A 30% salary hike on a Rs 10 lakh annual package may no longer feel like a true 30% increase in your take-home pay, thanks to the new income tax rules introduced in Budget 2025. Banker Vijay Chandola recently broke down the math, showing how tax implications can significantly erode the perceived benefits of a pay raise, especially for those in the middle-income bracket.
“With the new tax rules, a '30% salary hike' isn't really a 30% hike anymore,” Chandola, Product Lead at Axis Bank, wrote, illustrating the impact through a simple example. If your current cost-to-company (CTC) is ₹10 lakh and you receive a 30% raise, your new CTC would be ₹13 lakh. At first glance, this seems like a substantial boost. However, after accounting for taxes, the effective take-home salary drops significantly.
Here's how it breaks down: If your current CTC is ₹10 lakh and you receive a 30% hike, your new CTC will be ₹13 lakh. However, with the new tax structure in place, you'll need to pay approximately ₹75,000 in taxes. This means your net take-home salary after tax deductions will be around ₹12.25 lakh. While the CTC shows an increase of ₹3 lakh, the actual increment in your take-home salary is only ₹2.25 lakh, falling short of the anticipated 30% boost.
Chandola points out that to truly enjoy a 30% increase in net income, one would need to negotiate for a raise closer to 41% to offset the tax burden. “If you’re earning ₹10 lakh right now, unless you ask for at least a 41% hike, you’re leaving money on the table,” Chandola advised.
This effect is particularly pronounced for those with annual incomes around ₹12 lakh, who fall into a critical tax slab. Due to marginal relief under section 115BAC, individuals earning slightly above ₹12.75 lakh may find their take-home income nearly identical to those earning exactly ₹12.75 lakh, reducing the financial incentive for marginal pay increases.
However, Chandola noted that individuals with higher salaries, particularly those earning over ₹20 lakh annually, may not feel the pinch as sharply. The progressive nature of the tax system means that while they will still face tax deductions, the proportional impact on their disposable income is less severe.
Finance Minister Nirmala Sitharaman’s Budget 2025 introduced significant tax reforms aimed at benefiting the middle class. The new tax regime exempts individuals earning up to ₹12 lakh annually from paying any income tax, with additional standard deductions of ₹75,000 for salaried taxpayers. For those earning above this threshold, tax rates are progressively structured, ranging from 5% to 30% depending on the income slab.