It’s appraisal week. Your founder forwards you an offer letter the sales head sent to a candidate — ₹14 LPA CTC. The candidate has come back asking: “What’s my take-home? And why is basic only ₹3.5 lakh when my brother at the same package gets ₹7 lakh basic?” You open the salary structure your last consultant designed in 2019, and you already know — it won’t survive the new labour codes that kicked in on 21 November 2025.

If that scene feels familiar, you’re not alone. Almost every Indian SME we work with is restructuring CTCs in 2026 — and most are getting one or two pieces wrong. Here’s the clean guide.

TL;DR — Salary Structure in India 2026

Basic + DA must be at least 50% of total CTC under the Code on Wages 2019, which became operational on 21 November 2025.
A clean Indian CTC has 7 components: Basic, HRA, special allowance, employer PF, gratuity provision, bonus, and reimbursements/perks.
Take-home is usually 70–82% of quoted CTC — the gap is statutory contributions and tax.
Under the new tax regime (FY 2026-27), salaried employees get a ₹75,000 standard deduction and a rebate making income up to ₹12.75 lakh effectively tax-free.

What “salary structure” actually means (and why it matters in 2026)

A salary structure is the way you split an employee’s total annual compensation — the CTC — into named components. Each component has its own tax treatment, its own statutory implication, and its own effect on take-home pay. Get the split right and your employee keeps more rupees in hand for the same cost to you. Get it wrong and you either overpay tax for them or underpay PF and gratuity — both painful, in different ways.

In 2026 this matters more than ever because the four labour codes — Code on Wages 2019, Code on Social Security 2020, Industrial Relations Code 2020, and the OSH Code 2020 — became effective on 21 November 2025. The Ministry of Labour has since issued FAQ clarifications and a Compliance Handbook for employers, and Central Rules are being notified in phases. The single biggest change for payroll: wages (basic + DA + retaining allowance) must be at least 50% of total remuneration.

The 7 components every Indian CTC has

Here’s the standard split most Indian SMEs use for a salaried, white-collar employee. We’ve used a ₹12,00,000 annual CTC for a Delhi-based employee as the example.

Component	Typical %	Example (₹/year)	Tax treatment
Basic salary	50% of CTC	6,00,000	Fully taxable
HRA	50% of basic (metro)	3,00,000	Partially exempt — old regime only
Special / other allowance	Balancing figure	1,57,200	Fully taxable
Employer PF (12% of basic, capped at ₹1,800/m)	~3.6%	21,600	Tax-free on contribution; taxable above ₹2.5L/yr
Gratuity provision (4.81% of basic)	~2.4%	28,800	Exempt up to ₹20 lakh on exit
Statutory bonus (8.33% on ₹7,000)	~0.5%	6,996	Fully taxable
Reimbursements (mobile, internet, fuel)	variable	—	Exempt against bills

Two notes on the table above. First, employer PF is mandatory once you cross 20 employees, and is calculated on basic wages up to a ₹15,000 ceiling — meaning your maximum statutory employer contribution is ₹1,800/month per employee, even on high salaries. Second, gratuity is an accounting provision in CTC, not a monthly payout — it’s payable only after 4 years and 240 days of continuous service.

The 50% basic pay rule — what changed in November 2025

Section 2(y) of the Code on Wages defines “wages” as basic pay, dearness allowance and retaining allowance — and explicitly excludes HRA, conveyance, overtime, bonus, and other allowances. Then comes the kicker: those excluded allowances together cannot exceed 50% of total remuneration. By plain math, that means basic + DA + retaining allowance must be ≥ 50% of CTC.

Why does this hit IT services, BPO, retail and hospitality the hardest? Because historically those sectors kept basic at 25–35% of CTC and inflated special allowance to keep PF and gratuity liability low. With the codes in force, that’s no longer an option.

Three real consequences for your books:

PF outgo goes up — only if your basic is currently below the ₹15,000 ceiling. If you’re already at the ceiling, nothing changes on PF.
Gratuity provisioning goes up — your accountant will book a higher year-end provision.
Take-home drops marginally — employee PF (12% of higher basic) increases, so net salary dips. Most employees see a 3–8% reduction; their savings rise by the same amount.

Industry estimates from the Ministry’s March 2026 FAQ document and major payroll consulting firms put the average employer statutory cost increase at 5–15% for companies that previously ran low-basic structures. Plan your appraisal budgets accordingly.

How to design a tax-efficient CTC for FY 2026-27

The honest answer first: under the new tax regime, salary structure barely affects tax. You get a flat ₹75,000 standard deduction, and the rebate makes income up to ₹12,00,000 effectively tax-free. HRA, LTA, and most 80C deductions are not available under the new regime. So if your employee opts for the new regime, just keep the structure simple and compliant.

The old regime is where structuring pays off — for employees who actually rent a house, pay an EMI, contribute to PPF, and pay LIC premiums. Here’s a clean checklist HR managers should run for every offer letter:

Set basic at 50% of CTC — meets the labour code, supports retirement.
Set HRA at 50% of basic for metros (Mumbai, Delhi, Kolkata, Chennai) and 40% for non-metros. Bangalore, Hyderabad, Pune are non-metros for HRA exemption purposes.
Build in reimbursements with bill submission — mobile (₹2,000–₹3,000/month), internet (₹1,500–₹2,000/month), books and periodicals (₹1,000/month), professional development (₹50,000/year).
Add a meal card or Sodexo equivalent if your headcount supports it — ₹26,400/year tax-exempt.
Keep special allowance as the balancing figure, not a fixed percentage.
Include NPS employer contribution (up to 14% of basic for govt, 10% for private) — deductible under 80CCD(2) even in the new regime.

For a ₹12 LPA employee in Delhi paying ₹35,000/month rent, a well-designed old-regime structure can save ₹40,000–₹70,000 in tax versus a flat new-regime structure — but only if the employee actually claims the exemptions. Make rent declarations and 12BB submission part of your annual investment declaration drive.

Common salary structure mistakes HR managers make

Treating “monthly gross” as CTC in the offer letter. Always quote CTC = monthly gross × 12 + employer PF + gratuity provision + variable. If you don’t, attrition spikes when the first appraisal hike comes in and the employee realises their “12 LPA” was actually 10.6 LPA in their hand.
Keeping basic at 30% to save PF. Post-November 2025 this is non-compliant under the Code on Wages — and on labour inspection it triggers a wage code violation, not just a PF arrears notice.
Including variable pay inside CTC without a clear payout policy. If you list ₹1,00,000 as “performance bonus” in CTC but pay only on rating ≥ 4, document the rating thresholds in the appointment letter. Employees who exit before payout regularly take this to labour court.
Forgetting professional tax in the salary slip. PT is state-specific — Maharashtra ₹200/month, Karnataka ₹200/month, West Bengal up to ₹200/month, Tamil Nadu ₹208/month — and must show as a deduction on every slip in those states.
Not updating CTC when an employee crosses the ₹21,000 ESI gross ceiling. ESI deduction should stop from the next contribution period (April or October). Most payroll teams miss this and accidentally over-deduct.
Mixing old and new regime calculations mid-year. Once an employee declares their regime in April, lock it for the financial year. Mid-year switches require recomputing every TDS slip and almost always trigger a Form 24Q correction.

Salary Structure FAQs

Is the 50% basic rule mandatory in 2026?

Yes. The Code on Wages 2019 became operational on 21 November 2025, and the rule that wages (basic + DA) must be at least 50% of total remuneration applies to every employer in India once Central and state rules are notified for your state. The Ministry of Labour has confirmed this in its 2026 FAQ clarifications.

What’s the difference between CTC and take-home salary?

CTC is the total annual cost to the employer — fixed pay + variable + employer PF + gratuity provision + insurance + other perks. Take-home is what hits the employee’s bank account after employee PF, professional tax, ESI (if applicable), and TDS. Take-home is typically 70–82% of CTC depending on tax regime, location, and salary bracket.

Which cities count as “metro” for HRA exemption?

For HRA exemption under Section 10(13A) of the Income Tax Act, only four cities count as metros — Mumbai, Delhi, Kolkata, and Chennai. Employees there can claim up to 50% of basic as exempt HRA. Bangalore, Hyderabad, Pune, Ahmedabad, and all other cities are non-metro, with a 40%-of-basic cap. This is independent of HRA exemption rules under labour codes.

Should I structure salaries differently for employees who pick the new tax regime?

No. Maintain one clean structure for everyone and let the tax regime choice happen at the employee’s declaration stage. The salary slip is the same; only the TDS computation differs. Trying to maintain two structures creates payroll errors and is impossible to scale past 30 employees.

How often should I review my company’s salary structure?

Review the structure template at least once a year — usually in March, before the new financial year. Review individual CTCs at appraisal time. And do an emergency review whenever there’s a major regulatory change, like the labour codes notification in late 2025 or any future tax slab change in the Union Budget.

Do I need to issue a fresh appointment letter when I restructure CTC?

If gross monthly pay does not change but the internal split shifts to comply with the 50% basic rule, a signed addendum or revised salary annexure is enough. If you also change net take-home, issue a formal salary revision letter with the new effective date and employee acknowledgement on email.

Closing thought

A salary structure is a compliance document, a tax-planning tool, and a hiring signal all at once. Don’t borrow your competitor’s template — design yours for your industry, your state, and the new labour codes. If you’d rather not maintain spreadsheets, our payroll software auto-generates compliant 50%-basic structures and handles PF, ESI, PT and TDS on every slip. You can also try our free PF & ESI calculator to model a new CTC in under a minute.

Sources for current rules and clarifications: Ministry of Labour & Employment, EPFO, Income Tax Department.