Draft Income Tax Rules 2026 and Their Impact on Your Take Home Pay
The Draft Income Tax Rules, 2026 released by the Central Board of Direct Taxes (CBDT) propose important updates ahead of the new Income Tax Act coming into effect in April 2026. The draft revises long-standing exemption and perquisite limits to better reflect current living costs.
Open for public feedback until late February 2026, the proposed changes could provide meaningful relief for salaried taxpayers, especially those under the old tax regime.
Significant Hike in Exempt Allowances
Many allowances that were stuck at nominal amounts since the 1990s or early 2000s are getting a major upgrade:
Children's Education Allowance
Currently: ₹100 per month per child (up to 2 children).
Proposed: ₹3,000 per month per child.
For two children, this jumps from ₹2,400 to ₹72,000 annually tax-free.
Hostel Expenditure Allowance
From ₹300 to ₹9,000 per month per child.
Annual benefit for two kids: From ₹7,200 to ₹2,16,000.
Transport Allowance
Applies to employees in railways, airlines, shipping, road transport, etc., to meet personal expenses during duty (provided no daily allowance is received).
Exemption: 70% of the allowance, with the monthly cap rising from ₹10,000 to ₹25,000.
This long-overdue correction restores relevance for those incurring unavoidable expenses while away from base on operational duties.
Employer-Provided Meals
Tax-free limit per meal rises from ₹50 to ₹200.
Gifts and Vouchers
Annual tax-free limit increases from ₹5,000 to ₹15,000.
Interest-Free or Concessional Loans
Exempt threshold goes up from ₹20,000 to ₹2 lakh—helpful for medical emergencies or education advances.
These updates recognize inflation in education, travel, and daily expenses, allowing more of your CTC to stay tax-free.
House Rent Allowance (HRA) Gets More Generous
One of the biggest wins: The list of cities eligible for 50% HRA exemption (of basic + DA) is expanding.
Currently, only Delhi, Mumbai, Kolkata, and Chennai qualify for 50%; others get 40%.
The draft adds Bengaluru, Hyderabad, Pune, and Ahmedabad to the 50% category.
If you live in one of these cities and pay decent rent, your HRA exemption could rise substantially—potentially by lakhs annually—reducing taxable salary.
Changes to Perquisites Valuation
The draft Income Tax Rules 2026 propose higher taxable values for company-provided cars used partly for official and personal purposes, increasing the perquisite tax burden on employees.
Key Valuation Changes
Old Rules (Monthly Taxable Value)
- Cars ≤ 1.6L (Employer pays fuel/maintenance): ₹1,800
- Cars > 1.6L (Employer pays fuel/maintenance): ₹2,400
- Driver costs: ₹900
- Cars ≤ 1.6L (Employee pays fuel/maintenance): ₹600
- Cars > 1.6L (Employee pays fuel/maintenance): ₹900
New Draft Rules (Monthly Taxable Value)
- Cars ≤ 1.6L (Employer pays fuel/maintenance): ₹5,000
- Cars > 1.6L (Employer pays fuel/maintenance): ₹7,000
- Driver costs: ₹3,000
- Cars ≤ 1.6L (Employee pays fuel/maintenance): ₹2,000
- Cars > 1.6L (Employee pays fuel/maintenance): ₹3,000
TDS and Leased Car Impact
Executives with leased cars face higher TDS since the perquisite value is added to taxable salary, potentially reducing take-home pay unless offset by CTC adjustments. This applies under both old and new tax regimes as it pertains to perquisite valuation.
Despite the car perquisite hike, broader draft rule boosts—like higher standard deductions or allowances—often yield net savings, especially for mid-level staff with families needing transport or in field roles where car use is routine. Salary restructuring can further mitigate the impact.
Real Impact: Higher Take-Home in Old Regime
Here's a concrete example (based on recent analyses) for an employee earning ₹30 lakh gross annually, with two children, paying ₹75,000 monthly rent in a newly added 50% HRA city, plus standard deduction and Chapter VI-A investments of ₹4 lakh:
Current Rules
Exemptions ~₹6.6 lakh (HRA ₹6 lakh + minimal education/hostel).
Tax liability: ~₹4.09 lakh.
Under Draft 2026
Exemptions jump to ~₹10.88 lakh (HRA ₹7.5 lakh + education ₹72,000 + hostel ₹2.16 lakh).
Tax liability: ~₹2.75 lakh.
Annual Savings
₹1.34 lakh (adding ~₹11,000 to monthly take-home).
Even the new (default) regime would have higher tax (₹4.76 lakh) in this case. The old regime becomes significantly more attractive with these updated limits.
Tax Regime Comparison: A Detailed Look
This detailed comparison illustrates salary component breakdowns and tax liabilities across the existing Old Tax Regime, an optimized scenario under the Income Tax draft rules, and the New Regime. It highlights the significant shifts in financial impact.
The "Optimized Old Regime (Post-Draft)" scenario, reflecting the proposed rule changes, yields the lowest net tax liability. While the New Regime offers a higher standard deduction, its absence of other exemptions results in a slightly higher tax burden compared to the optimized Old Regime. This suggests significant advantages for those who can strategically utilize the updated exemptions.
HRA Calculator*
What Should You Do Now?
Review Your Salary Structure
Focus on basic pay, HRA, reimbursements, and special allowances.
Maximize Claims
Utilize education, hostel, or transport claims, especially if you have children.
Compare Tax Regimes
Assess old vs. new tax regimes once final rules are released.
Employers: Rethink CTC Packaging
Optimize compensation structure for maximum tax benefits.
These are draft proposals, and public feedback could lead to tweaks. But the direction is clear: relief for the salaried middle class by updating outdated limits.
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