Summary of this article
I-T Act 2025 shifts toward simpler tax regime with fewer allowance-based deductions
Traditional exemptions like HRA/LTA lose relevance as new regime becomes default
Employers may simplify salary structures with higher fixed pay, fewer perks
Flexibility in tax-efficient compensation design likely to reduce
The new Income-tax Act, 2025 shifts towards a deduction-like regime, which reduces the benefit of fragmented allowances. Incidentally, the new tax regime (NTR) also advocates a simple income structure without too many significant allowances and deductions.
Simpler Tax Slabs, Fewer Allowances
Under the new Income-tax Act, 2025, tax-linked allowances that historically carried exemptions are being reduced in relevance as the NTR becomes the default system.
“Most salary structuring allowances, such as house rent allowance (HRA), leave travel allowance (LTA), and various special allowances, remain disallowed in the new regime. However, at the same time, it is also pertinent to note that perquisite valuation limits are proposed to be substantially enhanced after a long time. These seemingly divergent steps appear to be creating confusion in the minds of employers as well as employees,” says SR Patnaik, partner (head - taxation), Cyril Amarchand Mangaldas.
“With the introduction of the new regime, majorly all these components have been rendered redundant since all such deductions have been done away with in lieu of providing more widespread slabs along with lower tax rates. From a corporate point of view, it will help them with simpler and streamlined payslips and salary disbursements,” adds Ritika Nayyar, partner, Singhania & Co.
Why Employers Must Rethink Salary Structures
Income-tax Act, 2025 enhances transparency by simplifying payslips and reducing disputes over allowance classification, unlike the complex structures under the Income-tax Act, 1961.
Says Patnaik: “From a purely tax standpoint, take-home pay increases for most employees even as certain tax-saving perquisites become unavailable, offset by corresponding increases in fixed pay. However, this limits flexibility in designing compensation packages, and restricting the customisable options available under the present regime.”
The net impact on take-home pay is better analysed by considering the revisions proposed under the new income tax rules as well as other legislation, such as the new labour codes.
Adds Nayyar: “But it will affect flexibility for structuring salary, where taxpayers could earlier effectively utilise tax exemptions towards basic expenses, such as household rentals, education of children, investment-linked deductions, etc which had no tax costs attached to them.
Overall, while tax policy intends to encourage convergence between contractual Cost To Company (CTC) and taxable salary, the restrictions under the new labour code and the new income tax rules appear to convey a different picture. “Hence, employers will have to discuss with their employees and their advisors to frame the optimum structure that is acceptable to all,” says Patnaik.
