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📚 Statutory Framework

Salary & Tax Calculation Methodology

A transparent, statutory breakdown of every formula, deduction rule, and tax bracket powering our India payroll engine for FY 2025-26 (AY 2026-27).

1. CTC to Gross Salary Deconstruction

Annual Cost to Company (CTC) incorporates not just direct compensation paid to the employee, but statutory retirals borne by the employer:

  • Gross Salary: CTC − Employer EPF − Employer Gratuity Contribution
  • Basic Salary: By corporate standard, set to 40% to 50% of CTC.
  • House Rent Allowance (HRA): Typically 40% (non-metro) or 50% (metro) of Basic Salary.
  • Special Allowance: Balancing allowance ensuring that components sum to Gross Salary.

2. Employee Provident Fund (EPF)

Governed by the Employees' Provident Funds & Miscellaneous Provisions Act, 1952:

  • Employee Share: 12% of Basic Salary deducted monthly from take-home pay.
  • Employer Share: 12% of Basic Salary (split into 3.67% to EPF and 8.33% to EPS pension fund, capped at ₹1,250/mo under statutory ceiling).
  • Wage Ceiling: Capped at statutory wage ceiling (₹25,000/mo effective Sept 2026, or earlier ₹15,000/mo) unless voluntary full basic EPF is opted.

3. Income Tax Slabs & Deductions (FY 2025-26)

New Tax Regime (Section 115BAC) — Default

  • Standard Deduction: ₹75,000 for salaried employees.
  • ₹0 to ₹4,00,000: 0%
  • ₹4,00,001 to ₹8,00,000: 5%
  • ₹8,00,001 to ₹12,00,000: 10%
  • ₹12,00,001 to ₹16,00,000: 15%
  • ₹16,00,001 to ₹20,00,000: 20%
  • ₹20,00,001 to ₹24,00,000: 25%
  • Above ₹24,00,000: 30%
  • Section 87A Rebate: Up to ₹60,000 for taxable income ≤ ₹12,00,000 (meaning ₹0 tax up to ₹12.75L salaried income).

Old Tax Regime (Optional)

  • Standard Deduction: ₹50,000 for salaried employees.
  • ₹0 to ₹2,50,000: 0%
  • ₹2,50,001 to ₹5,00,000: 5%
  • ₹5,00,001 to ₹10,00,000: 20%
  • Above ₹10,00,000: 30%
  • Section 87A Rebate: Up to ₹12,500 for taxable income ≤ ₹5,00,000.
  • Deductions Permitted: Section 80C (up to ₹1.5L), Section 80D (up to ₹75k), Section 80CCD(1B) NPS (up to ₹50k), Section 24(b) Home Loan Interest (up to ₹2L), and HRA Exemption u/s 10(13A).

Regime Comparison Rule of Thumb

For most salaried earners with total deductions under ₹3.75 Lakhs, the New Tax Regime delivers lower net tax liability due to widened 5% to 15% slabs and the higher ₹75,000 standard deduction. Taxpayers claiming substantial home loan interest and 80C/80D benefits may continue with the Old Regime.

4. Surcharge and Health & Education Cess

On calculated tax (post-rebate):

  • Health & Education Cess: 4% applied across all tax amounts.
  • Surcharge (New Regime): 10% (> ₹50L), 15% (> ₹1 Cr), 25% (> ₹2 Cr). (Capped at 25%).
  • Surcharge (Old Regime): 10% (> ₹50L), 15% (> ₹1 Cr), 25% (> ₹2 Cr), 37% (> ₹5 Cr).

5. Professional Tax (PT)

Levied under Article 276 of the Indian Constitution by respective state governments. Capped at ₹2,500 annually. Standard default is ₹2,400/yr (₹200/month). Delhi, Haryana, and Rajasthan do not charge professional tax.

6. House Rent Allowance (HRA) Exemption u/s 10(13A)

Under the Old Tax Regime, employees living in rented accommodation can claim tax exemption on HRA. The exempt amount is the minimum of:

  • Actual HRA received from employer
  • 50% of Basic Salary (metro: Delhi, Mumbai, Kolkata, Chennai) or 40% (non-metro)
  • Actual rent paid minus 10% of Basic Salary

7. Statutory Gratuity Provision

Governed by the Payment of Gratuity Act, 1972. Payable to employees upon completion of at least 5 years of continuous service:

  • Statutory Formula: (15 × Last Drawn Monthly Basic × Completed Years) / 26
  • Employer Annual CTC Provision: Standardized at 4.81% (15 / 26 / 12) of Basic Salary.
  • Tax Exemption Limit: Cumulative gratuity up to ₹20,00,000 is fully exempt from income tax under Section 10(10).

Methodology FAQs

What statutory sources are used in the calculation engine?
Our calculations are based on the Income-tax Act, 1961 as amended by the Finance Act 2025, the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, the Payment of Gratuity Act, 1972, and state-level Professional Tax enactments.
How does the Section 87A rebate work under the New Regime?
Under Section 87A for FY 2025-26, resident individuals with total taxable income up to ₹12,00,000 are eligible for a tax rebate of 100% of the income-tax payable, capped at ₹60,000. Combined with the ₹75,000 standard deduction, salaried taxpayers with gross income up to ₹12,75,000 pay ₹0 tax.
How is HRA exemption calculated under the Old Regime?
HRA exemption under Section 10(13A) is calculated as the minimum of: (1) Actual HRA received, (2) 50% of Basic salary for metro cities (Delhi, Mumbai, Kolkata, Chennai) or 40% for non-metros, or (3) Rent paid minus 10% of Basic salary.
How is statutory gratuity calculated?
Gratuity is calculated as (15 × Last Drawn Monthly Basic × Tenure in Years) / 26 days. On an annualized basis, employers reserve approximately 4.81% (15/26/12) of basic salary.

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FY 2025-26 Indian Statutory References & Tax Audit

Our salary calculation engine models statutory provisions under the Indian Income-tax Act, 1961 (amended by Finance Act 2025), EPFO circulars, and the Payment of Gratuity Act, 1972. All calculations are strictly client-side and deterministic.

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