Salary: standard deduction, HRA and Form 16

Part of Income tax. 7 min read. Free lesson with a short video, quiz and practice.

Your CTC (cost to company) is not your take-home pay. Salary is made of parts, and each part is taxed differently. Knowing them helps you read your payslip and plan your tax.

Parts of a salary

• Basic pay: the core part, usually 40–50% of salary. Many other items are worked out from it.
• HRA (house rent allowance): money for rent.
• Special or other allowances: usually fully taxable.
• Employer's PF and NPS contribution: part of CTC, not paid to you monthly.

Standard deduction

Every salaried person and pensioner gets a flat standard deduction without showing any bills: ₹75,000 in the new regime and ₹50,000 in the old regime.

HRA exemption (old regime only)

If you live in a rented home and pay rent, part of your HRA can be tax-free. The exempt amount is the lowest of three numbers:

1. HRA actually received.
2. Rent paid minus 10% of basic salary.
3. 50% of basic salary in a metro city, 40% elsewhere.

From tax year 2026-27, the new Income-tax Rules count eight cities for the 50% limit: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. You must also tell your employer your relationship with the landlord.

Example: Neha lives in Pune. Her basic pay is ₹6,00,000 a year, her HRA is ₹3,00,000 and she pays ₹3,00,000 rent.

• HRA received: ₹3,00,000
• Rent minus 10% of basic: ₹3,00,000 − ₹60,000 = ₹2,40,000
• 50% of basic: ₹3,00,000

The lowest is ₹2,40,000, so that much HRA is tax-free in the old regime. In the new regime, all of her HRA is taxable.

TDS on salary and Form 16

Your employer estimates your yearly tax and deducts it every month as TDS. At the start of the year, tell your employer which regime you want. In the old regime, give proofs of rent and investments when asked (the declaration form is now Form 124, earlier Form 12BB).

After the year ends, your employer gives you a certificate of salary paid and tax deducted. From tax year 2026-27 it is called Form 130 (earlier Form 16). Use it to file your return.