New Tax Regime 2026: How salary components, deductions will tweak under Income Tax Act 2025 from April 1

The Income Tax Act, 2025, along with the newly notified Income Tax Rules 2026 (effective April 1, 2026), brings a significant reset for salaried taxpayers, with key changes around HRA, salary structuring, and deductions. The government’s broader objective is to simplify a system that had become overly complex over decades, while also offering targeted relief through higher allowances and streamlined compliance.

HRA and salary structure

House Rent Allowance (HRA) continues to remain one of the most important tax-saving components for salaried individuals, but the new regime introduces a notable tweak. More cities—including Bengaluru, Pune, Hyderabad, and Ahmedabad—now qualify for a higher 50% HRA exemption, aligning them with metro-like benefits. Delhi-NCR, however, continues at a 40% exemption threshold.

This change is significant for urban salaried professionals, as it increases the tax efficiency of compensation structures in fast-growing cities beyond traditional metros. Employers may also recalibrate salary breakups to optimise HRA benefits, making salary structuring more strategic under the new regime.

At the same time, the rules bring clarity to perquisites (non-cash benefits). The updated framework clearly categorises perks into taxable and non-taxable components, with revised valuation norms for benefits such as company-provided vehicles and allowances. Notably, the exemption limit on employer-provided medical loans is proposed to increase sharply from ₹20,000 to ₹2 lakh, offering additional relief in healthcare-related financial planning.

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Higher allowances

One of the most impactful changes comes in the form of enhanced deductions for children-related expenses. The Children Education Allowance has been increased to ₹3,000 per month per child, a sharp jump from the earlier ₹100 limit. Similarly, the hostel allowance has been raised to ₹9,000 per month per child, compared to just ₹300 previously.

These revisions mark a meaningful shift, especially for middle-class salaried families, where education expenses form a large share of household budgets. The move effectively converts what were once negligible deductions into materially relevant tax-saving tools.

Simplified tax system

A structural change introduced under the new law is the replacement of the Financial Year (FY) and Assessment Year (AY) with a single “Tax Year”, defined as a 12-month April–March period. This simplifies tax filing and reduces confusion for taxpayers, particularly first-time filers.

Additionally, the government plans to roll out redesigned Income Tax Return (ITR) forms aimed at improving usability and reducing compliance friction.

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Tax slabs unchanged

In her Budget 2026 speech, Finance Minister Nirmala Sitharaman announced that the Income Tax Act, 2025 will come into effect from April 1, 2026, but the tax slabs will remain same. The 2025-2026 tax slabs under the new law will apply to income earned in the financial year 2026–27.

Compliance eases

The new rules also ease certain compliance requirements. Thresholds for mandatory PAN quoting in transactions such as vehicle purchases and cash deposits have been increased, reducing the burden for smaller transactions.

At the same time, regulatory oversight has been strengthened in capital markets. Stock exchanges will now be required to:

Maintain audit trails for seven years Prevent deletion of transaction records Submit monthly reports on modified trades

This aims to improve transparency and safeguard investor interests.

Bottom Line

For salaried individuals, the Income Tax Act, 2025 reshapes the tax landscape through higher HRA benefits, improved allowances, clearer salary structuring, and simplified compliance. While the real impact will depend on execution, the framework marks a clear move towards a more modern, taxpayer-friendly system.