How to Structure a Tax-Efficient Salary (CTC Breakup Explained)

\## Introduction

"Your CTC is ₹12 lakh." It sounds simple, until the first payslip arrives and the amount in the bank is much lower than the employee expected.

The gap comes from how salary is structured. Two employees with the same CTC can take home very different amounts, depending on how their pay is split into components and which tax regime they choose.

Three terms are worth getting clear first:

This guide explains every part of a CTC and shows how employers can design salary structures that are tax-efficient for employees and compliant with the law.

\## The components of CTC

A typical CTC in India is made up of these parts.

Components like employer PF, gratuity and insurance are part of CTC but never appear in the monthly bank credit, which is the main reason take-home pay is lower than CTC ÷ 12.

\## Old vs new tax regime: why it changes everything

The tax regime an employee chooses decides which salary components actually save tax.

**What this means for salary structuring:** Under the new regime, most allowances are fully taxable, so the split between basic, HRA and special allowance barely changes an employee's tax. The main tax-saving levers are the employer's NPS and PF contributions.

Under the old regime, a well-designed structure with HRA, LTA and reimbursements can meaningfully reduce tax, especially for employees who pay rent and invest in tax-saving options.

The best approach for employers is a structure that works under both regimes, with flexible components employees can use if they choose the old regime.

\## Worked example: CTC breakup for ₹12 lakh

Here's a sample structure for an employee in Maharashtra with a CTC of ₹12 lakh, with basic pay at 50% of CTC.

**Monthly deductions from gross salary:**

Why no TDS? Taxable income under the new regime is ₹11,49,540 minus the ₹75,000 standard deduction, which comes to ₹10,74,540. That's below ₹12 lakh, so the rebate brings the tax to nil.

For the same employee under the old regime, tax would depend on their rent, investments, and other deductions, and would usually be higher unless they claim substantial exemptions.

\## Tax-efficient salary components

**Components that save tax under both regimes:**

- **Employer NPS contribution:** One of the strongest tools under the new regime. Employer contributions to an employee's NPS account are deductible up to 14% of basic pay under the new regime (10% under the old), within an overall annual limit on tax-free employer retirement contributions.

- **Employer PF contribution:** Tax-free up to the prescribed limits.

- **Reimbursements for official expenses:** Phone, internet and travel costs incurred for work and paid against bills are generally not treated as taxable salary.

**Components that save tax only under the old regime:**

- **HRA:** Exempt up to the lowest of three amounts: the actual HRA received, rent paid minus 10% of basic pay, or 50% of basic pay in metro cities (40% elsewhere).

- **LTA:** Exempt for the cost of domestic travel, for two journeys in a four-year block.

- **Meal benefits:** Meal vouchers or cards are exempt up to a set amount per meal.

- **Children's education and hostel allowances:** Small fixed exemptions per child.

A flexible benefits plan (FBP) lets employees allocate part of their CTC to these components based on their own needs and chosen tax regime. It's one of the simplest ways to make a single salary structure work for everyone.

\## The labour codes and the 50% wages rule

The new labour codes, which came into effect in November 2025, changed how salary structures are designed.

Under the Code on Wages, "wages" include basic pay, dearness allowance and retaining allowance. Certain components, such as HRA, conveyance allowance, employer PF contributions and overtime, are excluded. But if the excluded components add up to more than 50% of total remuneration, the excess is added back to wages.

**Why it matters:** Wages are the base for PF, gratuity and other benefits. If an employer keeps basic pay very low and pushes most of the salary into allowances, the rule automatically increases the wage base for these calculations.

**The practical effect:** Many employers now set basic pay (plus DA) at around 50% of total pay. This usually means:

- Higher PF contributions for employees above the wage ceiling, if PF is calculated on actual wages.

- Higher gratuity liability for employers.

- Slightly lower take-home pay in some cases, but higher long-term savings for employees.

State rules under the codes are still being rolled out, so review your salary structures with your legal or payroll advisor.

\## Best practices for employers

1. Keep basic pay at around 50% of total pay to stay aligned with the Code on Wages and avoid surprise increases in PF and gratuity.

2. Design for both tax regimes. Include components that help old-regime employees, without making the structure worse for new-regime employees.

3. Offer employer NPS contributions. They're one of the few meaningful tax savings available under the new regime.

4. Use a flexible benefits plan. Let employees choose how to allocate part of their pay.

5. Be transparent about CTC. Show employees their gross salary, deductions and expected take-home clearly in their offer letter.

6. Standardize by grade. Use consistent structures for each level so payroll stays simple and fair.

7. Review every year. Budget changes and new rules can make last year's structure out of date.

\## How Mocha HRMS helps you manage salary structures

- **Salary structure templates:** Create CTC templates by grade or role and apply them in a few clicks.

- **Automatic CTC breakup:** Enter the CTC and let Mocha HRMS split it into components based on your rules.

- **Regime-aware tax calculation:** TDS is calculated based on each employee's chosen tax regime and declarations.

- **Employee declarations:** Employees submit their regime choice, rent details and investment proofs through self-service.

- **Clear payslips:** Employees see every component and deduction, which reduces payroll questions.

- **Salary revisions:** Update structures during appraisals, with arrears calculated automatically.

With Mocha HRMS, salary structures stay consistent, compliant and easy for employees to understand.

\## Conclusion

A tax-efficient salary structure isn't about finding loopholes. It's about splitting CTC sensibly, following the 50% wages rule, and giving employees options that suit their tax regime. The result is higher take-home pay, fewer payroll questions and a structure that stays compliant.

Tax rules and limits change with each Union Budget, so review your structures with your CA every year.

Want to build salary structures in minutes? Book a free demo of Mocha HRMS.

\## Frequently asked questions

**Why is my take-home salary lower than CTC divided by 12?** CTC includes employer contributions like PF and gratuity that aren't paid monthly, plus deductions like employee PF, professional tax and TDS.

**What percentage of CTC should basic pay be?** Under the labour codes, keeping basic pay (plus DA) at around 50% of total pay is the safest approach.

**Is HRA useful under the new tax regime?** HRA is still paid as part of salary, but it's fully taxable under the new regime. It only saves tax under the old regime.

**Can employees switch tax regimes?** Salaried employees without business income can generally choose their regime each year when filing their return, even if they declared a different choice to their employer.

**Is employer NPS contribution worth offering?** Yes. It's one of the few tax-saving options under the new regime, and it helps employees build retirement savings.