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

The Central Board of Direct Taxes (CBDT) has released draft Income Tax Rules 2026, and salaried taxpayers have reason to pay close attention. The proposed rules introduce significant increases in tax-free allowances and perks, potentially tilting the scales back in favour of the old tax regime for many employees.

If you're currently in the new tax regime for its simplicity, it's time to run the numbers again. The old regime with its exemptions might deliver better post-tax income under the proposed changes.

What's Changing: Key Proposed Allowance Increases

The draft rules propose substantial hikes in several tax-free allowances that directly impact your take-home salary:

1. Children Education Allowance: 30x Increase

• Current: ₹100 per child per month (₹1,200/year)
• Proposed: ₹3,000 per child per month (₹36,000/year)
• Impact: Annual tax-free income increases by up to ₹34,800 per child

2. Hostel Allowance: 9x Increase

• Current: ₹300 per child per month (₹3,600/year)
• Proposed: ₹9,000 per child per month (₹108,000/year)
• Impact: Parents with children in hostels see massive tax relief

3. Meal Allowance Expansion

The proposed rules expand tax-free meal benefits, including higher limits for food coupons and meal vouchers provided by employers. This directly reduces taxable perquisites for employees receiving meal benefits.

4. HRA Exemption: Broader Coverage

While the basic HRA calculation formula remains unchanged, the draft rules clarify and expand applicability across more cities. The HRA exemption continues to be the single largest tax saver for salaried employees paying rent, with exemptions reaching up to 50% of basic salary in metro cities.

Old Tax Regime Revival: Do the Math

The increased allowances could make the old tax regime viable again for many taxpayers who switched to the new regime. Here's when the old regime may work better:

Scenario 1: High HRA + Standard Deductions

For employees with significant HRA exemptions (typically those paying substantial rent in metro cities), combining HRA benefits with the increased allowances can outweigh the lower tax rates of the new regime.

Example calculation for ₹15 lakh salary:

• HRA exemption: ₹3,00,000 (50% of basic in metro)
• Children education (2 kids): ₹72,000
• Standard deduction: ₹50,000
• Section 80C (PPF/ELSS): ₹1,50,000
• Total deductions: ₹5,72,000
• Taxable income: ₹9,28,000

Under the old regime with these deductions, you could pay less tax than the new regime's flat rates on ₹15 lakh.

Scenario 2: Limited Deductions

If you don't claim HRA (living in owned property or with family) and have minimal 80C investments, the new regime likely remains better. The increased allowances alone may not bridge the gap.

Other Key Changes in Draft Rules 2026

Rationalized Perquisite Valuation

The draft rules simplify how employer-provided benefits are valued for taxation:

• Lower taxable valuations for company-provided accommodation
• Clarified rules for transport and conveyance allowances
• Simplified valuation of employer gifts and rewards

Reduced Compliance Burden

The Income Tax Rules are being streamlined from 511 rules to 333 rules, and tax return forms reduced from 399 to 190. This simplification aims to reduce confusion and litigation while maintaining taxpayer protections.

Updated Accountant Definitions

New eligibility criteria for accountants who can certify tax documents and represent taxpayers, ensuring higher professional standards.

What You Should Do Now

1. Review Your Current Tax Planning

Calculate your tax liability under both regimes using the proposed allowance limits. Factor in:

• Actual HRA exemption you can claim (based on rent paid)
• Children education and hostel allowances applicable to you
• 80C investments you actually make (not just plan to make)
• Other deductions like NPS (80CCD), health insurance (80D)

2. Plan Your Investment Strategy

If the old regime works better, ensure you're maximizing:

• PPF, ELSS, or other 80C investments up to ₹1.5 lakh
• NPS contributions for additional ₹50,000 under 80CCD(1B)
• Health insurance premiums under 80D

3. Submit Feedback to CBDT

The draft rules are open for public feedback until February 22, 2026. Taxpayers and professional bodies can submit suggestions through the Income Tax Department's official portal.

Implementation Timeline

The new Income Tax Act 2025 and these draft rules come into effect from April 1, 2026 (Assessment Year 2026-27). The increased allowances and simplified rules will apply to income earned from FY 2026-27 onwards.

Employers should prepare their payroll systems to accommodate the new allowance limits and ensure employees can claim benefits from the start of the financial year.

Bottom Line

The proposed Income Tax Rules 2026 represent a significant shift in how allowances and perks are taxed. For salaried employees, particularly those with children and those paying rent in metro cities, the old tax regime may become attractive again.

Don't make assumptions based on last year's calculations. The 30x increase in children education allowance and expanded HRA coverage could tip the scales. Run fresh numbers for your specific situation once the rules are finalized.

Remember: the best tax regime is the one that leaves more money in your pocket after all deductions and exemptions, not the one that looks simpler on paper.