Running Payroll in 2026-27: New Regime Defaults, Salary TDS and the Labour Codes

Tax year 2026-27 (April 2026 to March 2027) is the first year under the Income-tax Act, 2025, and the first full year of the Labour Codes. Payroll teams need to account for both.

The new tax regime is the default

The new regime is the default for salary TDS. An employee who wants the old regime, with deductions such as house rent allowance, the ₹1.5 lakh investment deduction (formerly Section 80C, now Section 123 of the 2025 Act) and home loan interest, must tell the employer. Without such an intimation, TDS is computed under the new regime.

Key features of the new regime as currently applicable:

Standard deduction of ₹75,000 for salaried employees
No tax on taxable income up to ₹12 lakh, through the rebate available to resident individuals
Slab rates rising from 5% to 30% above ₹24 lakh
Employer's contribution to NPS deductible up to 14% of salary

For most employees earning up to about ₹13 lakh, the new regime results in lower or nil tax. Employees with large home loan interest and HRA claims may still benefit from the old regime. A side-by-side computation at the start of the year helps employees decide.

Monthly TDS mechanics

Estimate annual salary and tax, and deduct evenly over the remaining months.
Consider other income or TDS from other employers if the employee declares it.
Deposit TDS by the 7th of the following month (by 30 April for March).
File the quarterly salary TDS statement, and issue the annual TDS certificate to employees by the prescribed date after year end.

Under the 2025 Act, the TDS provisions are consolidated in Section 393, and form numbers have been updated. Use the current versions of forms and utilities. Do not rely on templates from earlier years.

Labour Codes: the payroll changes

Wage definition – basic pay plus DA (and retaining allowance) must be at least 50% of total remuneration for computing PF, gratuity, bonus and overtime. If allowances exceed 50%, the excess is added to wages.
Gratuity for fixed-term employees after one year of service, on a pro-rata basis.
Timely payment of wages – the Code on Wages sets time limits for payment of wages and for settlement on separation (within two working days of resignation, termination or retrenchment).
Records and payslips – electronic records and payslips are recognised.

Year-end and exit processes

Full and final settlement – compute leave encashment, gratuity, notice pay and recoveries, and apply TDS correctly. Exemptions for gratuity and leave encashment have limits.
Perquisite statements and the annual certificate must reflect perquisites such as company car, accommodation and ESOPs at their prescribed values.
Reconcile salary as per the books with the TDS statements before filing the fourth-quarter statement. Mismatches lead to notices for employees and for the employer.

A practical checklist for 2026-27

Collect regime choices from all employees in writing.
Update payroll software for the 2025 Act's forms and section references.
Run the 50% wage test and update salary structures.
Provide for gratuity for fixed-term staff.
Fix a monthly payroll calendar covering inputs, approval, payment and deposit of statutory dues.

The information in this article reflects the law as on the date of publication and is for general guidance only.