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Salary Sacrifice in India: How CTC Restructuring Can Cut Tax

Reviewed on 9 October 2026 against the Income-tax Act, 2025, the Code on Wages, 2019 and the Income Tax Department's e-filing portal. This is general information, not tax advice. Your employer's payroll policy decides which options you actually have.

"Salary sacrifice" is a British term: an employee gives up part of their cash pay and the employer provides a benefit instead, often with a tax or social-security advantage. Indian tax law has no scheme by that name. The same idea exists here as CTC restructuring, also called a flexible benefit plan (FBP). Part of your cost-to-company is paid as a benefit or contribution rather than as taxable cash.

Restructuring only saves money when the law treats a component more favourably than plain salary. The tax regime you use decides whether it does. This guide shows which components still work, how to calculate the gain and what you give up in exchange.

Start with the law and the regime

Two dates matter:

Section numbers have changed, so use this map when HR documents quote the old ones:

Provision1961 Act2025 Act
New tax regime (default)Section 115BACSection 202
Investments such as PF, life insurance, ELSS (₹1,50,000 cap)Section 80CSection 123
Your own extra NPS contribution (₹50,000)Section 80CCD(1B)Section 124(3)
Employer's NPS contributionSection 80CCD(2)Section 124(1) and (2)
Health insurance premiumSection 80DSection 126

The new regime is the default. Under section 202(2) it disallows most exemptions and Chapter VIII deductions. The main exception for salaried people is the employer's NPS contribution. That single rule decides most restructuring choices.

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Which components still help, regime by regime

ComponentNew regimeOld regime
Employer contribution to your NPS accountDeductible up to 14% of basic pay plus DADeductible up to 10% (14% for government employers)
House rent allowanceNo exemptionExempt within limits if you pay rent and don't own the home
Leave travel allowance or concessionNo exemptionExempt for eligible journeys in India, within conditions
Employer-paid group health insuranceNot treated as a taxable perquisite (section 17(2)(c))Same
Employer transport between home and officeNot treated as a taxable perquisite (section 17(2)(e))Same
Voluntary PF, ELSS or life insurance through payrollNo deductionDeduction within the ₹1,50,000 cap
Your own NPS top-upNo deductionUp to ₹50,000 extra
Meal cards, phone and other FBP itemsDepends on perquisite valuation rules and any prescribed allowances; confirm with payrollSame

Sources: the slab and deduction details for FY 2025-26 are listed on the e-filing portal's guide for salaried individuals. The employer NPS limits are in section 124 of the 2025 Act.

The practical takeaway:

  • New regime: employer NPS is usually the only restructuring that cuts tax for a typical salaried person.
  • Old regime: HRA, LTA and the investment deductions add more options. You need enough of them to beat the lower new-regime slabs.

Worked example: moving special allowance into employer NPS

Illustrative figures, using the new-regime slabs in section 202(1) and the 4% cess. Not a projection for any real employer.

Ravi works for a private company. His taxable salary is ₹18,00,000 a year, including basic pay of ₹7,20,000 and no DA. His employer offers corporate NPS through its flexible benefit plan. He asks to move ₹1,00,800 a year out of special allowance into employer NPS, which is exactly 14% of his basic pay. His CTC does not change.

StepOption A: all cashOption B: ₹1,00,800 to employer NPS
Salary income, including employer NPS (section 16(k))₹18,00,000₹18,00,000
Standard deduction₹75,000₹75,000
Employer NPS deduction (section 124)Nil₹1,00,800
Taxable income₹17,25,000₹16,24,200
Tax before cess₹1,45,000₹1,24,840
Tax with 4% cess₹1,50,800₹1,29,834

How the figures are worked out: both options pay ₹20,000, ₹40,000 and ₹60,000 on the first three taxable bands (₹4 to 16 lakh). The rest is taxed at 20%:

  • Option A: ₹1,25,000 × 20% = ₹25,000.
  • Option B: ₹24,200 × 20% = ₹4,840.

Effect on Ravi:

  • He pays about ₹20,966 less tax a year.
  • His take-home cash falls by ₹1,00,800 minus that saving, which is about ₹79,834.
  • In return, ₹1,00,800 goes into his NPS account each year.

So the restructuring is worth it only if he is comfortable saving that money for retirement. It is not a free increase in pay.

If Ravi used the old regime instead, the employer NPS deduction would be capped at 10% of basic pay (₹72,000). He would then need to compare the two regimes in full, including any HRA and investment deductions he can claim. Our guide to how salary is taxed in India walks through a full regime comparison.

What you give up, and the limits that bite

  • Lock-in. NPS money is meant for retirement. Withdrawals before exit are limited to the purposes and amounts allowed by the Pension Fund Regulatory and Development Authority (PFRDA). Don't move money you may need for a home deposit or an emergency.
  • The ₹7,50,000 ceiling. If your employer's combined contributions to your PF, NPS and approved superannuation fund exceed ₹7,50,000 in a tax year, the excess is taxed as a perquisite under section 17(1)(h). Senior employees with a high basic pay can hit this.
  • Labour-law wage rules. The Code on Wages, 2019, in force from 21 November 2025, counts basic pay, DA and retaining allowance as "wages" and excludes items such as HRA, conveyance and employer PF or pension contributions. If those excluded items together exceed half of total remuneration (or another percentage the Centre notifies), the excess is added back to wages for labour-law purposes (section 2(y)). This affects how far an employer can shrink basic pay. A restructuring that cuts basic can also reduce benefits calculated on wages.
  • A mismatch between payroll and your return. Payroll deducts TDS based on the regime you indicate, but you make the final choice in your return. If you pick components that only help in the old regime and then file under the new one, you lose the benefit.
  • Employer discretion. No law requires an employer to offer an FBP or corporate NPS. Changes usually happen only at a fixed window, often at the start of the year.

A five-step check before you restructure

  1. Pick your likely regime first. Run both regimes on your expected salary. If the new regime clearly wins, ignore HRA, LTA and investment-linked components.
  2. List what your employer actually offers. Ask HR for the FBP policy, the change window and whether corporate NPS is available.
  3. Calculate the cash cost against the tax saved. Use the method in the worked example: tax saved compared with the drop in take-home pay.
  4. Check the side effects. Look at the ₹7.5 lakh contribution ceiling, the wage definition under the Code on Wages, and the effect on PF and gratuity.
  5. Confirm it on paper. After the change, check your payslip and your annual TDS certificate (Form 16 for FY 2025-26; the new form prescribed for tax year 2026-27). Make sure the components appear as agreed.

For a wider look at comparing packages, see salary versus benefits and retirement planning from salary.

When to get professional help

Restructuring gets more complicated in some situations:

  • you have income from a business, profession or capital gains
  • you hold ESOPs or RSUs
  • you changed jobs during the year
  • you are close to the ₹7.5 lakh contribution ceiling

In those cases, a chartered accountant can model your exact numbers. Keep your offer letter, payslips and TDS certificates ready for the discussion.

Sources, editorial process and corrections

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