The new Income Tax Rules, effective from April 1, 2026, offer increased tax-free allowances for salaried employees, including a rise in the House Rent Allowance (HRA) exemption from 40% to 50% of basic pay in cities like Ahmedabad, Bengaluru, Hyderabad, and Pune. This change could boost take-home pay significantly, with potential tax-free income reaching ₹2,88,000 annually for employees with two children. However, the expanded definition of 'wages' under the Code on Social Security, 2020, complicates matters for employers, as it increases their liabilities for gratuity and provident fund contributions. The Code now includes most allowances as part of 'wages,' leading to higher long-term costs for employers. Employers must carefully evaluate how they structure salaries to balance the benefits for employees against the rising statutory liabilities. The decision-making process involves considering whether to reallocate funds from excluded to included components or to merely reclassify existing components without changing the wage base. This strategic compensation decision requires careful planning to optimize tax benefits while managing employer costs effectively.