The Centre’s draft Income Tax Rules, 2026, released last week, propose a set of revisions that may revive interest in the old tax regime among salaried
taxpayers. While the new regime has gained traction due to lower slab rates and fewer compliance requirements, the latest proposals aim to sweeten the old structure by sharply enhancing select exemptions. The changes are currently open for public feedback until 22 February and, if finalised, will take effect from 1 April. Bigger Relief On Education, Hostel And HRA The most striking revision is the steep increase in children’s education allowance. The exemption, earlier capped at just Rs 100 per month per child, is proposed to rise to Rs 3,000 per month per child. This translates to Rs 36,000 annually per child, up to a maximum of two children, Rs 72,000 per year for eligible families. Similarly, the hostel expenditure allowance could jump from Rs 300 per month per child to Rs 9,000 per month per child. That means an annual exemption of Rs 1.08 lakh per child, again limited to two children. Another potentially game-changing move is the proposed metro classification of Bengaluru, Pune, Hyderabad and Ahmedabad for HRA purposes. If implemented, residents of these cities would qualify for a 50 per cent basic pay cap for HRA exemption—bringing them at par with Delhi, Mumbai, Kolkata and Chennai. “These benefits are only available in the old regime and not in the new regime, so yes, these will definitely play an increased role now in making the choice," said Mayank Mohanka, founder of TaxAaram India and partner at S.M. Mohanka & Associates, in a report from Mint. When Does The Old Regime Make Sense? For individuals earning between Rs 14 lakh and Rs 24 lakh annually, deductions typically need to range from about Rs 5.18 lakh to Rs 7.87 lakh for the old regime to compete with the new one. At Rs 25 lakh and above, deductions exceeding Rs 8 lakh may tip the balance. A Bengaluru-based employee earning Rs 30 lakh annually, paying Rs 60,000 in monthly rent and supporting two children, one in school and one in a college hostel, illustrates the impact. Under the revised allowances, total deductions could rise to Rs 9.8 lakh, potentially resulting in tax savings of Rs 39,000 compared to the new regime, assuming all exemptions are fully claimed. Even without hostel expenses, a substantial HRA component combined with deductions such as Section 80C, home loan interest or car lease benefits may push total claims above the break-even mark. HRA Likely To Have The Widest Impact Tax professionals believe the HRA revision could carry the most weight. “House rent is one of the largest recurring expenses for salaried individuals in metro cities. It is common for employees in Bengaluru to pay between Rs 35,000 and Rs 50,000 per month in rent. With the higher metro-based exemption limit, the incremental tax saving could range between Rs 15,000 and Rs 30,000 annually, depending on the individual’s tax slab," Mohanka estimates in the report. For lower- and middle-income earners, however, crossing the break-even threshold may remain challenging unless rent outgo is significant. Mohanka also cautioned that proper documentation, rent receipts, hostel fee records and education proofs will be essential to ensure accurate TDS calculations and Form 16 reporting. Relief On Perquisites And Transport Allowance The draft rules also suggest increasing the tax-free ceiling for employer-provided gifts and non-cash perks from Rs 5,000 to Rs 15,000 annually. “These typically include Diwali gift hampers, shopping vouchers, sweets, dry fruits, gadgets, concert tickets or employee-recognition rewards," said Mohanka. Additionally, transport allowance for employees who are blind, deaf and dumb, or orthopaedically handicapped is proposed to increase significantly, offering targeted relief. Notably, these allowances apply only to salaried individuals, not business owners. As Mohanka pointed out, “The reduced slab rates of the new regime, coupled with the increased threshold rebate limit to Rs 12 lakh, make the new regime more beneficial to the businessmen taxpayers. Changes in these allowances are irrelevant for them, and the choice between regimes continues to hinge largely on slab rates and rebate thresholds rather than such exemptions," said Mohanka.
