Income Tax Liability and wage

In India, your income tax liability is computed by adding all wage components defined under Section 17 of the Income-tax Act, applying allowable exemptions, deducting the standard deduction of ₹75,000 under the new regime for FY 2026-27, adding other income, claiming Chapter VI-A deductions if eligible, and then applying slab rates with the Section 87A rebate up to ₹7 lakh and a 4% cess.

Mayank Wadhera

Published: 26 Apr 2023

Updated: 16 May 2026

4 min read

With the new tax regime now the default for individuals from AY 2024-25 onwards and Union Budget 2026 further refining slab structures, salaried Indians need a sharper grip on how their wage translates into income tax liability. "Wage" is no longer just basic pay — it is a defined bouquet of compensation under the Code on Wages, 2019 and the Income-tax Act, and getting the definition right is the difference between a clean return and a CPC notice.

What counts as "wage" for tax purposes

Under the Income-tax Act, salary income covered by Section 17 includes basic pay, dearness allowance, bonus, commission, perquisites, profits in lieu of salary, and any allowance not specifically exempt. The Code on Wages, 2019 — now substantially operational in 2026 — aligns the wage definition across labour laws, capping excluded items (HRA, conveyance, statutory bonus, gratuity, etc.) at 50% of total remuneration. Anything beyond that 50% is pulled back into "wages" for PF, gratuity, and ESI computation.

Building blocks of income tax liability

Your annual liability is built up in a precise order:

Compute gross salary using all components paid by the employer.
Apply exemptions — HRA under Section 10(13A), LTA, gratuity, leave encashment, etc. (available in the old regime; restricted in the new regime).
Subtract the standard deduction of ₹75,000 (new regime, FY 2026-27) or ₹50,000 (old regime).
Add income from other heads — house property, capital gains, other sources.
Subtract Chapter VI-A deductions (80C, 80D, 80CCD(1B), etc.) if you opt for the old regime.
Apply the slab rates of your chosen regime, claim Section 87A rebate (up to ₹7L taxable income under the new regime), then add 4% cess.

New regime vs old regime — wage planning

Under the new regime in FY 2026-27, basic exemption is ₹3 lakh, slab rates rise gradually to 30% above ₹15 lakh, and the standard deduction is ₹75,000. Most allowances and Chapter VI-A deductions are switched off. The old regime keeps deductions alive but at higher slab rates with a ₹2.5 lakh exemption. A salary structure heavy on HRA, NPS, and LTA can still tilt the old regime in your favour; a lean, cash-heavy structure usually favours the new regime.

Common wage-structure mistakes

Treating reimbursements as exempt without supporting bills — they get added back during scrutiny.
Forgetting that employer's NPS contribution beyond 10% of salary is taxable.
Ignoring perquisite valuation for company car, ESOPs, or rent-free accommodation.
Missing the 50% wage cap under the Code on Wages, which inflates PF and gratuity outflow.
Switching regimes mid-year without filing Form 10-IEA correctly.

Compliance checklist for FY 2026-27

Submit a fresh investment declaration (Form 12BB) to your employer at the start of the year.
Reconcile Form 16, AIS, and Form 26AS before filing your ITR.
If you are a business or professional with Section 115BAC opt-out, file Form 10-IEA within the due date.
Maintain rent receipts, premium proofs, and donation certificates for at least six assessment years.
Use the income tax portal's pre-filled return as a base — but always verify wage breakup against the salary slip.

Special situations every payroll team should know

Variable pay, joining bonus clawbacks, ESOP perquisite tax, gratuity above ₹20 lakh, and leave encashment at retirement each carry nuanced treatment under the Income-tax Act. The Code on Wages further pulls overtime, statutory bonus, and certain incentives into the wage definition for PF and gratuity, even when income-tax treatment is unchanged. Payroll teams in 2026 must run dual computations to reconcile these layers.

Foreign assignments add another dimension. A short-term deputation may shift tax residency, change tax equalisation obligations, and trigger DTAA relief claims. Salary paid in foreign currency, hypothetical tax adjustments, and 401(k) or RSU vests for employees on US assignments all require careful classification under salary and 'profits in lieu of salary' before computing liability.

Year-end tax-planning calendar

By December — finalise investments under 80C, 80D, NPS, and home loan principal. By January — submit proofs to employer (Form 12BB) so TDS reflects accurate liability. By March — make catch-up investments, harvest LTCG and STCG with awareness of the ₹1.25 lakh LTCG exemption, and complete advance tax payments to avoid Section 234C interest.

Post-financial-year — pull AIS, TIS, Form 26AS, capital gains statements, and bank interest certificates by June. File ITR before the Section 139(1) due date to preserve carry-forward of losses and avoid late-fee under Section 234F. Review the next year's regime choice before April salary cycle starts.

Conclusion

Income tax liability for salaried Indians is no longer a one-line calculation. The interaction between the Code on Wages, the new default tax regime, and Budget 2026 rate adjustments means your wage structure deserves an annual review. Plan early, document fully, and pick the regime that fits your actual cash flow rather than your assumptions.

Frequently Asked Questions

What is the standard deduction for salaried taxpayers in FY 2026-27?

Under the new tax regime, the standard deduction for salaried individuals and pensioners in FY 2026-27 is ₹75,000. Under the old regime it remains ₹50,000. It is applied directly to gross salary before computing taxable income.

Does the new tax regime allow HRA exemption?

No. The new regime under Section 115BAC switches off most exemptions including HRA, LTA, professional tax, and most Chapter VI-A deductions (except 80CCD(2) for employer NPS contribution). HRA exemption is available only if you opt for the old regime.

How does the Code on Wages affect tax-free salary components?

The Code on Wages, 2019 requires that excluded components like HRA and conveyance cannot exceed 50% of total remuneration. Anything beyond is treated as "wages" for PF and gratuity, increasing employer contributions, though the income-tax treatment of each component continues to follow the Income-tax Act.

When should I file Form 10-IEA?

Form 10-IEA is filed by individuals with business or professional income who want to opt out of the new tax regime, or later return to it. It must be filed on or before the income tax return due date under Section 139(1) for the relevant assessment year.

How is the Section 87A rebate calculated under the new regime?

For FY 2026-27, if your total taxable income under the new regime does not exceed ₹7 lakh, you can claim a full rebate of tax payable under Section 87A, effectively bringing your liability to zero before cess. A marginal relief mechanism applies for income just above ₹7 lakh.