Salary Restructuring to Save Tax Under the New Regime

Short answer: With the new tax regime as the default option, most traditional tax-saving deductions like HRA and Section 80C are unavailable. However, you can still reduce your taxable income by restructuring your salary to include components like the employer's NPS contribution, meal coupons, and other exempt perquisites. This strategy involves converting parts of your taxable allowance into tax-free benefits, directly lowering your tax outgo.

What is salary restructuring?

Salary restructuring is the process of modifying the components of your total compensation package (CTC) without necessarily changing the total amount. The goal is to create a more tax-efficient structure by reallocating funds from taxable components, like a 'Special Allowance', to non-taxable or partially exempt components like perquisites and employer contributions to retirement funds. This is a formal process done in agreement with your employer, usually at the beginning of a financial year.

Why is restructuring necessary under the new tax regime?

Restructuring is more critical than ever because the new tax regime, governed by Section 115BAC of the Income Tax Act, is the default for all salaried individuals. This regime offers lower tax rates but disallows over 70 common exemptions and deductions, including House Rent Allowance (HRA), Leave Travel Allowance (LTA), and most deductions under Chapter VI-A (like Section 80C, 80D, 80TTA). Therefore, the old method of saving tax through these avenues is no longer available if you are in the new regime. Strategic restructuring is the primary tool left to legally reduce your tax liability.

Which salary components can reduce my tax bill in the new regime?

Even under the restrictive new tax regime, several components remain tax-exempt or eligible for deduction, making them ideal for salary restructuring.

• Standard Deduction: A flat deduction of ₹75,000 is available to all salaried individuals under the new regime. This requires no investment or expense proof.
• Employer's Contribution to NPS: This is the most powerful tool. An employer's contribution to your National Pension System (NPS) account up to 10% of your salary (Basic + DA) is deductible under Section 80CCD(2).
• Meal Perquisites: Food and non-alcoholic beverages provided by the employer through paid vouchers or coupons (like Sodexo) are exempt up to ₹50 per meal. This can amount to an annual tax-free benefit of ₹26,400 (assuming ₹2,200 per month).
• Superannuation Fund: An employer's contribution to an approved superannuation fund up to ₹1,50,000 per year is exempt.
• Work-Related Perquisites: Items provided by the employer for official work, such as laptops, mobile phones, and internet bills, are not considered taxable perquisites in your hands.
• Gifts: Gifts in kind from the employer up to ₹5,000 annually are exempt from tax.

Should I opt for the old regime instead?

Choosing between the old and new tax regimes depends entirely on your financial situation, particularly your ability to utilize deductions. The new regime is beneficial for those with lower incomes (due to the ₹12 lakh rebate) or those who do not have significant expenses or investments like rent, home loans, or 80C investments. High-income earners with substantial HRA and home loan interest deductions might still find the old regime more favourable. A careful comparison is essential every year.

Old Tax Regime vs. New Tax Regime (FY 2025-26)

Feature	Old Tax Regime	New Tax Regime (Default)
Standard Deduction	₹50,000	₹75,000
Rebate (Sec 87A)	Up to ₹5 lakh income	Up to ₹12 lakh income
HRA Exemption	Available	Not Available
LTA Exemption	Available	Not Available
Section 80C (PF, ELSS etc.)	Up to ₹1,50,000	Not Available
Section 80D (Health Insurance)	Available	Not Available
Home Loan Interest (Sec 24b)	Up to ₹2,00,000	Not Available
Employer NPS (80CCD(2))	Available	Available
Employee NPS (80CCD(1B))	Up to ₹50,000	Not Available

For a detailed analysis, read our guide on the New vs. Old Tax Regime.

How does the employer's NPS contribution work?

The deduction under Section 80CCD(2) for an employer's contribution to NPS is a significant benefit available in both tax regimes. Your employer can contribute up to 10% of your salary (defined as Basic Pay + Dearness Allowance) to your Tier-I NPS account. This amount is deducted from your gross income, reducing your taxable income directly. For instance, if your basic salary is ₹10,00,000, your employer can contribute ₹1,00,000 to your NPS account, and this ₹1,00,000 will not be included in your taxable income. This is an excellent way to save for retirement while also saving tax now.

Worked example

Priya is a software engineer in Bengaluru with a Cost-to-Company (CTC) of ₹18,00,000 per annum for the financial year 2025-26. She is in the default new tax regime.

Scenario A: Unstructured Salary

Her entire CTC is paid as a taxable salary.

• Gross Taxable Salary: ₹18,00,000
• Less: Standard Deduction: ₹75,000
• Net Taxable Income: ₹17,25,000

Tax Calculation:

• Tax on ₹17,25,000 (as per new regime slabs): ₹2,17,500
• Add: 4% Health & Education Cess: ₹8,700
• Total Tax Payable: ₹2,26,200

Scenario B: After Salary Restructuring

Priya discusses restructuring with her HR department. They agree to carve out the following from her CTC:

• Employer's NPS Contribution: ₹72,000 (assuming 10% of a Basic Salary of ₹7,20,000)
• Meal Coupons: ₹26,400 per annum

The total amount now paid as tax-exempt benefits is ₹98,400. This is no longer part of her taxable salary.

• Gross Taxable Salary: ₹18,00,000 - ₹98,400 = ₹17,01,600
• Less: Standard Deduction: ₹75,000
• Net Taxable Income: ₹16,26,600

Tax Calculation:

• Tax on ₹16,26,600: ₹1,87,980
• Add: 4% Health & Education Cess: ₹7,519
• Total Tax Payable: ₹1,95,499

By simply restructuring her salary, Priya saves ₹30,701 (₹2,26,200 - ₹1,95,499) in taxes annually. You can model your own situation using our online income tax calculator.

Common mistakes

1. Ignoring NPS: Many employees overlook the employer's NPS contribution under Section 80CCD(2), which remains the most effective tax-saving tool under the new regime.
2. Not formalizing the structure: Any restructuring must be formally documented in your employment agreement or salary structure letter. Informal arrangements are not valid for tax purposes.
3. Confusing Allowances with Perquisites: Cash allowances for meals or gadgets are fully taxable. To get the tax benefit, they must be provided as perquisites, like meal vouchers or company-owned devices.
4. Forgetting to Compare Regimes: Do not blindly accept the default new regime. Always calculate your tax liability under both regimes before the financial year begins to make an informed choice.
5. Misunderstanding Perquisite Rules: Providing a company car or gadget for purely personal use will result in the perquisite value being added to your taxable income. Ensure the primary use is official.

How SP & SC helps

Navigating salary structures under the new tax laws can be complex for both employers and employees. SP & SC's payroll and compliance services provide end-to-end solutions. For employers, we design and implement tax-efficient and compliant salary structures. For employees, we offer personalized advisory to help you understand your CTC, choose the right tax regime, and identify opportunities for restructuring to maximize your take-home pay. We ensure that your salary is optimized for tax savings while adhering to all legal requirements.

Frequently asked questions

H3: Can my employer refuse to restructure my salary?

Yes, salary restructuring is a mutual agreement between the employer and the employee. Companies are not legally obligated to offer a flexible or restructured salary package, though many do to remain competitive in hiring.

H3: Is it better to have a higher basic salary?

A higher basic salary increases your statutory contributions like Provident Fund (PF) and gratuity, which builds a larger retirement corpus. However, it also increases the taxable portion of your salary. A balanced approach is usually best, ensuring your basic pay is sufficient without inflating your tax liability unnecessarily.

H3: Are gift vouchers from an employer taxable?

Gift vouchers or coupons received from an employer are exempt from tax up to a cumulative value of ₹5,000 in a financial year. Any amount exceeding ₹5,000 is fully taxable as a perquisite.

H3: How often can I restructure my salary?

Typically, employers allow salary restructuring once a year, before the start of the financial year. This allows them to manage their payroll and TDS calculations effectively. You must usually submit your choice of tax regime and restructuring requests within a specific deadline set by your employer.

H3: Does the new ₹12 lakh rebate apply to everyone?

No, the tax rebate under Section 87A, which makes income up to ₹12 lakhs effectively tax-free, is only available for individuals who opt for the new tax regime. If your net taxable income under the new regime exceeds ₹12 lakhs even by one rupee, you are not eligible for any rebate and must pay tax on the entire income as per the slabs.

Get a fixed-fee quote

Whether you are a founder designing your company's compensation policy or an employee looking to optimize your take-home pay, we can help. Contact SP & SC to share your documents, and we will provide a clear, written fixed-fee quote for our services. You can also reach us on WhatsApp at +91 90356 74566. Our team handles all aspects of tax planning and compliance, ensuring you achieve the best possible outcomes, end to end.