New Income Tax draft Rules 2026
New Income Tax Draft Rules 2026: Why the Old Tax Regime Is Back in Focus
In this post, we will discuss how the new draft income tax rules have brought the old tax regime back into the discussion and what it means for salaried employees, HR professionals, and payroll teams.
For the last few years, the new tax regime was promoted as the default option because of its lower tax slabs and simplified structure. However, the recent draft rules have made the old regime more practical and beneficial for many taxpayers by revising outdated exemption limits.
Introduction
The Income Tax Department has released the draft Income Tax Rules, 2026 on Saturday. These new rules will take effect from April 1, 2026, starting with the financial year 2026-27. The draft rules introduce several changes, mainly focused on making tax filing simpler and improving ease of compliance for taxpayers.
While presenting the Union Budget 2026 on February 1, Finance Minister Nirmala Sitharaman mentioned that the simplified Income Tax Rules and forms would be notified soon. She also said the new forms have been redesigned to allow ordinary taxpayers to file their returns easily, without confusion or difficulty.
Let us understand what has changed.
“Old Tax Regime is still very much alive”
There was a general belief that the old tax regime would slowly be phased out. But the draft rules clearly show that it continues to stay.
More importantly, several exemptions under the old regime have now been updated to realistic levels. Earlier, many allowances existed only on paper because the limits were too low to offer any real tax benefit. With revised limits, the old regime now becomes a serious option again. For employees who claim multiple deductions and allowances, this could result in meaningful tax savings.
1.HRA Benefit expanded to more cities
One of the most important changes is related to the House Rent Allowance.
Cities like Bengaluru, Hyderabad, Pune and Ahmedabad are now treated at par with major metros for HRA exemption purposes. This means eligible employees in these cities can claim up to 50 per-cent of salary for HRA calculation instead of 40 per-cent.
For a large section of IT and service-sector employees, especially in cities like Bengaluru and Hyderabad, this can make a noticeable difference in taxable income. For payroll teams, this means salary structuring and tax projections need to be revisited.
3.Major Increase in Allowance Limits
Several allowances that were fixed decades ago have now been significantly increased. For example:
- Children’s education allowance has been raised from a negligible amount to a much more realistic figure per child. Hostel expenditure allowance has also been increased sharply.
- Transport allowances for specific categories have been revised upward.
|
Allowance |
Old Limit |
Proposed Draft Limit |
|
Children’s education allowance |
₹100/month |
₹3,000/month per child (max 2) |
|
Hostel expenditure allowance |
₹300/month |
₹9,000/month per child (max 2) |
|
Transport allowance (special needs) |
₹3,200/month |
₹15,000 (metros) / ₹8,000 (others) + DA |
Earlier, these limits were so low that most employees did not even consider them while planning taxes. With the new draft limits, these exemptions can actually reduce taxable income in a meaningful way.
This makes the old regime attractive for employees who have children, pay hostel fees, or receive structured allowances as part of their CTC.
4.Real Impact on a Mid-Level Salary
For someone earning around ₹15 lakh per annum, the enhanced exemptions under the old regime can lead to significant tax savings when compared to the new regime, depending on salary structure and eligible claims.
This does not mean the old regime is automatically better for everyone. But it does mean that employees must calculate both options carefully before choosing.
The “one size fits all” approach may no longer work.
5.What this means for Salaried Employees
Employees should now:
- Recalculate tax liability under both regimes.
- Check if their salary structure includes HRA and other allowances.
- Review deductions under sections like 80C, 80D and housing loan interest.
- Avoid blindly sticking to the default regime.
Those with higher deductions and allowances may find the old regime more beneficial again.
6.What this means for HR and Payroll Teams
For HR and payroll professionals, this is an important development.
You may need to:
- Update tax calculation sheets and payroll software.
- Communicate clearly with employees about regime selection.
- Offer guidance sessions before the declaration window closes.
- Help employees understand how their salary structure affects tax choice.
Software solutions and payroll systems should also ensure that both regimes are accurately modelled, especially with revised allowance limits.
Final Thoughts
The draft income tax rules have not replaced the new regime. Instead, they have made the old regime relevant again.
With updated exemption limits and expanded HRA benefits, the old tax regime now deserves a fresh comparison.
For employees, this means more careful tax planning.
For HR and payroll teams, it means providing better guidance and updated calculations.
Choosing the right regime is no longer about simplicity alone. It is about understanding your salary structure and making an informed decision.
This concludes our post on the New Income Tax Draft Rules 2026. Please share your thoughts and inquiries in the comments section below. We look forward to answering them.
