Many salaried individuals have had their salary break-up rejigged for this financial year in order for companies to comply with the Centre’s new labour laws, which came into effect from 1 April this year.
The primary change to the salary structure is a shift in focus towards long-term and retirement savings for salaried individuals, which means your current in-hand pay may take a hit. Overall, it may also impact your taxable salary and which regime you choose.
How do the new labour laws impact salary break-up?
As per the reforms, there is a new uniform definition of “wages”, which will now include basic pay, dearness allowance (DA), and retention allowance. These components are together required to comprise at least 50% of an employee’s annual compensation.
Further, components such as bonus, house rent allowance (HRA) and special allowances are classified as exclusions till such time that they do not in total exceed 50% of the salary. The excess amount must be added back to wages. In effect, this raises the basic pay component for many employees.
Notably, as some statutory benefits such as contributions to the Employees’ State Insurance Corporation (ESIC) and the Employees’ Provident Fund Organisation (EPF) are linked to your basic pay, there could be a shift in these amounts as well.
‘Salary routed to long-term benefits’
Overall, retirement and social security benefits such as gratuity, insurance coverage, and provident fund could see increased contribution, while in-home salary for employees may decline slightly due to higher deductions.
According to CA Chandni Anandan, Tax Expert at Clear Tax, the shift is better viewed as a reallocation of compensation rather than a net cut. “The more the salary is routed into protected, long‑term benefits, while the overall cost to the employer often remains comparable. For salaried taxpayers, the impact can be managed through smarter tax planning- leveraging investments under Sections 80C and 80D, optimising HRA and other eligible benefits, and using the new regime’s higher standard deduction, so that the tax outflow is optimised to the fullest extent,” she added.
Could changes to labour law impact your tax regime choice?
Not directly. Deductions and exemptions are governed by income‑tax laws, not by the labour codes, which focus on employment conditions, social security, and welfare benefits. “The labour codes do not, by themselves, introduce or modify income‑tax deductions or exemptions available to salaried taxpayers. Any tax benefit or deduction would flow from the Income‑tax Act and the rules notified under it, rather than from the labour codes,” Puneet Gupta, Partner, People Advisory Services – Tax at EY India stated.
Jay Parmar, Co-founder and Partner at tax services firm Aurtus added, “India’s new labour laws have altered salary structures and expanded social security coverage. They do not create new income tax deductions; they increase compulsory savings such as provident fund and pension contributions. These higher contributions would continue to enjoy tax benefits under existing income tax provisions.”
Tax slab under old tax regime
| Income Tax Slabs | Income Tax Rate |
|---|---|
| Up to Rs. 2.5 lakh | Nil |
| Rs. 2.5 lakh to Rs. 5 lakh | 5% |
| Rs. 5 lakh to Rs. 10 lakh | 20% |
| Above Rs. 10 lakh | 30% |
Tax slab under new tax regime
| New Tax Regime Slabs | New Tax Regime Rates |
|---|---|
| Up to Rs. 4 lakh | Nil |
| Rs. 4 lakh to Rs. 8 lakh | 5% |
| Rs. 8 lakh to Rs. 12 lakh | 10% |
| Rs. 12 lakh to Rs. 16 lakh | 15% |
| Rs. 16 lakh to Rs. 20 lakh | 20% |
| Rs. 20 lakh to Rs. 24 lakh | 25% |
| Above Rs. 24 lakh | 30% |
The consideration over whether new tax regime or old tax regime is better for you should take into account the applicable slab, and deductions you can claim. There is also the matter of standard deduction and rebate under Section 87A.
Overall, the new tax regime offers a lower tax slab rate but has very few deduction benefits, while the old tax regime has higher tax slab rates but lets you reduce the taxable income through significant deductions and exemptions.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
