₹2.88L in income tax saving? Here’s how parents can benefit from April 1, 2026

From April 1, a new chapter in India’s income tax framework begins, bringing significant changes to how salaried individuals can optimise their tax outgo. Among the most notable updates under the revised income tax rules is the sharp increase in exemptions for child education allowance and child hostel allowance — moves that could tilt the balance in favour of the old tax regime for many taxpayers.

Allowance limits

The government has substantially enhanced these allowances, offering higher tax-free limits for parents. The child education allowance has been increased from ₹100 per month to ₹3,000 per month per child. Similarly, the child hostel allowance has jumped from ₹300 per month to ₹9,000 per month per child. These revised limits apply to a maximum of two children and are calculated on a monthly basis.

Up to ₹2.88 lakh exemption

This steep revision marks a significant shift, especially for salaried taxpayers who structure their income to take advantage of exemptions. Over a full financial year, the total tax-exempt amount can go up to ₹2.88 lakh for two children—₹72,000 from education allowance and ₹2.16 lakh from hostel allowance. This directly reduces taxable income, leading to meaningful tax savings.

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Old tax regime gets an edge

However, there is a critical distinction taxpayers must keep in mind. These enhanced benefits are available only under the old tax regime. The new tax regime, which offers lower tax rates and a simplified structure, does not permit most exemptions and deductions, including these allowances. As a result, individuals opting for the new regime will not be able to claim these revised benefits.

The change reinforces a broader trend in the tax system—while the new regime focuses on simplicity and lower rates, the old regime continues to reward taxpayers who actively plan their finances and claim deductions. For individuals with children, especially those incurring education and hostel-related expenses, the revised allowances can significantly improve tax efficiency under the old structure.

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Salary structuring and documentation

Eligibility for these benefits is limited to salaried employees, and the allowances must be part of the salary package. Taxpayers cannot claim them independently while filing returns. Instead, these components need to be included in the Cost to Company (CTC) and reflected clearly in the salary breakup as child education allowance and hostel allowance.

Employees who wish to avail of these benefits may need to coordinate with their employers during the salary restructuring or tax declaration process at the beginning of the financial year. Proper documentation, such as school fee receipts or hostel accommodation proof, may also be required for compliance and payroll purposes.

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Choosing the tax regime

The timing of these changes is crucial. As the new financial year begins on April 1, taxpayers are once again faced with the choice between the old and new tax regimes. The decision will largely depend on an individual’s salary structure, eligible exemptions, and overall financial planning strategy.

With enhanced allowances now in place, the old tax regime may regain relevance among salaried individuals with higher deductions. At the same time, those who prefer a no-exemption, lower-rate system may still find the new regime more suitable.

Ultimately, the start of the financial year presents an opportunity for taxpayers to reassess their tax strategy and choose the regime that delivers the maximum benefit.