Revived Focus on Old Tax Regime: New Income Tax Draft Rules and Key Takeaways
The latest draft of Income Tax Rules, 2026 has highlighted a resurgence of interest in the old tax regime, particularly regarding significant benefits that could appeal to many taxpayers.
Key Proposal: Expanding HRA Exemptions
A central feature of the draft rules is the proposed expansion of cities eligible for the higher 50% House Rent Allowance (HRA) exemption under the old tax regime. Currently, only four metropolitan cities—Mumbai, Delhi, Kolkata, and Chennai—qualify for this higher exemption, while other cities are capped at 40%. The new proposal aims to include Bengaluru, Hyderabad, Pune, and Ahmedabad in this advantageous bracket, aligning HRA provisions with the realities of rising housing costs in India’s major job markets.
Tax experts, including Himank Singla of SBHS & Co., note this shift modernizes HRA provisions to reflect changing urban demographics and the escalating cost of living in major economic hubs.
Increased Allowances in Line with Inflation
In addition to the HRA changes, the draft rules propose substantial increases in several long-stagnant allowances.
- Children Education Allowance: Set to rise from Rs 100 to Rs 3,000 per month for each child (limited to two children).
- Hostel Expenditure Allowance: Proposed to increase from Rs 300 to Rs 9,000 per month per child.
These adjustments acknowledge the impact of inflation and restore relevance to exemptions that have diminished over the years. Taxpayers who depend on deductions and allowances may find the older tax regime more advantageous due to these updates.
Stricter Compliance for Foreign Income Reporting
The draft rules also introduce stricter compliance requirements for foreign income reporting. Taxpayers will be required to certify claims for foreign tax credits through Form 44, necessitating certification by a chartered accountant (CA) under specific circumstances—such as for companies or when foreign taxes exceed Rs 1 lakh. The CA will need to verify income records and proof of tax payments to ensure treaty eligibility.
The Old Regime’s Renewed Relevance
Despite the government’s push towards a new tax regime with lower rates and limited deductions in recent years, the draft rules signal a strategic realignment. By enhancing exemptions and adjusting allowances for inflation, the old tax regime may regain its value—benefiting salaried taxpayers who face high rental costs, manage children’s educational expenses, or engage in structured tax planning.
In conclusion, the proposed changes in the 2026 Draft Income Tax Rules could revive interest in the old regime, offering substantial benefits to those who choose to maintain their tax strategies within this framework.