Understanding Salary Components and Tax

How different parts of a salary - basic pay, HRA, LTA, standard deduction and reimbursements - are taxed, and how salary structure affects take-home pay.

A salary slip lists several components. They can be taxed differently, especially under the old tax regime.

Basic salary

Fully taxable. Other components, like provident fund contributions and gratuity, are often calculated as a percentage of basic pay.

House Rent Allowance (HRA)

Under the old regime, HRA can be partly exempt if you live in rented accommodation. The exempt amount is the lowest of:

Actual HRA received.
Rent paid minus 10 percent of basic salary.
50 percent of basic salary in metro cities, or 40 percent elsewhere.

You need rent receipts and, for large rents, the landlord’s PAN. HRA exemption isn’t available under the new regime.

Leave Travel Allowance (LTA)

Under the old regime, LTA can be exempt for domestic travel, for two journeys in a block of four years, covering travel costs only.

Standard deduction

All salaried employees get a standard deduction from salary income, without proof. Under the new regime, it was raised to 75,000 rupees from 2024-25; under the old regime it is 50,000 rupees.

Employer’s NPS contribution

Employer contributions to NPS up to a set percentage of salary are deductible, including under the new regime, making it a useful component.

Reimbursements and perks

Some reimbursements, like certain meal vouchers or phone bills, may have tax benefits under specific rules, mostly in the old regime.

Planning tips

Understand your salary structure and ask HR about flexible components.
Compare both regimes each year.
Keep proof of rent and expenses.

The HRA calculation

An employee in Mumbai earns basic pay of 50,000 rupees a month, gets HRA of 25,000 and pays rent of 30,000. Under the old regime, her exempt HRA is the lowest of 25,000 (HRA), 25,000 (rent minus 10 percent of basic) and 25,000 (50 percent of basic): 25,000 a month, so her entire HRA is tax-free.

Thinking all allowances are tax-free

Many exemptions apply only under the old regime and depend on actual expenses and proof.

Key takeaways

Basic salary is fully taxable.
HRA exemption, under the old regime, is the lowest of three limits.
The standard deduction is 75,000 rupees in the new regime.
Employer NPS contributions are deductible in both regimes.