Draft Income Tax Rules 2026: With HRA, allowances revised, is any tax relief in sight for salaried earning up to Rs 2 lakh?

India’s Income Tax framework has existed since 1961, but the economy, compensation structures and cost of living have changed dramatically. From April 1, 2026, the new Income-tax Act, 2025, along with the Draft Income-tax Rules, 2026, will come into force, potentially altering exemptions, compliance processes and take-home pay calculations — especially for salaried individuals earning ₹15–25 lakh annually.

Public feedback on the draft rules is open until February 22, 2026.

Zeel Jambuwala, Co-founder & Partner at Aurtus, explained that while tax rates remain unchanged, compliance formats will be reorganised. “The numbering and names of familiar forms will change under the new rules (effective from April 1, 2026) – certain old forms which we are very used to, like Form 16 (salary TDS certificate) will now be called Form 130, Form 26AS will be called Form 168, Form 16A will also be renumbered.” She clarified that these changes are structural and administrative rather than rate-based.

Aurtus is a full-service tax firm, which offers direct and indirect tax, transaction tax  and regulatory services.

1. What are the key changes in the new income tax rules from April 1, 2026?

The biggest impact for salaried individuals lies in higher tax-free allowances — applicable only under the old tax regime.

As Jambuwala noted, “The changes are done to bring the values of these allowances and perquisites in line with the current market rates and inflation.”

Key proposed revisions include:

Children education allowance increased from ₹100 to ₹3,000 per month per child

Hostel allowance raised from ₹300 to ₹9,000 per month per child

Free meal exemption enhanced from ₹50 to ₹200 per meal

Non-cash gift exemption increased from ₹5,000 to ₹15,000 annually

Car lease perquisite values significantly revised upward

However, she cautioned, “It is important to note that these exemptions apply only under the OLD tax regime. Taxpayers opting for the new tax regime do NOT get these exemptions.”

2. How will the new rules affect PAN card requirements?

The Draft Income-tax Rules, 2026 do not introduce a fundamental overhaul of India’s PAN framework. However, they rationalise and reorganise existing PAN-related provisions under the Income-tax Act, 2025 to improve clarity, consistency and digital enforcement.

Key updates include:

Property Transactions: PAN will continue to be mandatory for the purchase or sale of immovable property. However, the monetary threshold for mandatory PAN quoting has been revised upward to better reflect current property valuations in high-value transactions.

Cash Deposits and Withdrawals: PAN-linked reporting requirements remain in place, but limits have been streamlined and revised to align with present-day banking practices.

Motor Vehicle Purchases: PAN quoting continues to apply only above specified value thresholds. Two-wheelers remain excluded, maintaining earlier policy intent while clarifying reporting obligations.

Impact on Individuals

For individuals, the overall framework remains familiar. PAN will still be required for high-value financial transactions such as property purchases, large investments and specified banking activities. The key difference lies in improved digital integration, as PAN-linked data will flow more seamlessly into systems such as the Annual Information Statement (AIS) and Statement of Financial Transactions (SFT), improving verification and matching.

Impact on Corporates

For businesses, the implications are more operational. Companies must ensure accurate PAN collection and validation across vendors and counterparties. Automated reconciliation across TDS returns, SFT filings and income-tax returns will make mismatches easier to detect.

Overall, the PAN-related changes focus on simplification, rationalised thresholds and stronger digital enforcement rather than introducing new compliance burdens.

3. What new tax benefits are available under the updated rules?

The updated rules primarily enhance tax-free allowances and perquisites provided by employers, aligning exemption values with inflation and current market conditions. These benefits apply only under the old tax regime.

Revised allowances include higher limits for:

Children education allowance

Hostel allowance

Free meals

Non-cash gifts

Car lease perquisites

A major revision relates to House Rent Allowance (HRA). Under the old regime, HRA exemption is capped at 50% of salary (Basic + DA) for metro cities and 40% for non-metros. Previously, only Delhi, Mumbai, Kolkata and Chennai qualified as metros.

Effective April 1, 2026, Bengaluru, Hyderabad, Pune and Ahmedabad have been added to the 50% metro category. Additionally, relief for employees with disabilities has been strengthened through higher transport allowance limits, particularly for those posted in notified metro cities.

4. Are there changes in income tax slabs for individuals?

There are no fresh changes to the income-tax slab rates coming into effect on 1 April 2026. The slab rates applicable for FY 2025–26 continue to apply for FY 2026–27, as no amendments to the slab structure were proposed in the Finance Bill for FY 2026–27. It is important to distinguish between the new Income-tax Rules, 2026 and changes to tax rates. The Rules primarily reorganise compliance procedures, forms and reporting requirements under the new legislative framework. Tax slabs and rates can only be modified through amendments to the Income-tax Act via the Finance Act, not through the Rules.