Income Tax Rules 2026 Draft: Allowance Limit Hike May Make Old Regime Beneficial

WBPAY Team31 seconds agoLast Updated: February 21, 2026

Income Tax Rules New Tax Vs Old Tax Regime

Income Tax Rules: The central government has taken a significant step towards simplifying and modernizing the Income Tax Act. While recent budgets have focused on making the ‘New Tax Regime’ the default and more attractive option, the newly released draft of ‘Income Tax Rules 2026’ suggests a different narrative. If these draft proposals are accepted, the limits of various allowances, which have remained nominal for decades, could see a massive hike. Consequently, for employees with higher salaries, the Old Tax Regime might once again become the most profitable option.

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Which Allowance Limits are Proposed to Increase?

The draft released by the Central Government proposes multiplying the upper limits of several key allowances. According to a report by the Economic Times, the suggested changes are as follows:

Education & Hostel Allowance: Currently, the tax exemption for Children’s Education Allowance is a mere ₹100 per month. The draft proposes increasing this to ₹3,000 per month. Similarly, the Hostel Allowance is proposed to be hiked from ₹300 to ₹9,000 per month.
Meals & Gift Vouchers: The tax exemption limit for free meals during office hours is suggested to increase from ₹50 to ₹200 per meal. Additionally, the annual limit for tax-free gift vouchers is proposed to be raised from ₹5,000 to ₹15,000.
Loans & HRA: The exemption limit for interest-free or concessional loans is proposed to increase from ₹20,000 to ₹2 lakh. Furthermore, the 50% House Rent Allowance (HRA) exemption benefit is now proposed to be extended to cities like Bengaluru, Hyderabad, Pune, and Ahmedabad.

Will the Old Regime be Better for Salaries Above ₹15 Lakh?

Tax experts suggest that if these proposals are implemented, individuals earning ₹15 lakh or more annually might find the Old Tax Regime more beneficial. Under the current New Regime, the tax liability on a ₹15 lakh salary is approximately ₹97,500. However, under the Old Regime, by utilizing all deductions (such as Sections 80C, 80D) and the proposed increased allowances, the tax liability could drop to around ₹41,496. This indicates a potential for significant savings. Similarly, additional savings of approximately ₹60,000–₹65,000 could be realized on salaries of ₹20 lakh and ₹25 lakh.

New Income Tax Bill & Implementation

Finance Minister Nirmala Sitharaman has clarified that the Income Tax Act of 1961 was outdated and laden with complexities, failing to keep pace with the digital age. Hence, a new bill is being introduced, which will come into effect on April 1, 2026. It will comprise 536 sections and feature simplified language. Key highlights include:

The concepts of ‘Previous Year’ and ‘Assessment Year’ will be eliminated and replaced by a single ‘Tax Year’.
Refunds will be processed smoothly even if the Income Tax Return (ITR) is filed after the deadline.
Business properties that have been vacant or unused for a long time will not be taxed.
The public can submit their comments on these drafts until February 22, 2026.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult a Chartered Accountant or tax expert before making any tax-related decisions.