What to do with a salary hike, with the tax maths

The raise is not the take-home

Most of us hear a hike as a headline figure: ₹18 lakh to ₹20 lakh. What you can use is smaller, because the extra income is taxed at your top slab rate, not your average one. Seeing the real number first prevents the common mistake of planning around the headline.

The tax maths, in the new regime

As of October 2026, the new regime is the default. Its slabs are nil to ₹4 lakh, then 5% to ₹8 lakh, 10% to ₹12 lakh, 15% to ₹16 lakh, 20% to ₹20 lakh, 25% to ₹24 lakh and 30% above, with a ₹75,000 standard deduction for salaried people and 4% cess. (These are unchanged for FY 2026-27 as far as we can verify; confirm on the income tax portal.) Taxable income up to ₹12 lakh pays nothing after the section 87A rebate.

An illustration with assumed figures. Your gross salary rises from ₹18 lakh to ₹20 lakh, all of it taxable cash pay:

The extra tax is ₹41,600 on a ₹2,00,000 raise. That is 20.8%, the 20% slab plus cess. You keep ₹1,58,400 a year, or ₹13,200 a month. If part of the raise goes into employer EPF or NPS contributions, the cash is smaller, though some of that is savings by another name.

Near ₹12 lakh the picture is different: the rebate and marginal relief make the effective rate on the first rupees above the line unusual. The income tax calculator handles it, and the salary calculator estimates take-home from a CTC. If you work in the old regime or are comparing, use the old vs new regime calculator, and read the regime comparison for FY 2026-27. You can verify the slabs on the income tax portal.

Fix the gaps before you spend or invest

A raise feels like permission to spend, and some of it should go to living better. But the order matters: the money that protects you from a bad year comes before the money that improves a good one.

Before you decide what to do with ₹13,200 a month, check four things, in this order:

1. Emergency fund. Three to six months of expenses. If it is not there, this comes first; the emergency fund calculator sets the target.
2. Insurance. A term plan if anyone depends on you (how much cover you need) and health cover that does not depend on your employer (waiting periods and exclusions).
3. Expensive debt. A card balance or personal loan is a guaranteed cost that no investment reliably beats; see snowball vs avalanche.
4. Goals with dates. A down payment, a child's school fees. The goal calculator turns each into a monthly amount.

Split the raise on purpose

Without a decision, the raise vanishes into spending in about two months. This is lifestyle creep, and it is not a moral failing; it is what happens when nothing else claims the money. The fix is to give the increase a job before it arrives.

One simple split of the ₹13,200 a month:

The shares are a starting point. Raise the investing share if your lifestyle is already comfortable; raise the gaps share if the emergency fund is thin.

What the SIP half does

Here is an illustration, not a forecast, with an assumed return of 10% a year. An extra ₹6,600 a month, invested for 20 years, adds up to ₹15.84 lakh of contributions and grows to about ₹50.5 lakh. Do the same with half that amount and you get half the result; the SIP calculator lets you vary the amount, years and return, and the cost of delaying a SIP shows what waiting a year does.

Better still is to build the habit into every future raise. A step-up SIP increases the instalment by a fixed percentage each year, and our post on step-up SIPs shows the effect. If you have not started at all, first salary money checklist is the place to begin. For where to put the money, see five questions before buying a mutual fund and compare funds in the screener; your asset mix matters more than any single pick, as asset allocation by age explains.

Tax-efficient options for part of the raise

Under the new regime, most deductions are gone, but one remains useful for some employees. Employer NPS contribution (old section 80CCD(2)) is deductible up to 14% of basic pay plus dearness allowance in the new regime, and it needs your employer to offer the option. It restructures salary rather than adding to it, and the money is locked until retirement, so it suits long-term savings only. See NPS explained and the NPS calculator. Voluntary EPF is another route; check your employer's policy and the rules on the EPFO site, since interest on very large employee contributions can be taxable. The lesser-known tax deductions for salaried employees post lists more, with the regime caveats.

A last check

A raise also changes your risk. A higher salary usually brings higher fixed costs, a bigger home or car EMI, and more people relying on you, so revisit your cover. When the hike lands, write down three numbers: the new monthly take-home, the amount you will move to the SIP, and the date it starts. Automate it the same week. A raise that is not automated is a raise you are likely to spend. Revisit in a year, and use the net worth calculator to see how it adds up.

This post is for education only and is not financial or tax advice. The examples use assumed figures, not forecasts; tax slabs and rules change, so verify them with the income tax department or a qualified professional.