New Income Tax Act Takes Effect Today, Alters Basic Pay and Dearness Allowance Calculations

(INDIA) — Companies across India began restructuring employee pay from April 1, 2026, as the New Income Tax Act 2025 and the Labour Code, including the Code on Wages, took effect and required basic pay, Dearness Allowance and retaining allowance to make up at least 50% of cost to company.

The change shifts a larger share of salary into components that form the base for provident fund and gratuity, a move that can reduce monthly in-hand pay for many workers even as it raises retirement-linked savings over time.

Employers that long kept basic pay at 25-40% of CTC and filled the rest with allowances now have less room to do so. Under the new structure, total allowances cannot exceed 50%.

That marks a change from common salary designs in which allowances made up 70-80% of overall compensation. Those structures helped contain PF and gratuity obligations because both were tied to a smaller wage base.

For employees, the immediate effect depends on how their salaries were already arranged. A worker whose basic pay was already 50% of CTC may see little change, while someone with a low basic pay and a large allowance component may see a sharper shift.

A Rs 50,000 CTC illustrates the point. If the basic pay was already Rs 25,000, the revision may be limited. If the basic pay was Rs 10,000 and allowances accounted for Rs 40,000, the basic pay would need to rise, for example to Rs 25,000, and deductions linked to that higher base would also rise.

Provident fund contributions are calculated at 12% of basic pay plus Dearness Allowance. Gratuity is based on final basic pay and length of service.

As a result, sectors that employ large numbers of salaried workers under flexible pay structures, including IT, retail, BPO and hospitality, can face 5-15% higher statutory costs. Employees in those sectors may gain in future payouts, but they can also see less cash in hand each month if companies do not raise overall CTC.

The broad effect comes from a simple arithmetic shift. When allowances move into basic pay, the wages base used for PF and gratuity rises, lifting statutory deductions inside the same compensation envelope.

An example cited for a Rs 50,000 salary package shows how that base changes. In that illustration, Basic Pay is 20,000, or 40% of CTC, HRA is 10,000, or 20%, Conveyance Allowance is 5,000, and Special Allowance is 9,000.

The wages base for PF and gratuity in that example is 29,000. That figure combines Basic Pay with portions shifted from allowances into the salary elements counted for retirement-linked benefits.

Even where the headline CTC does not change, the employee may still feel the revision in monthly cash flow. The higher base pulls more money into PF and increases the base that matters for gratuity accrual.

That trade-off sits alongside the tax changes that started on the same date. Under the new tax regime, income up to Rs 12.75 lakh is tax-free with Rs 75,000 standard deduction.

Because the new regime does not provide HRA exemptions, the move toward a higher basic pay has limited tax impact for many workers who stay in that regime. The bigger effect for many households comes from salary restructuring and higher deductions, not from a change in slab rates.

HRA still carries documentation rules in cases where it applies. Rent agreements and PAN are required if annual rent > Rs 1 lakh.

If those requirements are not met, TDS is deducted without HRA allowance. Aadhaar does not replace PAN for that purpose.

Another allowance threshold also changed. The conveyance allowance limit rose to Rs 5,000/month.

The New Income Tax Act 2025 also defines the tax year as Apr 1-Mar 31. Compliance timelines under the framework include an ITR-3/4 due date of Aug 31 and revised returns by Mar 31.

Other tax provisions remain unchanged from Budget 2025 in the areas of tax slabs, residential status and capital gains. The new Act also brings virtual digital assets within undisclosed income.

For payroll departments, the challenge lies in reworking structures without changing the total salary promise more than necessary. Companies must decide how much of the higher statutory cost they absorb and how much they leave to flow through as lower take-home pay inside the existing CTC.

That decision will likely vary by employer. Some companies may adjust allowances differently or raise CTC to soften the effect on monthly cash salary, while others may comply with the new minimum basic pay requirement without changing overall compensation.

Workers whose salaries already leaned heavily on basic pay are less exposed to a sudden drop in hand salary. Those whose packages depended on special allowances, low basic pay and lower retirement-linked deductions face a bigger adjustment.

A likely reduction of 5-15% in take-home pay is expected for employees with low basic pay, assuming their CTC does not rise to offset the change. The size of the drop depends on the current salary mix and on how each company implements the restructuring.

For employees, the shift creates a near-term and long-term split. Monthly disposable income can fall as deductions rise, but EPF and gratuity build faster because they are linked to a larger base.

That could matter for workers who stay with one employer for long periods, because gratuity depends on final basic pay and length of service. A higher final basic pay can strengthen that payout.

The Labour Code changes also carry protections beyond salary structure. Salaried individuals up to Rs 24,000/month are entitled to timely payments, protection from unauthorized deductions and double overtime rate.

The rules also enforce gender equality in wages. That provision sits alongside the broader push to standardize wage treatment under the Code on Wages.

Employers now have to balance legal compliance, payroll cost and employee expectations at the same time. For firms in labor-intensive service sectors, even small changes across a large workforce can add up quickly.

For employees comparing old and new tax systems, the salary revision can also affect that choice. A change in basic pay, HRA treatment and deductions may alter which regime works better for a particular worker, even if the headline tax structure stays familiar.

That makes salary slips more important than usual this year. Workers need to check whether their employer moved components into basic pay, how Dearness Allowance is shown, whether retaining allowance applies, and how PF deductions changed after April 1.

Human resources teams are likely to face questions from staff who expected a routine payroll cycle and found lower in-hand salary instead. The reduction may look modest in some cases and much larger in others, depending on how far the old salary structure was from the new 50% floor.

Employees with home rent claims or allowance-heavy packages may need to examine both payroll and tax planning together. Rent agreements, PAN documentation where annual rent > Rs 1 lakh, and the absence of HRA exemption in the new tax regime all affect how those numbers translate into net pay.

The timing also matters because the changes began at the start of the financial year. That gives companies a clean Apr 1-Mar 31 cycle to reset payroll, tax withholding and compliance systems under the new framework.

For many workers, the first clear sign of the change will not be a legal notice or policy circular but a revised payslip. A higher basic pay, a different Dearness Allowance mix and a lower monthly bank credit may show that the New Income Tax Act 2025 and the Code on Wages have moved from policy into pay packets.