Income Tax Act 2026: How pay structures could change

Why employers are reworking payroll plans now

Employers are reassessing compensation structures as multiple regulatory changes converge within tight deadlines. Legal and regulatory experts say the upcoming new Income Tax Act, new Labour Codes, and the DPDP Act have grey areas that are creating confusion for companies. The concern is not limited to paperwork. It extends to take-home pay calculations, benefit taxation, retirement benefit costs, and potential disputes.

Unlike many past regulatory transitions in India that had longer gaps between legislation and enforcement, experts note that the current rollout timelines are forcing faster decisions. Companies are revisiting wage definitions, benefit policies, and HR and finance processes to ensure compliance. The immediate challenge is that several moving parts are changing at the same time, which increases execution risk for employers.

New income tax rules put focus on salary components

Tax and regulatory consultant Rahul Garg, managing partner at Asire Consulting, said draft changes issued for public consultation a few days earlier cover salary components such as car benefits, children allowance and education allowance. He said these changes require additional analysis to determine take-home pay, especially because the wage definition base is now higher.

Garg also flagged a second-order impact: potential tax liabilities due to more amounts becoming taxable, including car benefits, and a possible increase in company costs due to retirement benefits. For many organisations, this shifts the conversation from only employee payroll impact to overall cost-to-company adjustments.

The immediate operational pressure point is timing. Garg said the work of analysing the impact and making adjustments needs to be completed by April 1, 2026.

Compliance timelines are unusually tight

Legal experts said the short window between policy clarity and enforcement is forcing employers back to the drawing board. In the current set of changes, compliance timelines are not aligned to long transition periods.

One cited example is the new Labour Codes, which are expected to require compliance immediately from November 21. Separately, the new Income Tax Act is effective from April 1, 2026. With parallel changes, companies are trying to avoid a situation where payroll structures comply with one framework but create exposure under another.

Reporting and systems readiness are emerging pain points

Sharanya Tripathi, an advocate at Jotwani Associates, said queries under the income tax changes include reporting standards, compliance thresholds, and the readiness of internal systems. For large employers, payroll systems integrate tax withholding, benefit valuation, employee declarations and statutory reporting. Even small changes in how components are classified or valued can require system upgrades, policy communication, and audit trail strengthening.

The risk for employers is not only employee dissatisfaction over altered take-home pay. It is also compliance risk if internal systems are not ready when new rules become effective.

Expat tax incentives target electronics and semiconductors

Separately, the Budget announced a five-year exemption for non-residents under notified schemes. The exemption applies to foreign-sourced income for eligible non-resident individuals working in India, and targets sectors such as electronics and semiconductors.

The stated purpose is to address the industry’s long-standing concern around double taxation, which has discouraged expatriates from taking longer tenures. By exempting income earned outside India for the initial five years, the policy aims to improve India’s attractiveness for specialised foreign talent at a time when global demand for electronics and semiconductor professionals is high.

EPF cost concerns remain for expatriate hiring

Despite the exemption, a separate cost issue remains: mandatory 12% Employee Provident Fund (EPF) contribution from both employee and employer, stemming from a 2023 Delhi High Court ruling. The employer contribution adds a direct cost burden and, as noted in the text, has previously deterred some firms from hiring expatriates.

The combination of a tax incentive and a high statutory contribution requirement highlights how compensation decisions for global talent are shaped by both tax and labour compliance. Industry participants have indicated the EPF issue needs regulatory adjustment to better align with talent attraction goals.

India’s narrow tax base keeps pressure on salaried taxpayers

The broader policy context is India’s narrow tax base and the concentration of burden on compliant segments. The text notes India’s tax-paying population is only about 1.6% to 5% of the total population, and that the burden is skewed by the mix of government and private sector jobs.

It also flags double taxation pressures in daily life, where taxpayers face both income tax and GST on commodities. Concerns are amplified when disposable income growth for the formal salaried segment is constrained, potentially limiting domestic consumption.

Another datapoint offered is that India’s tax-to-GDP ratio for federal taxes is 11.7%, with direct taxes contributing 6.1% and indirect taxes 5.6%. Only about 5% of the population files tax returns, with about 71.4 million returns filed during FY 2021–22.

Presumptive tax under Section 44ADA creates an uneven outcome

The text also highlights a contrast in outcomes between salaried taxpayers and certain professionals. Under existing rules, certain professionals can legally pay ₹0 tax on income of up to ₹24 lakh, if the income qualifies as professional receipts and conditions are met.

It applies to service-based professionals such as doctors, chartered accountants, lawyers, consultants, engineers, architects, designers and freelancers, and not to salaried employees or trading businesses. Under Section 44ADA, eligible professionals can opt for presumptive taxation where 50% of receipts are assumed to be profit. If gross receipts are ₹24 lakh, the presumed taxable income becomes ₹12 lakh, which can be offset by the rebate available in the new tax regime to make the final tax liability ₹0.

Staffing industry seeks GST cut to spur formal jobs

On indirect taxes, the Indian Staffing Federation (ISF) has asked the finance ministry to reduce the GST rate on employment services from 18% to 5%. ISF said this would accelerate formal job creation and improve competitiveness, especially in sectors where GST ranges between 5% and 18%.

ISF, representing over 137 organised staffing firms that collectively employ more than 1.8 million contract workers, said employment services are often viewed as an “additional cost”. It pointed to sectors such as healthcare, retail, pharmaceuticals, tourism, and e-commerce as areas with potential for formal employment, where higher GST on staffing acts as a hiring deterrent. The text notes the last meeting took place in December 2024.

Gig work, GST design, and the risk of reversing formalisation

The text argues that GST reductions on goods, while staffing services remained at 18%, have made gig hiring more attractive for employers. It claims this expands gig work at the cost of temporary formal services and worsens labour market conditions.

It also flags concerns about GST authorities seeking to levy GST on transactions between riders and drivers, even when such payments occur outside the platform’s direct involvement. The text argues platforms are already taxed on subscription revenues and drivers are taxed on earnings, and that another layer of taxation would reduce gig worker take-home pay. One claim made is that about 20 lakh gig workers per day could move back to a cash-based economy, undermining digitisation efforts.

Key dates and figures at a glance

What it means for companies and employees

For employers, the near-term task is to model compensation changes, update payroll systems, and re-check compliance processes against evolving standards. For employees, the most visible impact is likely to be in how benefits and allowances translate into take-home pay and tax withholding.

For policymakers, the text underscores a recurring tension: efforts to simplify or modernise regulation can still create uncertainty when implementation timelines are tight and thresholds or reporting standards are unclear. The parallel debate over GST on staffing and gig work taxation shows that tax design can influence how quickly jobs formalise.

Conclusion

The combined rollout of the new Income Tax Act, Labour Codes and DPDP Act is pushing companies to re-evaluate pay structures, compliance readiness and litigation exposure. With April 1, 2026 flagged as a key deadline for income tax-linked payroll recalibration, employers are likely to accelerate internal reviews and system changes ahead of enforcement timelines.