Draft Income-tax Rules 2026 put old tax regime back on the table. Here is what you need to know

The draft Income-Tax Rules 2026 have unexpectedly brought the old tax regime back into play, at a time when many expected it to gradually disappear in favour of the newer simplified regime.

The draft rules preserve the traditional system with higher HRA benefits and revisions to allowances like children’s education and hostel expenses.

This means taxpayers still have the choice to benefit from deductions and exemptions that are not available under the new regime, keeping the old system relevant for financial planning.

"The proposed changes, such as higher HRA benefits and revisions to longstanding allowances like children’s education and hostel allowances, make the old regime more attractive for many salaried taxpayers who rely on deductions and exemptions to lower their tax burden, which are not available in the new regime. This shift signals that the government is not ready to phase out the old regime quickly," said Abhishek Soni, CEO & Co-founder, Tax2win

"Instead of removing it altogether, the draft rules suggest a continued dual-regime approach that preserves taxpayer choice and recognises the ongoing relevance of traditional exemptions and allowances that remain important for financial planning and savings decisions," said Abhishek Soni.

"A key signal in this direction is the long-overdue revision of allowances such as the children's education allowance, which had remained unchanged for decades despite rising education costs. This move reflects an acknowledgement that legacy exemptions had lost their real economic value and needed rationalisation to align with present-day expenses. At the same time, the continued importance of house rent allowance (HRA) reinforces the government’s recognition of housing as a major cost centre for urban taxpayers. By retaining and strengthening such deductions, the draft rules indicate a more balanced approach, one that does not force taxpayers into a one-size-fits-all regime but allows them to choose based on their actual financial commitments," said Vipin Upadhyay, Partner, King Stubb & Kasiva, Advocates and Attorneys.

HRA

As per Rule 279 of the draft Income-tax Rules, 2026, the amount of HRA that can be claimed as tax-exempt will be the lowest of the following three amounts:

• the actual HRA received during the relevant period;

• the excess of rent paid over 10% of the employee’s salary; or

• 50% of salary for employees posted in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru, and 40% of salary for all other locations.

Change is the revision of long-standing allowances

Another notable change is the revision of long-standing allowances that had remained unchanged for decades.

The children’s education allowance is proposed to increase from ₹ 100 to ₹3,000 per month per child (for a maximum of two children). Similarly, the hostel expenditure allowance rises from ₹300 to ₹ 9,000 per month per child.

Additionally, the transport allowance for employees who are blind, deaf and mute, or orthopedically handicapped with lower-extremity disability has been increased to ₹15,000 plus Dearness Allowance in metro cities and Rs 8,000 plus DA in other cities, compared to ₹3,200 per month under the old income-tax rules.

A new and simplified Income Tax Act, 2025, which will replace the over six-decade-old Income Tax Act of 1961, will come into effect from April 1.

The draft Income-tax Rules, 2026, contain 333 rules and 190 forms.