The government has released the draft Income-tax Rules, 2026, to support the new Income-tax Act, 2025, effective April 1, 2026.
New Draft Rules Propose Massive Hikes in Exemption Limits for Salaried Class
The Income-tax Act, 2025 comes into effect from April 1, 2026. To support the new tax law, the government has framed the draft Income-tax Rules, 2026, along with updated tax forms, giving taxpayers a clearer picture of how the new Act will work in practice. These draft documents will remain available in the public domain for feedback and comments from stakeholders and the general public till February 22. Amarpal S. Chadha explains how the draft rules aim to simplify compliance and make the tax filing process more practical
What are the key changes proposed in the draft rules?
Gift or voucher or token: The value of gifts, vouchers, or tokens from employers will be ‘nil’ for tax purposes if the total is below Rs 15,000 during the tax year, up from the previous limit of Rs 5,000.
House Rent allowance: More cities are eligible for the higher HRA exemption of 50% of salary, extending the benefit beyond the four metros.
Meal: The non-taxable limit for free food and non-alcoholic beverages provided by employers during working hours has been increased from Rs 50 to Rs 200 per meal per day.
Motor car: The value of perquisite in case where the motor car is owned or hired by the employer and used by the employee partly for business purpose and partly for personal purpose has also been revised. Where cubic capacity of engine does not exceed 1.6 litres and expenses on maintenance and running are met or reimbursed by the employer, the value of perquisite per month has been revised to Rs 5,000 (plus Rs 3,000, if chauffeur is provided) against Rs 1,800 (plus Rs 900, if chauffeur is provided). Where expenses on running and maintenance for private or personal use are fully met by the assessee, the perquisite valuation has been revised to Rs 2,000 (plus Rs 3,000, if chauffeur is provided) from Rs 600 (plus Rs 900, if chauffeur is also provided).
For cases where cubic capacity of engine exceeds 1.6 litres and expenses on maintenance and running are met or reimbursed by the employer the perquisite valuation will now be Rs 7,000 (plus Rs 3,000, if chauffeur is provided). Earlier this was Rs 2,400 (plus Rs 900, if chauffeur is provided). When expenses on running and maintenance for private or personal use are fully met by the assessee, the valuation of the perquisite has been revised to Rs 3,000 (plus Rs 3,000, if chauffeur is provided) from Rs 900 (plus Rs 900, if chauffeur is provided) earlier.
How do the new rules aim to simplify tax compliance for taxpayer?
The draft Income-tax Rules, 2026 have been designed with the aim of making tax compliance simpler, clearer, and more user-friendly.
One key step towards this is the standardisation of common information across forms, which reduces repetitive data entry and eases the compliance burden. Features such as pre-filled information and automated reconciliation make filing more intuitive, reduce errors, and save time.
Beyond simplifying filing, these smart forms also enable centralised processing and data-driven decision-making, allowing the tax authorities to use technology to provide better services to taxpayers. The language of the forms has been made simpler, and accompanying notes have been streamlined to reduce operational, administrative, or legal ambiguities.
Which exemptions and allowances under the old tax regime have been revised?
Key exemptions on allowances that had remained unchanged for many years under the old tax regime have now received inflation-adjusted increases. The children’s education allowance has been raised from Rs 100 to Rs 3,000 per month per child, while the hostel allowance has jumped from Rs 300 to Rs 9,000 per month per child. These revisions restore the real value of these exemptions, providing substantial relief to families managing education-related expenses.
More cities such as Bengaluru, Hyderabad, Pune, and Ahmedabad will now qualify for a higher HRA exemption of 50% of salary, compared with only the four metros under the old rules, making it easier for salaried taxpayers living in these cities to save on taxes. In other cities, the HRA exemption will continue to remain at the 40% ceiling.
How do inflation-linked updates to allowances impact salaried taxpayers?
Certain exemptions / non-taxability limits that had remained stagnant for years have been revised to account for inflation, ensuring that taxpayers retain the actual value of this exemptions/ non-taxability. For instance, the tax-free limit for employer provided loan for medical treatment of specified diseases has been increased to `2 lakh, up from the earlier limit of `20,000. Again, the tax-free limit for free or concessional education facilities provided by an employer has been increased to `3,000 per month per child from the earlier limit of Rs 1,000 per month per child.
What do these changes indicate about the continued relevance of the old tax regime?
While the government’s focus is gradually shifting toward the new tax regime, the inflation-linked increases in allowances and the expanded HRA benefits highlights the continued relevance of the old tax regime. The draft Income-tax Rules, 2026 signal continuation of India’s dual tax regime, showing that the old tax regime still offers advantages for taxpayers who claim eligible exemptions and deductions.
The writer is tax partner, EY India. With inputs from Shanmuga Prasad, director, EY India
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
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