Income Tax Rules 2026: Key Changes That May Revive Old Tax Regime
Income Tax Rules 2026: Key Changes That May Revive Old Tax Regime
The new draft of the Income Tax Rules, 2026, shows that more people are becoming interested in the old tax system again, mainly because it offers some major benefits that many taxpayers may find attractive.
Enhancement of HRA Exemption
Presently, only four big cities, such as Mumbai, Delhi, Kolkata, and Chennai, allow salaried employees to claim up to 50% of their salary as House Rent Allowance (HRA) exemption under the old tax system. In all other cities, the limit is 40%. The new proposal suggests adding Bengaluru, Hyderabad, Pune, and Ahmedabad to the 50% category.
This change is being suggested because housing costs have increased a lot, and they are now major job hubs. Tax experts say this update would make the HRA rules more realistic and better suited to today’s urban living costs.
Higher Allowances to Match Inflation
Besides the proposed HRA changes, the draft rules also suggest big increases in some allowances that have not been updated for many years.
- Children’s Education Allowance: Proposed to increase from Rs. 100 to Rs. 3,000 per month per child (for up to two children).
- Hostel Expenditure Allowance: Proposed to rise from Rs. 300 to Rs. 9,000 per month per child.
These changes take inflation into account and make these tax benefits more meaningful again. Because of this, people who use deductions and allowances might find the old tax regime more beneficial.
Enhanced Compliance Requirements for Foreign Income Reporting
The draft rules also bring stricter requirements for reporting foreign income. Taxpayers will have to confirm their claim for foreign tax credits by filing Form 44. In certain cases, such as for companies or when the foreign tax paid is more than Rs. 1 lakh, a Chartered Accountant (CA) must certify the form. The CA will check income details and proof of tax paid to make sure the taxpayer qualifies for benefits under the tax eligibility.
The Old Regime’s Renewed Relevance
Even though the government has been promoting the new tax regime with lower tax rates and fewer deductions, the draft rules suggest a shift in approach. By enhancing exemptions and adjusting allowances to match inflation, the old tax regime could become attractive again. This would be beneficial for salaried employees who pay high rent, have children’s education expenses, or prefer structured tax planning.
The proposed changes in the Draft Income Tax Rules 2026 may bring renewed interest in the old tax regime, as it could offer better benefits for those who want to continue using deductions and plan their taxes carefully.