in those four, their HRA exemption just got bigger.

One new detail for your declaration process. If an employee pays more than ₹1 lakh a year in rent to a parent, spouse or sibling, they need to declare the landlord's name, PAN and relationship on Form 124 (previously Form 12BB). Without it, the claim won't stand.

Leave Travel Allowance (LTA)

A reimbursement for domestic travel, exempt for two journeys in a block of four calendar years. The current block runs from 2026 to 2029. Under the new Act, it sits in Schedule III (it was Section 10(5) earlier).

It only covers actual travel costs (not stay or food) and only for the employee and immediate family. A small allowance, but a meaningful one for employees who travel. If someone made no exempt journeys in the last block, they can carry one forward, as long as they take it before the end of 2026.

Children's education and hostel allowances

These used to be the allowances nobody bothered with: ₹100 a month for education and ₹300 for hostel, limits that hadn't moved in decades. The Income Tax Rules, 2026 changed that.

The exemption is now ₹3,000 per month per child for education and ₹9,000 for hostel, for up to two children. For an employee with school-going kids, that's real money.

Special Allowance

The flexible bucket. Whatever doesn't fit elsewhere usually lands here. It's fully taxable, and it's still where you balance the structure. Just remember it counts as an exclusion under the wage definition, so it can't push basic below half anymore.

Everything else

A handful of other components (meal vouchers, uniform, telephone) exist with smaller exemptions, and a couple have moved up. Meal vouchers are now exempt up to ₹200 a meal (up from ₹50), and employer gifts up to ₹15,000 a year (up from ₹5,000). Use them where they fit your team. Stuff them in artificially, and you're just adding clutter.

Worth noting: most of these exemptions only apply under the old tax regime. Under the new regime, the default since FY 2023-24, they're largely folded into a flat standard deduction. We'll come back to that.

(Meal vouchers are one of the few that some advisors treat as available under both regimes, so check before you promise it.)

The statutory layer

Some parts of the structure aren't yours to design. They're set by law, and the only decision you make is making sure they're calculated correctly. Most of them now sit under the Code on Social Security, 2020.

There are four of them, and together they form the safety-net layer of an Indian salary. They're not the part employees usually look at, but they're the part that quietly compounds into something meaningful over a career.

Employees' Provident Fund (EPF)

Both you and the employee contribute 12% of wages every month. Note that word: wages, as the Code defines it. That's basic plus DA, plus anything added back under the 50% rule.

The employee's share goes into their EPF account. Your share is split between EPF and the Employees' Pension Scheme (EPS). Contributions, balances, and withdrawals are managed through EPFO.

The other big change is the ceiling. On 17 September 2026, the statutory wage ceiling went up from ₹15,000 to ₹25,000 a month, its first revision since 2014. If you've been capping PF at ₹1,800 a month, that cap is now ₹3,000, so your CTC math will need a fresh look.

For employees whose wages are above ₹25,000 a month, there's some flexibility in how contributions are calculated. Make that choice consciously, not on autopilot.

Employees' State Insurance (ESI)

Applicable for employees whose gross monthly wages are ₹21,000 or below (₹25,000 for employees with disabilities). The employee contributes 0.75% and the employer 3.25%. ESI funds medical and cash benefits for the employee and dependents through ESIC.

Unlike PF, the ESI ceiling hasn't moved, despite plenty of talk about raising it. Whether you need to register depends on your headcount, not just your pay levels; the ceiling then decides which of your people contribute. Check at every payroll cycle as wages change.

Gratuity

Now governed by the Code on Social Security, 2020, which absorbed the Payment of Gratuity Act, 1972 (both on the Ministry of Labour site). Permanent employees still become eligible after five years of continuous service. Fixed-term employees now qualify after just one year, and any extra stretch beyond six months counts as another full year.

The formula is straightforward: last-drawn wages × 15 × completed years of service, divided by 26. Again, "wages" means the Code's definition, so a low basic padded with allowances won't shrink the number. For private-sector employees, the ceiling remains ₹20 lakh.

Most employers reflect a notional gratuity provision (around 4.81% of wages) inside the CTC, which is honest. The actual payment only happens at exit.

Professional Tax (PT)

A state-level deduction, capped at ₹2,500 per year by Article 276 of the Constitution. The exact slabs depend on the state your employee works in. Karnataka, Maharashtra, Tamil Nadu, West Bengal and several others levy it. Some states don't.

The moving parts

The remaining components are the ones that change most from one structure to another.

Reimbursements. Genuine business expenses (mobile bills, internet, books, travel) reimbursed against actual bills. They're not part of taxable salary, which is the point. Keep them clean and documented.

Variable pay or bonus. A performance-linked component, paid quarterly or annually. Treat it as a separate line and not as a backdoor for inflating the headline CTC. Employees see through that quickly.

TDS. The income tax that you, as the employer, are required to deduct and deposit each month, now under Section 392 of the Income Tax Act, 2025 (it was Section 192 under the old Act). It's calculated on the employee's projected annual income and chosen tax regime, declared at the start of the tax year (the new Act drops "financial year" and "assessment year" in favour of a single "tax year"). The Income Tax Department handles all the filings. Your quarterly returns go on Form 138 (previously Form 24Q), and you reconcile through Form 130 (previously Form 16) at year-end.

One transition note: salaries for FY 2025-26 still fall under the old Act and the old certificate. Form 130 (previously Form 16) applies from Tax Year 2026-27 onward.

Old regime, new regime, and what's actually shifted

Until 2020, structuring a salary was largely about packing in as many tax-exempt allowances as possible. The new tax regime, now the default, has changed the calculus. It offers lower tax rates and a higher standard deduction (₹75,000, left unchanged in Budget 2026) but removes most allowance-level exemptions.

And for a lot of people, it's hard to argue with. A salaried employee earning up to ₹12.75 lakh a year pays no income tax at all under the new regime, once the standard deduction and rebate are counted.

For your employees, this means HRA, LTA, Section 123 investments (the new home of Section 80C, with the same ₹1.5 lakh limit) and others only matter if they opt out of the new regime.

For you as an employer, it means the structure should still be flexible enough to serve both kinds of people:

• those who stay with the old regime and want every allowance optimised (the bigger HRA, education and hostel limits give them more to work with)
• those who pick the new regime and just want a simple, clean payslip

In the end

Salary structuring is one of those quiet acts of company-building. It rarely makes it into the all-hands deck. It almost never gets a thank-you. But it sits underneath everything else, the trust, the planning, the small weekly conversations people have at home about money.

The rules will keep moving. They've moved a lot this past year alone. But the structure you put in place today is the scaffolding for years of those moments. Worth a little time, and a lot of care.

We're in the business of making paydays simpler. Yours, and the people you pay. If you'd like to see what that looks like in practice, head over to Zoho Payroll and take it for a free spin.