The Draft Income Tax Rules, 2026 have been released by the Central Board of Direct Taxes (CBDT), and they contain changes that could significantly alter the calculus for taxpayers choosing between the old and new tax regimes. While the Income Tax Act, 2025 brought structural simplification, these draft rules bring meaningful financial changes that affect your take-home pay.
The new rules, when finalized, will take effect from April 1, 2026, marking the beginning of tax year 2026-27. Public feedback is invited until February 22, 2026, after which the final notification will be issued.
The Big Picture: Simplification With Substance
On the surface, the draft rules deliver on the government's promise of simplification. The number of rules drops from 511 to 333—a reduction of 35%. Forms are cut from 399 to 190. But beneath these numerical improvements lie material changes to exemption thresholds that could shift the balance between the two tax regimes.
Currently, over 80% of individual taxpayers have moved to the new tax regime, driven by lower tax rates and simpler compliance. However, the proposed allowance revisions may prompt a recalculation for many.
Major Allowance Revisions Proposed
1. Children Education Allowance: 30x Increase
The children education allowance—frozen at token levels for decades—is proposed to increase from Rs.100 per month per child to Rs.3,000 per month per child, capped at two children. This represents a 30-fold increase, finally reflecting current education costs in India.
Annual impact: For two children, exemption rises from Rs.2,400 to Rs.72,000 per year.
2. Hostel Expenditure Allowance: 30x Increase
Similarly, the hostel expenditure allowance is proposed to rise from Rs.300 per month per child to Rs.9,000 per month per child, again limited to two children.
Annual impact: For two children in hostels, exemption increases from Rs.7,200 to Rs.2,16,000 per year.
3. Food Meal Vouchers: 4x Increase
The exemption for food meals and vouchers provided by employers during working hours is proposed to increase from Rs.50 per meal to Rs.200 per meal.
Annual impact: At 22 working days per month, this rises from Rs.13,200 to Rs.52,800 per year.
4. HRA: Four New Cities Added
A significant revision expands the list of cities eligible for 50% HRA exemption (instead of 40%). The new entrants are Bengaluru, Pune, Ahmedabad, and Hyderabad—joining Delhi, Mumbai, Chennai, and Kolkata.
For salaried employees in these high-rent cities, this offers materially higher HRA exemption potential under the old regime.
The Regime Choice Arithmetic
To understand the impact, consider the breakeven points—how much deduction you need under the old regime to match the new regime's tax liability:
- At Rs.15 lakh salary: Approximately Rs.5.45 lakh in deductions needed
- At Rs.20 lakh salary: Approximately Rs.7 lakh in deductions needed
- At Rs.24 lakh and above: Approximately Rs.8 lakh in deductions needed
Previously, reaching these thresholds seemed unrealistic for many salaried individuals. The proposed changes alter this equation significantly.
Real-World Example
Consider a taxpayer with:
- Two children in hostels
- Residence in Bengaluru, Pune, Hyderabad, or Ahmedabad
- Standard Section 80C investments (Rs.1.5 lakh)
New exemptions available:
- Hostel allowance: Rs.2,16,000
- Children education: Rs.72,000
- Food vouchers: Rs.52,800
- HRA (enhanced): Varies by salary structure
- Section 80C: Rs.1,50,000
Combined, these easily exceed Rs.5 lakh in exemptions—bringing the old regime within reach for many who had previously abandoned it.
What This Means for Taxpayers
Review Your Regime Choice
If you're currently in the new tax regime but have significant deductions available (home loan interest, children's education expenses, HRA eligibility), calculate your tax liability under both regimes with the new exemption limits.
Salaried Employees Should Act
Talk to your HR department about restructuring your salary package to maximize these exemptions. The window to submit feedback on the draft rules closes February 22, 2026.
The New Tax Regime Still Wins For Some
If you don't have children, don't pay significant rent, or have minimal tax-saving investments, the new regime likely remains optimal. The math is individual—calculate before deciding.
Other Notable Changes
- Motor car perquisite: Taxable values for employer-provided cars have been revised downward, particularly for smaller vehicles.
- Form simplification: Pre-filled forms will become smarter, reducing compliance burden.
- Accountant definition: Rationalized to reduce ambiguity.
How to Submit Feedback
The CBDT has invited comments and suggestions on the draft rules until February 22, 2026. Taxpayers and professionals can submit feedback through the official Income Tax Department portal.
Bottom Line
The Draft Income Tax Rules, 2026 represent more than administrative streamlining—they contain substantive changes that could reverse the migration to the new tax regime for millions of taxpayers. With children education and hostel allowances seeing 30-fold increases, and HRA benefits expanding to four major cities, the old regime's appeal is set to grow.
Take time to recalculate your tax liability under both regimes once the rules are finalized. For many families with children and rent obligations, the math may now favour returning to the old system.
Disclaimer: This article is for informational purposes only. The draft rules are subject to change based on public feedback. Consult a qualified tax professional before making financial decisions.