The draft Income Tax Rules 2026 have revived the old tax regime, even as many expected it to gradually fade in favour of the newer simplified system. The draft rules, released by the Income Tax Department on Friday, provide higher House Rent Allowance (HRA) benefits and revisions to allowances for children's education and hostel expenses.
Taxpayers will still have the option to claim deductions and exemptions not available under the new regime.
New Law Aims To Simplify Tax Procedures
The rules support the New Income Tax Act, 2025, which will take effect from April 1, as announced by Finance Minister Nirmala Sitharaman during her 2026 Budget speech. The new code is set to replace the 60-year-old 1961 Act.
The draft reduces the number of rules from 511 to 333 and the number of forms from 399 to 190. The government has invited stakeholders to provide feedback on the draft.
House Rent Allowance (HRA) Changes
The draft expands the cities eligible for a 50 per cent HRA exemption under the old regime. Currently, only Mumbai, Delhi, Kolkata, and Chennai qualify. The draft adds Bengaluru, Hyderabad, Pune, and Ahmedabad. Other cities remain at 40 per cent.
Under Rule 279, the HRA exemption will be the lowest of:
- Actual HRA received
- Rent paid minus 10 per cent of salary
- 50 per cent of salary for the listed cities, 40 per cent for other locations.
Revisions To Allowances
The draft updates long-standing allowances:
- Children's education allowance: Rs 3,000 per month per child (up from Rs 100), max two children.
- Hostel allowance: Rs 9,000 per month per child (up from Rs 300).
- Transport allowance: For those who are blind, deaf and mute, or orthopedically handicapped, the allowance rises to Rs 15,000 plus Dearness Allowance (DA) in metro cities and Rs 8,000 plus DA in other locations, compared to Rs 3,200 per month under the old rules.
Foreign Income Compliance
The draft tightens reporting of foreign income. Claims for foreign tax credit via Form 44 now require certification by a chartered accountant for companies or where foreign tax paid exceeds Rs 1 lakh. The accountant must verify income records, tax payments, and treaty eligibility.
