Structuring salary properly: what still saves tax under the new regime

When the new tax regime became the default, a lot of salary structuring became decorative. Allowances that once carried exemptions now simply add to taxable income under a different name. But two things survived, and one of them — the employer contribution to NPS — is genuinely valuable and genuinely underused by small companies.

What survived into the new regime

The practical consequence: under the new regime, splitting salary into a dozen allowance heads achieves nothing. What still moves the needle is the employer-side contributions, because they are deductible to the company and not taxable to the employee within limits.

The employer NPS deduction most companies miss

Section 80CCD(2) allows an employer contribution to the employee’s NPS account, deductible for the company and not taxed in the employee’s hands, up to a percentage of salary — a materially higher percentage under the new regime than the old one. It is the one substantial salary-side planning tool that the new regime left intact.

It is underused for a mundane reason: it requires the employer to actually set up the contribution route, and most small companies never did. For a senior employee this is a meaningful, entirely legitimate saving, and it costs the company nothing extra if it is carved out of existing CTC rather than added to it.

If you run payroll for anyone in a higher bracket and you are not offering an employer NPS component, that is usually the single largest legal saving still available in a salary structure.

HRA, when the old regime still applies

Employees who opt out into the old regime — and some still should, particularly those with a large home-loan interest deduction — can claim HRA. The exemption is the least of three amounts:

1. the actual HRA received;
2. rent paid minus 10% of salary;
3. 50% of salary in the four metros, or 40% elsewhere.

Jaipur is a non-metro for this test, so the ceiling is 40%. Rent above ₹1 lakh a year requires the landlord’s PAN. Our rent receipt generator produces receipts in the format assessing officers expect, and the old versus new regime comparison covers which side an individual should sit on.

Statutory components you do not get to choose

• Provident fund — mandatory coverage is driven by the wage ceiling; both employer and employee contribute, and the employer share is a genuine cost, not a deduction from CTC unless your offer letter says so clearly.
• ESI — applies below its own wage ceiling and is heavily weighted to the employer.
• Gratuity — 15 days’ wages for each completed year, payable after five years of continuous service, exempt in the employee’s hands within the statutory limit.
• Professional tax — state-level; our Rajasthan professional tax guide covers the local position.

The four labour codes tighten the definition of “wages” for these calculations, which changes the base that PF and gratuity are computed on. We covered the mechanics in the four labour codes.

The structuring mistakes that cause trouble

• Loading a large share of CTC into “special allowance” to depress the PF base — the labour codes were written specifically to stop this.
• Reimbursements paid without bills. A reimbursement without supporting evidence is salary, and treating it otherwise creates a TDS shortfall the company answers for.
• Paying genuine employees as consultants to avoid PF and ESI — covered separately in employee versus consultant, and the most expensive of these mistakes when it unwinds.

Where we come in

We set up salary structures that hold up to scrutiny — the right base for PF and gratuity, an employer NPS component where it helps, and Form 16 that matches what was actually paid. Our payroll setup service covers structure, registrations and the monthly run.

This article is general information, not professional advice. Limits, rates and dates change by notification — confirm the position for your own year before acting on it.