Old Regime's Resurgence?
The Indian government's recent unveiling of draft rules for the New Income Tax Act, set to take effect from April 1, 2026, has sparked a significant conversation
about the potential resurgence of the older tax regime. While the government has strived to popularize the new regime, introduced in the Union Budget of 2020-2021 and made the default option for many, these new draft rules suggest the older system is far from obsolete. The proposed changes aim to simplify tax procedures by reducing the number of rules from 501 to 333 and streamlining forms from 399 to 190. However, a key development that could shift taxpayer preferences lies in the expansion of higher House Rent Allowance (HRA) exemptions under the old regime. This move may once again bring the deductions and benefits available in the traditional tax system into sharp focus for a considerable number of salaried individuals.
HRA Expansion Benefits
A pivotal aspect of the new draft rules is the proposed expansion of cities eligible for the higher 50 per cent House Rent Allowance (HRA) exemption under the old tax regime. Currently, this significant benefit is restricted to taxpayers residing in metropolitan cities like Mumbai, Delhi, Kolkata, and Chennai. The draft rules, however, seek to include Hyderabad, Pune, Ahmedabad, and Bengaluru in this list. This expansion is expected to provide substantial relief to a larger segment of salaried professionals by enhancing their eligible exemptions, thereby increasing their take-home income. Experts like CA Avinash Kumar Rao describe this proposal as 'timely and progressive,' emphasizing its role in promoting equity by offering uniform tax treatment for employees in comparable housing markets. Himank Singla further notes that this revision aligns HRA provisions with evolving urban demographics and rising housing costs in key economic centers, modernizing the tax framework.
Revised Child Allowances
Beyond the HRA enhancements, the draft rules also introduce revised allowances for parents, potentially reinstating the importance of deductions that may have been overlooked. The education allowance for children has seen a notable increase, moving from Rs 100 to Rs 3,000 per month per child, applicable for a maximum of two children. Similarly, the hostel expenditure allowance has been revised upwards from Rs 300 to Rs 9,000 per month per child. These adjustments signal a governmental effort to acknowledge and support the expenses associated with raising children. Furthermore, the transport allowance for employees with specific disabilities – blind, deaf and dumb, or orthopedically handicapped with lower extremity impairment – has also been significantly increased. This allowance has been raised from Rs 3,200 under the old rules to Rs 15,000 plus Dearness Allowance for those in metros and Rs 8,000 plus Dearness Allowance for those in other cities, offering more robust support.
Compliance & Next Steps
The draft rules also introduce enhanced compliance measures, particularly concerning the reporting of foreign income. Foreign tax credit claims, filed via Form 44, will now mandatorily require certification by a chartered accountant in two specific scenarios: for companies or when the foreign tax paid exceeds Rs 1 lakh. This certification involves the accountant verifying income records, evidence of tax payment, and treaty eligibility, aiming to bolster transparency and reduce potential disputes. The government has released these draft rules to gather feedback from stakeholders, a move intended to improve compliance and mitigate the number of lawsuits. Experts anticipate that these changes are designed to offer relief amidst rising living costs. Ultimately, taxpayers are advised to carefully calculate their potential deductions and compare them against the 'break-even deduction' for different income levels. If their eligible deductions surpass this threshold, the old regime may prove more beneficial; otherwise, the new regime remains the more advantageous option. It's crucial to remember that these draft rules await formal approval.
