Will Old Tax Regime regain its edge from April 1? Draft Income Tax Rules 2026 may tilt balance for salaried taxpayers

The Draft Income Tax Rules 2026 propose significant upgrades to several tax-exempt allowances for salaried individuals, a move that could restore the relevance of the Old Tax Regime for taxpayers earning between ₹15 lakh and ₹25 lakh annually. Tax experts say the proposed changes aim to align exemptions with rising living costs and may alter the tax comparison between the Old and New regimes.

“The most meaningful shift in the draft rules is the renewed relevance of the Old Tax Regime,” said CA Hita Desai, Partner, NPV & Associates LLP. “By substantially enhancing tax-exempt allowances, the rules recognise the rising cost of living and provide practical relief to salaried individuals in the ₹15–25 lakh income bracket.”

Higher allowances under the Old Regime

Under the proposed rules, several allowances that previously provided minimal tax relief are set to see sharp increases.

The Children’s Education Allowance, currently capped at ₹100 per month per child, is proposed to increase to ₹3,000 per month per child for up to two children. Likewise, the Hostel Expenditure Allowance could rise from ₹300 per month to ₹9,000 per month per child, bringing the exemption closer to the actual cost of boarding education.

“The earlier limits were largely symbolic,” Desai explained. “The proposed revisions transform them into meaningful components that can materially reduce taxable income for families with school-going children.”

Another revision includes meal vouchers, where the tax-exempt value per meal could increase from ₹50 to ₹200, reflecting current workplace and food costs.

The draft rules also propose expanding metro-equivalent status for HRA purposes. Cities such as Bengaluru, Pune, Ahmedabad and Hyderabad may be treated at par with metro cities, allowing employees to claim HRA exemption of up to 50% of basic salary.

“With a properly structured salary package, these changes could reduce taxable income by ₹3–5 lakh annually,” Desai noted. “For individuals in the 30% tax bracket, this could translate into tax savings exceeding ₹1 lakh per year.”

Breakeven point between tax regimes

Until now, the New Tax Regime has generally been more advantageous for individuals earning between ₹15 lakh and ₹25 lakh because of lower tax rates and minimal documentation.

Under the FY 2025–26 tax structure, income up to about ₹12.75 lakh after the standard deduction is effectively tax-free under the New Regime.

“For someone earning ₹20 lakh annually, roughly ₹7 lakh of deductions were typically required for the Old Regime to become more tax-efficient,” Desai said. “Earlier, achieving that level of deductions was difficult because most benefits were limited to Section 80C, Section 80D and HRA.”

However, the enhanced education, hostel and meal allowances proposed under the Draft Rules could add ₹3–4 lakh of additional exemptions, making the break-even threshold significantly easier to reach.

“In practical terms, if an individual has two children in a hostel and pays rent in cities such as Bengaluru or Mumbai, the Old Regime could deliver higher tax savings,” Desai said. “However, for taxpayers without rent, home loans or significant exemptions, the New Regime may still remain more beneficial.”

Key deductions

Desai noted that taxpayers opting for the Old Regime should focus on high-impact deductions rather than multiple small claims.

Enhanced Children’s Education Allowance and Hostel Allowance could significantly reduce taxable salary where applicable. Taxpayers can also maximise deductions under Section 80C up to ₹1.5 lakh, covering investments such as PPF, EPF, ELSS and life insurance.

Health insurance premiums under Section 80D provide deductions between ₹25,000 and ₹50,000, depending on the taxpayer’s age.

“HRA exemptions, especially with the proposed metro expansion, and the home loan interest deduction of up to ₹2 lakh under Section 24(b) continue to remain important tax planning tools,” Desai added.

She also highlighted the role of structured perquisites, including meal vouchers and eligible gift vouchers, in improving tax efficiency when incorporated properly in salary structures.

Documentation and proofs

Despite the proposed revisions, the New Tax Regime is likely to remain the default option from FY 2026–27, meaning taxpayers must actively opt for the Old Regime each year while filing returns.

“Structured documentation is just as important as structured tax planning,” Desai said. “Higher-income taxpayers should maintain proper records to avoid scrutiny.”

Employees claiming HRA must keep rent receipts and rental agreements, and where monthly rent exceeds ₹50,000, the landlord’s PAN and Form 26QC compliance become essential.

Similarly, education and hostel allowances require fee receipts clearly showing the hostel component, while meal vouchers must be issued through approved employer systems. For LTA claims, taxpayers should retain boarding passes and travel invoices.

“If implemented as proposed, the Draft Income Tax Rules 2026 could significantly improve the attractiveness of the Old Tax Regime,” Desai said, “especially for salaried individuals who have genuine expenses that can be structured efficiently within the salary framework.”