Old vs New Tax Regime: How Draft Income Tax Rules 2026 impact Rs 15-25 lakh salaried taxpayers

The Draft Income Tax Rules, 2026 could materially reshape the old-versus-new tax regime equation for salaried individuals earning between Rs 15 lakh and Rs 25 lakh annually. By proposing higher exemption limits across several key allowances, such as house rent allowance (HRA), children’s education benefits, transport allowance and employer-provided meals, the draft rules revive the relevance of the old tax regime, which has steadily ceded ground since the new regime became the default.

Rahul Charkha, Partner at Economic Laws Practice, said the draft rules are less about altering tax rates for this income bracket and more about changing how salary income is reported, verified and processed. “The framework is moving towards a digital-first, pre-filled return ecosystem, where salary income, TDS, perquisites and other benefits are auto-populated using employer filings and third-party data,” he said, adding that Form 16 is expected to carry a far more granular salary break-up aligned with the Annual Information Statement (AIS) and Form 26AS. Within this broader reporting overhaul, several proposed changes tilt in favour of the old tax regime.

A key area is HRA, where cities eligible for the 50 per cent salary-based exemption have been expanded beyond the four metros to include Bengaluru, Hyderabad, Pune and Ahmedabad. Children’s education and hostel allowances have also been sharply enhanced, while the tax-free limit on employer-provided meals has been raised from ₹50 to ₹200 per meal, potentially translating into exemptions of over ₹1 lakh a year.

Is the old tax regime better than the new tax regime for ₹15–25 lakh salary earners?

According to Charkha, for most salaried taxpayers in this income range who have limited deductions, the new tax regime generally results in a lower tax outgo.

“The old regime becomes attractive only when an individual can claim substantial exemptions and deductions,” he said. This typically includes high HRA payouts with significant rent in eligible cities, a self-occupied home loan allowing the full ₹2 lakh interest deduction under Section 24(b), full utilisation of Section 80C limits, additional NPS benefits under Section 80CCD(1B), along with health insurance, enhanced children’s allowances, education-loan interest or qualifying donations.

What deductions can help reduce tax under the old regime?

Several deductions and exemptions under the old regime remain relevant beyond the draft-rule changes. Charkha said these include the ₹1.5 lakh deduction under Section 80C, an additional ₹50,000 for NPS contributions, health insurance deductions under Section 80D, and home-loan interest deductions of up to ₹2 lakh. HRA and Leave Travel Allowance exemptions also continue.

He added that higher education and hostel allowances, deductions under Section 80E for education-loan interest, donations under Sections 80G, 80GGA and 80GGB, savings interest deductions under Sections 80TTA and 80TTB, disability-related deductions and specified medical treatment expenses can further reduce tax liability under the old regime.

Will the new tax regime still remain the default option in 2026?

“For FY 2026–27, the new tax regime is expected to continue as the default,” Charkha said. Taxpayers opting for the old regime will need to actively choose it within prescribed timelines, failing which returns will be processed under the new regime by default.