Salaried individuals opting for the old tax regime may see notable tax relief under India's Draft Income Tax Rules 2026, subject to Parliament's approval. The proposals seek to widen the scope of certain exemptions and allowances tied to salary structures and employee perks, potentially bringing down taxable income and the final tax liability.
Most of the changes outlined in the Draft Income Tax Rules 2026 are aimed at taxpayers using the old tax regime. The proposals could make the old system more attractive again, particularly for individuals who claim several deductions and allowances. While many of the measures may reduce the overall tax burden, some provisions could also lead to a higher tax liability in certain cases.
The Draft Income Tax Rules 2026 outline a number of proposed revisions affecting several commonly used salary components and benefits. These include changes related to House Rent Allowance (HRA), Children Education Allowance and hostel allowances. The draft framework also covers certain employee perks such as subsidised meals and gift vouchers, as well as the tax treatment of company-provided vehicles.
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In addition, the framework proposes employer-backed interest-free or concessional loans and transport allowances available to specific employees in transport systems.
The draft Income Tax Rules 2026 propose revising the classification of metro cities for the purpose of House Rent Allowance (HRA), a benefit available under the old tax regime. Should Parliament approve the proposal without changes, taxpayers living in cities including Bengaluru, Hyderabad, Pune and Ahmedabad could be eligible for increased HRA exemptions.
Based on a sample salary structure of Rs 20 lakh a year, the updated rules could lead to tax savings of up to Rs 1.25 lakh compared with the earlier framework that dates back to the 1962 rules.
The estimates are based on the assumption that the property is rented either in an existing metro city or in one of the cities proposed to be added under the Draft Tax Rules 2026. Under the previous framework, the applicable limit was set at 40%, whereas the draft rules propose increasing it to 50%.
To illustrate how the new rules can lead to savings of up to Rs 1.25 lakh, we will consider a salaried professional living in Hyderabad.
One of the biggest changes relates to house rent allowance (HRA). Under the earlier rules, the exemption was capped at Rs 3.2 lakh. The revised rules allow the entire Rs 4 lakh HRA to qualify for exemption based on the updated calculation formula.
This alone increases the deduction by Rs 80,000, directly reducing taxable income. Allowances for children's education and hostel accommodation also see a dramatic increase. Children's education allowance: rises from Rs 2,400 per year to Rs 72,000, Hostel allowance: jumps from Rs 7,200 to Rs 2.16 lakh
Combined, these two allowances raise tax-free benefits by nearly Rs 2.8 lakh, providing substantial relief for families with school-going children.
Earlier, benefits such as free meals, gift vouchers and interest-free loans were partially taxable. Under the revised framework:
Free meals worth Rs 50,000 are fully exempt (earlier, only Rs 10,000 was exempt).
Gift vouchers up to Rs 15,000 are now tax-free, compared with the previous Rs 5,000 threshold.
The taxable component on short-term interest-free loans has been removed.
Together, these changes eliminate Rs 67,000 of taxable perquisites that previously added to the employee's tax liability.
Total deductions and exemptions increase sharply under the updated rules. Under the old framework (1962 rules), it stood at Rs 7.09 lakh, while it stands at Rs 10.68 lakh under the proposed draft rules.
That is an increase of nearly Rs 3.6 lakh in tax relief. As a result, the taxable salary drops from Rs 13.57 lakh to Rs 9.32 lakh.
With the lower taxable income, the total tax payable falls sharply. Under the earlier tax framework based on the 1962 rules, the total tax liability for the individual, including the 4% cess, works out to Rs 2,28,509. However, under the revised old tax regime rules proposed for 2026, the total tax payable falls sharply to Rs 1,02,856, resulting in a saving of roughly Rs 1.25 lakh.
For salaried employees with a structured compensation package, including HRA, education allowances and employer benefits, the revised rules could translate into substantial tax savings, potentially exceeding Rs 1 lakh annually.
However, the actual benefit will depend on individual salary structures, rent payments, deductions and eligibility for allowances.
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