The Draft Income Tax Rules 2026 have quietly revitalised the old income tax regime, making it more relevant than many expected. While the government continues to promote the simplified new tax regime, the old system has received meaningful updates that could shift the tax-saving equation for a specific segment of salaried taxpayers.
The most significant change is the expansion of cities qualifying for the 50% HRA (House Rent Allowance) exemption. Earlier limited to Delhi, Mumbai, Kolkata and Chennai, the updated draft now includes cities such as Bengaluru, Hyderabad, Pune and Ahmedabad. Given the sharp rise in urban rents, this move significantly enhances tax efficiency for employees living in these metro-equivalent cities.
Child-related benefits have also been revised. The limits for children’s education allowance and hostel allowance, which had remained stagnant for years, are now being updated. Families relying on these exemptions under the old regime will directly benefit, as such allowances are not available under the new regime.
Meal vouchers have seen a major jump from Rs 50 per meal to Rs 200 per meal, reflecting current living costs. Employer-linked perquisites — such as rent-free accommodation, car benefits and concessional loans — will now be valued under modernised rules instead of outdated valuation frameworks. This change reduces taxable income for many salaried employees.
Leave Travel Concession (LTC) rules are also being upgraded. The restriction limiting reimbursement to economy-class fares is proposed to be removed, allowing reimbursement based on entitled travel class. Additionally, a standard reimbursement of Rs 30 per kilometre is proposed where public transport is unavailable, adding flexibility and fairness.
Despite these enhancements, the new tax regime continues to offer lower tax liability for most mid-income earners due to reduced slab rates and the Section 87A rebate. For example, a salaried individual earning Rs 12 lakh with only the standard deduction pays zero tax under the new regime but would still incur significant tax under the old system.
However, the old regime now clearly benefits a narrower group: individuals with high HRA in metro cities, substantial rent payments, and full utilisation of deductions under Sections 80C and 80D. For higher earners with structured salary components and significant exemptions, the revised thresholds may tilt the balance back in favour of the old regime.
In essence, the government appears to be taking a transitional approach — modernising outdated exemptions while continuing to encourage long-term migration toward a simpler tax structure. The right choice ultimately depends on an individual’s salary structure, rent outgo, deductions, and employer-linked benefits.
Both regimes will coexist for now. But while the old regime has received a timely boost, the new regime remains the default and simpler option for most taxpayers.
