Draft Income Tax Rules 2026: Higher HRA, Tax-Free Perks to Boost Your Take-Home Pay

While Budget 2026 kept income tax slabs unchanged, the Draft Income Tax Rules 2026 released by CBDT on February 18, 2026, brings substantial relief for salaried employees through enhanced perquisite exemptions. The proposed Rule 15 will replace the decades-old Rule 3, rationalizing long-outdated thresholds for housing, education, meals, gifts, and conveyance benefits—potentially increasing your take-home salary significantly.

Major Highlights at a Glance

1. Children Education & Hostel Allowances: The Game Changer

The most dramatic increases come in education-related allowances—these haven't been revised for decades and were woefully inadequate given current education costs.

Children Education Allowance

• Current: ₹100 per month per child (max 2 children)
• Proposed: ₹3,000 per month per child (max 2 children)
• Annual Benefit: From ₹2,400 to ₹72,000 for two children

Hostel Expenditure Allowance

• Current: ₹300 per month per child (max 2 children)
• Proposed: ₹9,000 per month per child (max 2 children)
• Annual Benefit: From ₹7,200 to ₹2,16,000 for two children

2. HRA Exemption Extended to More Cities

Budget 2026 extended the higher 50% HRA exemption (instead of 40%) to four additional major cities beyond Delhi, Mumbai, Kolkata, and Chennai:

• Already covered (50%): Delhi, Mumbai, Kolkata, Chennai
• Newly added (50%): Bengaluru, Hyderabad, Ahmedabad, Pune
• Other cities (40%): Remain unchanged

3. Housing Perquisites: Major Tax Reduction

The Draft Rules rationalize the taxable value of employer-provided housing, reducing perquisite valuations by 25% to 50% across all city categories.

Employer-Owned Housing (Unfurnished)

City Population (2011 Census)	Current Rule 3	Draft Rule 15	Reduction
Up to 10 lakh	7.5% of salary	5% of salary	33%
10–15 lakh	10% of salary	5% of salary	50%
15–25 lakh	10% of salary	7.5% of salary	25%
25–40 lakh	15% of salary	7.5% of salary	50%
Above 40 lakh	15% of salary	10% of salary	33%

Employer-Leased Housing

The taxable value will now be the lower of 10% of salary or actual rent paid (previously 15% of salary).

4. Meal Vouchers & Office Meals: 4x Increase

The exemption for meal vouchers and office meals increases from ₹50 to ₹200 per meal—a much-needed update considering inflation since the original limit was set.

Critical Change: Unlike current rules where meal exemptions differ between old and new tax regimes, the Draft Rules apply the higher ₹200 limit regardless of which tax regime you choose.

5. Gifts from Employer: Triple the Exemption

The annual tax-free limit for gifts from employers increases from ₹5,000 to ₹15,000, giving companies more flexibility to reward employees through tax-efficient gifting.

6. Interest-Free Loans: 10x Threshold Increase

The threshold for taxing interest benefits on interest-free or concessional employer loans jumps from ₹20,000 to ₹2,00,000. This provides relief for employees who rely on salary advances or small employer loans.

Loans for specified medical purposes continue to remain outside the perquisite framework.

7. Motor Car Perquisites: Mixed Impact

Unlike housing, motor car perquisite values have been revised upward—but this reflects long-overdue recalibration of frozen limits:

Component	Current	Proposed
Car up to 1.6L (mixed use)	₹1,800/month	₹5,000/month
Car above 1.6L (mixed use)	₹2,400/month	₹7,000/month
Driver provided	₹900/month	₹3,000/month

Total Potential Tax Savings: A Case Study

Old Regime Revival? Do the Math

These enhanced allowances and perquisites apply primarily to the Old Tax Regime. For many salaried employees, especially those with children in education or those receiving employer-provided housing, these changes could make the Old Regime more attractive than the New Regime.

Key Consideration: If you have:

• Children in school/hostel
• Employer-provided housing in metro cities
• Meal vouchers as part of CTC
• HRA benefits in Bengaluru, Hyderabad, Pune, or Ahmedabad

You should seriously evaluate whether switching to (or staying in) the Old Tax Regime could result in lower overall tax liability.

Timeline and Implementation

• Draft Rules Published: February 18, 2026
• Public Feedback Deadline: February 22, 2026 (5 days)
• Expected Notification: March 2026
• Effective Date: April 1, 2026 (Assessment Year 2026-27)

How to Submit Feedback

CBDT has invited stakeholders to submit feedback on the Draft Income Tax Rules 2026. You can send your suggestions to:

• Email: draft.rules2026@incometax.gov.in
• Online: Through the Income Tax Department's e-filing portal
• Last Date: February 22, 2026

The Bottom Line

The Draft Income Tax Rules 2026 represents a significant step toward modernizing India's tax framework. By rationalizing perquisite valuations that have remained frozen for decades, these changes acknowledge current economic realities and could substantially boost take-home pay for millions of salaried employees.

While the motor car perquisite increases may affect some employees negatively, the overwhelming direction is toward reducing the tax burden—particularly for families with education expenses and those in employer-provided housing.

Action Item: Use these proposed changes as an opportunity to re-evaluate your tax regime choice for FY 2026-27. The enhanced exemptions may tilt the balance in favor of the Old Tax Regime for many taxpayers.