From April 1, 2026, two sets of rules have changed that will directly affect your salary slip and your tax outgo. One is about how your CTC (cost-to-company) is structured. The other is about how much HRA exemption you can claim.
In this post, let us look at both.
The 50% Basic Salary Rule
Under the Code on Wages, 2019, basic salary must constitute at least 50% of an employee’s total CTC.
With this rule, allowances such as HRA, conveyance, and special allowances together cannot exceed 50% of total remuneration.
For years, the basic salary was kept at 20-30% of CTC. Lower basic salary meant lower EPF deduction, higher take-home, and lower gratuity liability. In a way, both employer and employee were happy. However, this came at the expense of retirement savings.
That arrangement is now ending.
EPF goes up. And the net take-home income goes down (unless the overall compensation is increased). No free lunch.
#1 Your EPF contribution goes up
EPF is 12% of basic salary. Employees contribute 12% and the employer makes a matching 12% contribution. A total of 24% per month.
If the basic salary rises from 30% to 50% of CTC, your monthly EPF contribution increases significantly.
For instance, on a Rs. 12 lacs per annum CTC, basic goes from Rs. 30,000 to Rs. 50,000 per month. The employee EPF deduction alone rises by approximately Rs. 2,400 per month. Similarly, the employer contribution to EPF goes up by Rs 2,400. A net increase of Rs 4,800 towards EPF.
Since the employer contribution has increased, other components of CTC may have to come down to the total employer outgo (your salary + EPF contributions) within the planned levels.
Further, interest income of your EPF contribution above Rs 2.5 lacs per annum is taxable. Similarly, interest income on employer’s contribution exceeding Rs 7.5 lacs per annum is also taxable. Hence, this new rule could be tax problem for high earners too.
Note:
- It is not necessary that employees and employers must contribute 12% of the full basic salary towards EPF.
- The contributions can also be made at 12% of capped basic (at 15,000 per month).
- It is also possible that the employee contributes 12% of full basic and the employee contributes 12% of capped basic.
- Hence, if this rule is hurting your net take-home income and taxes adversely, there may be a workaround.
#2 Gratuity goes up
Your gratuity payout at the time of exit also increases, since it is calculated on basic plus DA.
Gratuity is calculated as 15 days of your last drawn basic salary for every completed year of service. The formula is: (Basic Salary / 26) x 15 x Number of Years of Service. This is applicable after 5 years of continuous service.
So, if your basic is Rs. 50,000 per month and you have served 10 years, your gratuity works out to Rs. 2,88,462.
A higher basic salary directly means a larger gratuity payout when you resign, retire, or are asked to leave.
This is clearly positive for employees because the gratuity burden falls entirely on the employer. This rule does not hurt your net take home salary. However, the employers may want to review the CTC structure because of this impending gratuity liability.
Note: As I understand, labour is a state subject, and these rules will require state-level notification before they become enforceable. I am not sure if all the states have notified the rules as yet. Hence, the exact effective date will vary by employer location. Advise you to check with your HR team.
HRA Changes
#1 Four new cities added to the 50% exemption list
Under the old Income Tax Rules, only Mumbai, Delhi, Kolkata, and Chennai qualified for the higher HRA exemption of 50% of basic salary. Every other city was at 40%.
Under Rule 279 of the Income Tax Rules, 2026, the list of metro cities for HRA purposes has been expanded to eight cities.
The full updated list is: Mumbai, Delhi, Kolkata, Chennai, Ahmedabad, Bengaluru, Hyderabad, and Pune. I am quite surprised that Noida and Gurgaon are not on this list.
If you live and work in any of these four new cities and are on the old tax regime, your HRA exemption ceiling goes up by 10% of basic.
HRA exemption is the lowest of three amounts:
- Actual HRA paid by your employe,
- Actual rent paid – 10% of basic salary, and
- 50% of basic salary if you live in any of the above 8 cities or 40% if you live elsewhere.
You must see a higher basic salary pulls tax exemption in different directions. While 50% (or 40%) of the basic increases (3), it also reduces (2) because 10% of basic is reduced from the actual rent paid.
Hence, in isolation, it is good news if you reside in one of the 4 newly added cities. However, a mandated higher basic salary may hurt many employees.
Note: HRA exemption is available only if you file your returns under the old tax regime. If you file your returns under the new regime, you cannot claim HRA exemption and these HRA changes do not affect you.
#2 HRA compliance is stricter now
Form 12BB is replaced by the new form 124. Now, you must now declare whether your landlord is a relative. This targets a common practice where rent is “paid” to parents or spouses on paper, the employee claims HRA, but the recipient never declares the rental income in his/her ITR.
You must also disclose the landlord’s PAN in form 124 if the total rent paid to the owner exceeds Rs 1 lacs in the year.
If your rent arrangement is genuine, properly paid through bank transfer, and your landlord is filing rental income in his/her tax return, you have nothing to worry about. However, if it was a paper arrangement, the risk of scrutiny just went up considerably.
Disclaimer: I am not a tax expert. Please consult a Chartered Accountant before acting on any information in this post.