Salary Structure Design Tips for Indian Startups (2026)

Designing a tax-efficient salary structure is a key HR + finance function. A well-designed salary structure saves tax for both employer and employee, while complying with all regulations. In this guide, we share tips and examples.

Key Principles

• Plan for Basic + DA of about 50% of total pay (a design choice, not a legal minimum): since the Code on Wages and Code on Social Security came into force on 21 November 2025, allowances above 50% of remuneration are added back to "wages" for PF, gratuity and bonus, so a low basic no longer cuts those costs
• HRA should be 40-50% of basic (for employees who rent)
• Special allowance balances the CTC
• Use exempt components: HRA, LTA, food coupons, telephone, internet, books
• Use the right mix of old vs new regime (for each employee)
• Max employer NPS contribution (Section 80CCD(2)): up to 14% of basic + DA in the new regime, 10% in the old regime (14% for government employers)
• Use ESOPs for senior employees (long-term incentives)

Components to Include

• Basic (30-50% of CTC)
• HRA (40-50% of basic, for metro: 50%, non-metro: 40%)
• Conveyance / Transport (₹1,600-₹3,200/month; fully taxable since FY 2018-19)
• Medical allowance (₹1,250/month; fully taxable since FY 2018-19)
• LTA (₹20,000-₹50,000/year)
• Food coupons / Sodexo (₹2,600/month)
• Telephone + Internet (₹1,500-₹3,000/month)
• Books / Periodicals (₹500-₹1,000/month)
• Education allowance (₹200-₹500/month)
• Hostel allowance (₹600/month)
• Special allowance (balancing figure)
• Employer PF (12% of basic + DA, often capped at 12% of the ₹15,000 wage ceiling = ₹1,800/month)
• Gratuity (15 days of wages per year of service, after 5 years; after 1 year for fixed-term employees under the Code on Social Security)
• ESOP (long-term)
• Variable pay / bonus
• Performance bonus
• Retention bonus

Components to Avoid

• High basic (> 50% of CTC) — increases PF + gratuity for employer
• High HRA for employees who own a house (no exemption)
• High allowance for employees in the new regime (no exemption)
• Allowances without receipts (telephone, fuel) — fully taxable
• Perks like club membership, gym — taxable as perquisites in the employee's hands, with TDS by the employer
• Reimbursements without bills — treated as taxable salary in the employee's hands

Tax-Efficient Structure (Old Regime)

Conveyance and medical allowance are fully taxable and are shown only because many offer letters still carry them. Basic here is about 43% of gross pay, so under the Labour Codes the PF and gratuity wage base would be topped up to 50%; set basic + DA at 50% if you want the figures to hold.

New Regime Considerations

In the new regime, most exemptions are not available. So the structure should be simpler:

• Higher basic (50-60% of CTC) — because no HRA / LTA / 80C deduction
• Standard deduction: ₹75,000 (in new vs ₹50,000 in old)
• Usually higher take-home, because the new-regime slabs and the ₹60,000 Section 87A rebate (FY 2025-26) leave less tax even without exemptions
• No HRA exemption (so why give high HRA?)
• No LTA (so skip it)
• Food coupons + telephone + internet are still exempt
• Employer NPS (80CCD(2)) is still allowed

Tools

• Income Tax Calculator: https://corporatewalla.com/resources/tools/income-tax-calculator
• Salary Calculator: https://corporatewalla.com/resources/tools/salary-calculator
• HRA Calculator: https://corporatewalla.com/resources/tools/hra-calculator
• Gratuity Calculator: https://corporatewalla.com/resources/tools/gratuity-calculator

Common Mistakes to Avoid

• Designing the same structure for all employees (regardless of regime)
• Not updating structure when tax laws change
• High HRA for employees who own a house
• Not collecting rent receipts for HRA exemption
• Not collecting LTA bills for LTA exemption
• Including perquisites in CTC (club, gym, car) without proper tax planning
• Not factoring in state-specific professional tax
• Not considering EPF vs NPS trade-off

Frequently Asked Questions