Salary Structuring and Tax Exemptions for FY 2025-26: What Still Works Under Each Regime

An informational overview of common salary components, their tax treatment, and how the choice of regime changes the picture.

How a salary is structured can materially affect an employee's take-home pay, but the introduction of the new tax regime has changed which components actually deliver a tax benefit. This article explains the main salary components, their treatment for FY 2025-26 (AY 2026-27), and the key difference between the two regimes.

The regime context

Under the old regime, a well-structured salary with HRA, LTA, and various allowances can reduce taxable income meaningfully. Under the new regime, most of these exemptions are not available - the standard deduction and the employer's NPS contribution under Section 80CCD(2) are the principal exceptions. So structuring decisions should be made together with the regime choice.

Common components and their treatment

The components worth understanding

• HRA: exempt under the old regime as the least of: actual HRA, rent paid minus 10% of salary, and 50% of salary (metro) or 40% (non-metro).

• LTA: exemption under the old regime for actual travel within India, twice in a block of four years, subject to conditions.

• Employer NPS (80CCD(2)): the employer's contribution to an employee's NPS account is deductible up to 14% of basic plus DA, and uniquely this benefit is available under the new regime too - making it the most relevant structuring lever for new-regime employees.

• Retirals: items such as gratuity, leave encashment, and PF have their own exemption rules and limits that apply regardless of structuring.

Declarations and documentation

Where an employee claims exemptions through the employer, these are declared in Form 12BB along with supporting proof (rent receipts, LTA travel proof, investment evidence). The employer relies on these declarations when computing TDS, and unsupported claims can be disallowed, leaving a shortfall the employee must settle at the time of filing.

Operationalising structuring and declarations

Applying the correct treatment to each component, capturing Form 12BB declarations and proofs, and reflecting them in monthly TDS is detailed work that scales poorly on spreadsheets. Most employers manage flexible salary structures and declarations through payroll or HRMS software; platforms such as HROne, among other payroll tools used in India, let employees declare components and proofs and then compute the correct taxable salary under the chosen regime. The responsibility for genuine, supportable claims rests with the employee, and the deduction responsibility with the employer.

Conclusion

Salary structuring still matters, but its value now depends heavily on the regime. Under the old regime, HRA, LTA, and 80C-type investments remain powerful; under the new regime, the standard deduction and employer NPS contribution are the main tools. Employees should align their structuring with their regime choice and keep proper documentation for anything they claim.

 Disclaimer: This article is for general information only and reflects the author's understanding of the law as of mid-2026. It is not professional, legal, or tax advice. Provisions are subject to amendment and interpretation; readers should verify the current position and consult a qualified professional before acting.