12 Mar 2025Updated: May 2026
Salary restructuring is one of the most impactful and legally permissible forms of income tax planning for salaried employees in India. The Finance Act, 2020 introduced the new tax regime as an alternative to the existing regime, and subsequent amendments — most recently the Finance (No. 2) Act, 2024 — have made the new regime the default. However, the choice between regimes has significant implications for salary structuring: many of the components that reduce tax liability under the old regime are not available under the new regime. The first decision, therefore, is which regime applies — and whether opting out of the default new regime makes financial sense.
New Regime vs Old Regime: The Restructuring Decision
Under the new tax regime (default from FY 2024-25), the tax rates are lower but most exemptions and deductions are unavailable — HRA exemption, LTA exemption, standard deduction of ₹75,000 (available from FY 2024-25 under the new regime), Section 80C, 80D, 80CCD, and most other Chapter VIA deductions do not apply. The new regime is straightforward but offers limited planning scope.
Under the old regime, the higher tax rates are partially offset by a wider range of exemptions and deductions. For employees with significant housing rent, home loan interest, EPF/PPF contributions, insurance premiums, and NPS contributions, the old regime can result in a lower effective tax rate. The break-even analysis — at what income level and deduction level the old regime becomes more favourable — should be done for each employee individually, not assumed.
Key Salary Components and Their Tax Treatment
House Rent Allowance (HRA)
HRA is exempt under Section 10(13A) to the extent of the least of: actual HRA received, 50% of basic salary (40% for non-metro cities), and actual rent paid minus 10% of basic salary. Only applicable under the old regime. Employees paying significant rent — particularly in Kochi, Bangalore, Mumbai, or Delhi — can generate substantial HRA exemption by structuring basic salary and HRA appropriately.
Leave Travel Allowance (LTA)
LTA is exempt under Section 10(5) for two journeys in a four-year block period, for travel within India. The exemption covers actual travel cost (economy air, AC rail, or road transport) for the employee and family. Applicable only under the old regime.
Food Allowance / Meal Vouchers
Meal allowances up to ₹50 per meal (effectively ₹26,400 per year for two meals per working day) are exempt. Meal vouchers provided through the employer are a standard restructuring element.
Phone and Internet Reimbursement
Actual reimbursement for mobile and internet expenses for business use is not a perquisite under the Income Tax Act. Structuring a reasonable phone/internet reimbursement component (typically ₹12,000–₹24,000 per year) reduces taxable salary with minimal compliance friction.
NPS Employer Contribution
Employer contributions to NPS (National Pension System) under Section 80CCD(2) are deductible from taxable salary up to 14% of basic salary for central government employees and 10% for others — and crucially, this deduction is available even under the new tax regime. This is the single most tax-efficient restructuring lever available under the new regime, as it reduces taxable salary at the employer level rather than requiring the employee to make additional investments.
Standard Deduction
A standard deduction of ₹75,000 is available to all salaried employees under both the old and new regimes (increased from ₹50,000 for FY 2024-25 onwards). No restructuring is required for this — it is a flat deduction from gross salary.
The Process: How Salary Restructuring Works in Practice
Salary restructuring requires a formal revision of the employment contract or CTC letter — it cannot be done informally. The employer's payroll system must be updated to reflect the revised components. For employees opting for the old regime, a declaration must be submitted to the employer at the start of the year (Form 12BB), listing the exemptions and deductions claimed. The employer deducts TDS accordingly. At year-end, the employee files ITR to reconcile actual figures with the TDS computation.
Regi Tom Antony And Associates provides income tax planning and salary restructuring advisory for salaried employees, consultants, and business owners across India. For SME payroll and tax advisory, visit smeadvisory.in. Contact: letstalk@rtaandassociates.com | Kakkanad, Kochi.