Last week an employee walked into my client’s HR office with an offer letter in one hand and a calculator app in the other. “This says my CTC is ₹9 lakh,” she said, “so why does the payslip preview show me ₹58,000 a month? That’s only ₹6.96 lakh a year.” She wasn’t wrong to ask. She just didn’t know that CTC and in-hand salary are two very different numbers — and in 2026, the gap between them changed again.
Two things moved this year that every HR manager processing offer letters needs to know: eight cities now qualify for the higher HRA exemption instead of four, and the labour codes’ 50% basic wage rule is now actually being enforced. If your salary structure template hasn’t been updated for both, you’re either miscalculating take-home pay or quietly building a compliance gap.
TL;DR
- Bangalore, Hyderabad, Pune and Ahmedabad joined Delhi, Mumbai, Kolkata and Chennai as “metro” cities for HRA exemption (50% of Basic instead of 40%), effective 1 April 2026.
- Under the Code on Wages, Basic + DA must be at least 50% of CTC — if allowances push it lower, the excess gets added back for PF and gratuity calculations.
- New Tax Regime is now tax-free up to ₹12 lakh taxable income (₹75,000 standard deduction + Section 87A rebate), which is why most employees under that bracket see zero TDS.
- Use EZHRM’s free CTC Salary Calculator to see your exact monthly in-hand number after PF, ESI, Professional Tax and TDS — old and new regime, side by side.
What CTC Actually Means (and Why It Isn’t Your Salary)
CTC, or Cost to Company, is the total amount your employer spends on you in a year — not what lands in your bank account. It bundles your Basic pay, HRA, allowances, the employer’s PF contribution, gratuity provision, and sometimes insurance premiums and other benefits. Your in-hand salary is what remains after Employee PF, ESI (if applicable), Professional Tax and TDS are deducted from your gross pay — and gross pay itself is already CTC minus the employer-side costs.
This is why a ₹9 lakh CTC rarely means ₹75,000 a month. Roughly 8-12% of CTC disappears into employer PF and ESI contributions and gratuity provision before you even see a “gross” figure, and then employee-side deductions take another bite. If you’re structuring offer letters, run the numbers through a proper CTC to in-hand salary calculator rather than a back-of-envelope percentage — it saves the awkward conversation on day one. EZHRM’s full library of free HR calculators covers every deduction on this list if you want to check them individually.
The HRA Rule That Just Changed for Eight Cities
Under Section 10(13A) of the Income Tax Act, HRA exemption depends on whether you work in a “metro” city. For over two decades, only Delhi, Mumbai, Kolkata and Chennai qualified for the higher 50% of Basic exemption slab, while every other city — including Bangalore and Hyderabad — was capped at 40%. That changed with effect from 1 April 2026: Bangalore, Hyderabad, Pune and Ahmedabad now sit alongside the original four metros, taking the list to eight cities eligible for the 50% exemption.
The exemption itself is still the lowest of three amounts under Income Tax Department Rule 2A: actual HRA received, 50% (metro) or 40% (non-metro) of Basic + DA, or actual rent paid minus 10% of Basic + DA. What changed is only the city list — but for a large chunk of India’s IT and services workforce sitting in Bangalore, Hyderabad, Pune and Ahmedabad, that’s a meaningful jump in exempt HRA, provided they’re on the Old Tax Regime (HRA exemption doesn’t apply under the New Regime at all).
If you’re an HR manager updating payroll masters, this is a one-line but high-impact change: check your city-mapping table before the next payroll cycle, not after an employee flags a mismatch in their Form 16.
How CTC Breaks Down to In-Hand — Step by Step
Every Indian payroll, regardless of company size, follows roughly the same waterfall:
| Step | What Happens | Typical Formula |
|---|---|---|
| 1. Basic Salary | Set as % of CTC | CTC × 35–50% |
| 2. HRA | Based on city type | Basic × 50% (8 metros) or 40% (others) |
| 3. Employer PF | Added to CTC, not paid to you | 12% of Basic, capped ₹21,600/year |
| 4. Gratuity provision | Added to CTC, held back 5 years | Basic × 4.81% |
| 5. Gross Salary | What shows on payslip | CTC − Employer PF − Gratuity |
| 6. Employee PF | Deducted from gross | 12% of Basic, capped ₹1,800/month |
| 7. ESI | Only if gross ≤ ₹21,000/month | 0.75% of gross |
| 8. Professional Tax | State-specific | ₹0–₹2,500/year depending on state |
| 9. TDS | Based on regime chosen | Annual tax ÷ 12 |
For example, a ₹10 lakh CTC with 40% Basic in a metro city under the New Regime works out to roughly ₹71,667 monthly gross, ₹1,800 Employee PF, ₹200 Professional Tax (Maharashtra), and about ₹2,358 monthly TDS — landing at close to ₹67,300 in-hand. Run your own numbers, including old-regime comparisons, on the CTC salary calculator.
The 50% Basic Wage Rule Isn’t Optional Anymore
The four labour codes came into force from 21 November 2025, with the Central Rules notified on 8 May 2026 and states following on their own timelines through the year. The rule that matters most for salary structuring: Basic pay + Dearness Allowance + Retaining Allowance must together form at least 50% of an employee’s total remuneration. It isn’t that Basic must be exactly 50% — it’s that if the “excluded” components (special allowance, bonuses, other perks) exceed half of total pay, the excess gets added back to wages for the purpose of calculating PF and gratuity.
Practically, this means many companies that historically kept Basic at 30-35% to reduce PF outgo now need to restructure. The upside for employees is a bigger retirement corpus and higher gratuity payout at exit; the downside is a smaller in-hand number today because Employee PF (tracked by EPFO) is calculated on a larger Basic. If your salary structure still shows Basic below 50%, get it corrected before your next appraisal cycle — retrofitting mid-year is far messier than fixing it at offer stage, especially once you factor in full and final settlement calculations for anyone exiting under the old structure.
Old vs New Tax Regime: Which Actually Pays More In-Hand?
The New Regime is now the default, and for most salaries under ₹12 lakh, it wins on take-home pay without you doing anything.
| Slab (New Regime, FY 2026-27) | Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Combined with the ₹75,000 standard deduction and the Section 87A rebate, taxable income up to ₹12 lakh effectively pays zero tax under the New Regime. Above that, the Old Regime can still win — but only if the employee has real deductions to claim: ₹1.5 lakh under 80C, health insurance under 80D, and meaningful HRA exemption from renting in one of the eight metro cities. Without those, the New Regime’s simplicity and lower slabs usually come out ahead. Don’t assume — model both for anyone earning above ₹12-15 lakh before they lock their regime choice for the year.
Where HR Managers (and Employees) Get This Wrong
- Treating CTC as take-home. Quoting “₹8 LPA” without explaining the Employer PF and gratuity carve-out sets up a disappointed new hire in week one.
- Forgetting the new metro list. Payroll teams that haven’t updated their city master still cap Bangalore and Hyderabad HRA at 40%, short-changing employees under the Old Regime.
- Ignoring the ESI cliff. An employee crossing ₹21,000 gross mid-year should exit ESI from the next contribution period — many payroll runs keep deducting it by mistake.
- Letting Basic drift below 50%. Old salary templates built before the labour codes often still show 30-35% Basic, which is now a compliance risk, not just a PF optimisation.
- Assuming New Regime is always better. For senior employees with home loans, 80C investments, and metro rent, Old Regime can still save more tax — but only if someone actually runs the comparison.
A Quick Checklist Before You Finalise Any Offer Letter
- Confirm Basic + DA is at least 50% of CTC per the Code on Wages.
- Check the employee’s work city against the updated eight-city metro list for HRA.
- Run both Old and New Regime through a CTC salary calculator before finalising the offer.
- Verify Professional Tax slab for the employee’s state — this varies and is easy to miss for multi-state teams.
- Cross-check PF and ESI thresholds if the role is close to the ₹15,000 (PF) or ₹21,000 (ESI) wage ceilings.
- Share the full breakup — not just the CTC number — in the offer letter to avoid disputes later.
Frequently Asked Questions
Is HRA exemption available under the New Tax Regime?
No. HRA exemption under Section 10(13A) is only available if you opt for the Old Tax Regime. Under the New Regime, HRA is fully taxable, but the higher ₹75,000 standard deduction and lower slab rates partly offset this for most salary levels.
Which cities count as “metro” for HRA in 2026?
Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Pune and Ahmedabad all qualify for the 50% of Basic HRA exemption slab effective 1 April 2026. All other cities remain capped at 40% of Basic.
Does a higher Basic salary always mean lower in-hand pay?
Usually yes in the short term, since Employee PF is 12% of Basic. But it also means higher Employer PF, higher gratuity accrual, and often higher HRA exemption under the Old Regime — so the long-term retirement and tax picture can improve even as monthly cash reduces slightly.
What is the maximum Professional Tax an employee can be charged?
The Constitution caps Professional Tax at ₹2,500 per year across any Indian state. States like Delhi, Haryana, UP and Rajasthan don’t levy it at all, while Maharashtra, Karnataka, West Bengal and others apply their own slabs within that ceiling.
Do I need to recalculate CTC structures for existing employees because of the 50% wage rule?
If your current Basic + DA is below 50% of CTC, yes — the excess in excluded allowances gets added back for PF and gratuity computation regardless of what your offer letter states. It’s worth auditing your salary structure templates now rather than waiting for an inspection.
How is Employee PF capped if my Basic is above ₹15,000?
The statutory PF wage ceiling is ₹15,000 of Basic, so the mandatory Employee PF deduction caps at ₹1,800/month even if actual Basic is higher — unless the employer and employee agree to contribute on the full Basic voluntarily.
Structuring CTC by hand in Excel for even a 50-person team means re-checking HRA cities, Basic ratios, PF caps and regime comparisons every time someone joins or gets a hike — and it’s easy to miss an update like the new metro list. EZHRM’s payroll software runs all of this automatically for every payslip, alongside PF, ESI, TDS and Professional Tax filing, so your team spends less time recalculating and more time on people. Try the free CTC Salary Calculator to see where your own offer stands, and browse more guides like this on the EZHRM blog.