1. The Draft Income Tax Rules 2026 offer a number of welcome benefits and procedural clarity for taxpayers. These draft rules are open for public comments until 22 February, after which the Government is expected to notify the final rules for implementation.
Although these rules are currently in draft form, they are more than just change procedures and limits . The Draft Rules quietly suggest that many new relaxations, exemptions, and higher thresholds may benefit taxpayers mainly under the Old Tax Regime, especially salaried families. These changes offer an early glimpse into how the balance between the two regimes may evolve.
2. The Income Tax Rules are set to be implemented from 01. April 2026 . A clear understanding at this stage can help taxpayers stay informed and prepared for the upcoming changes. This article briefly outlines the following :
(a) What do these draft rules mean for the common taxpayer?
(b) How could the choice between the old and new tax regimes change?
(c ) How much extra tax might be saved under the old regime with higher deductions and exemptions?
3. Enhanced Tax Exemption for Subsidised Meals: The Draft Income Tax Rules, 2026, propose welcome relief for salaried employees who receive subsidised meals through office canteens or meal vouchers such as Sodexo, Pluxee, or Zaggle. The existing Rs.50 per meal exemption is proposed to be increased to Rs. 200 per meal.
3.1 Illustration: An employer provides two meals each working day; the benefit works as follows:
| Existing Exemption | Proposed Exemption (Draft Rules) |
| Rs. 50 per meal | Rs. 200 per meal |
| Rs. 50 × 2 meals = Rs. 100 per day
Rs. 100 × 25 working days = Rs. 2,500 per month Rs. 2,500 × 12 months = Rs. 30,000 per year |
Rs. 200 × 2 meals = Rs. 400 per day
Rs. 400 × 25 working days = Rs. 10,000 per month Rs. 10,000 × 12 months = Rs. 1,20,000 per year |
3.2 The subsidised meal benefit may not be available under the new tax regimes. Although the Draft Rules, in their present form, do not specifically deny this benefit under the old tax regime, the position under the new tax regime remains uncertain. Since the new regime generally restricts exemptions for perquisites, the final legislation, once enacted by Parliament, may expressly deny this benefit.
4. Higher HRA Benefit Proposed for Additional Cities: The Draft Rules propose extending the 50% HRA exemption to taxpayers residing in rented accommodations in cities such as Bengaluru, Hyderabad, Pune, and Ahmedabad.
At present, the 50% salary exemption for HRA purposes is available only to taxpayers residing in Mumbai, New Delhi, Kolkata, and Chennai.
For taxpayer residing in all other cities across India, the exemption is restricted to 40% of salary.
It is important to note that the HRA exemption is available only under the old tax regime. No tax relief on HRA is permitted under the new tax regime.
5. Sharp Increase in Children’s Education and Hostel Allowances: The Draft Rules propose a substantial enhancement in the children’s education allowance and hostel allowance limits.
The children’s education allowance is proposed to be increased from Rs.100 per child per month to Rs.3,000 per child per month. The hostel allowance is proposed to increase from Rs.300 per child per month to Rs.9,000 per child per month.
These revisions mark a significant upward adjustment in limits that had remained largely unchanged for several decades.
5.1 Illustration: To understand the real impact of the proposed Draft Tax Rules, let us consider a practical situation. Mr Ajay earns an annual salary of Rs.24,00,000.He has two school-going children staying in a hostel, lives in rented accommodation in Bengaluru, and continues under the Old Tax Regime.
| Particulars | Existing
Amount Rs. |
Proposed( Draft Rule)
Amount Rs. |
| Salary | 24,00,000 | 24,00,000 |
| Children Education Allowance
|
2,400 | 72,000 |
| Hostel Expenditure | 7,200 | 2,16,000
|
| Total annual tax-free benefit | 9,600 | 2,88,000 |
| Additional Tax-Free Amount | Rs. 2,88,000-Rs. 9,600 = Rs. 2,78,400 | |
This higher exemption directly reduces taxable income under the Old Tax Regime.
Depending on the applicable tax slab, the actual tax saving could run into several tens of thousands of rupees in a year. And when combined with (a) Higher HRA exemption for Bengaluru, and (b)other revised employee-related benefits, the overall relief for a salaried family can become meaningful rather than merely symbolic.
6. Enhanced Valuation of Motor Car Perquisites: The Draft Income Tax Rules, 2026, also propose upward revisions to the valuation of motor car perquisites provided by employers to employees. As a result, employees could face increased tax liability, as the enhanced valuation of the perquisite would be included in their taxable salary and be subject to income tax.
If an employer provides a car for both official and personal use, and the employee bears the fuel and maintenance costs, the taxable perquisite value has been sharply revised. Earlier, for a car with an engine capacity of less than 1.6 litres, the taxable value was Rs. 600 per month. Under the draft rules, this has been increased to Rs. 2,000 per month.
The proposed revision in the valuation of Motor Car Perquisites + ( chauffeur) is tabulated below :
|
Monthly expenses on maintenance and running are met by |
Cubic capacity of engine does not exceed 1.6 litres | Cubic capacity of engine exceeds 1.6 litres | ||||
| Existing (Rs.) | Proposed (Rs.) | Increase in Annual Taxable Salary (Rs.) | Existing (Rs.) | Proposed (Rs.) | Increase in Annual Taxable Salary (Rs.) | |
| (A) | (B) | C=(B-A)*12 | (D) | (E) | F=(E-D)*12 | |
| Employer | 1800 + 900 | 5000+3000 | 63,600 | 2400 + 900 | 7000 + 3000 | 80,400 |
| Employee | 600 + 900 | 2000+3000 | 42,000 | 900 + 900 | 3000 + 3000 | 50,400 |
The revised valuation of perquisites will apply to both tax regimes, as it forms part of taxable salary income, regardless of the selected regime.
7. Revised PAN Requirement Thresholds: The Draft Rules also propose important revisions to the thresholds where quoting PAN becomes mandatory, as summarised below.
| Particulars | Existing Rule | Proposed Draft Rule |
| Cash deposit in the bank/post office | PAN is required if a single cash deposit exceeds Rs.50,000 in a day | PAN is required only when total cash deposits in a financial year reach Rs. 10 lakh or more |
| Cash withdrawal from bank/post office | No specific PAN trigger limit | PAN required when total withdrawals in a financial year reach Rs. 10 lakh or more |
| Cash payment at hotels, restaurants, or events | PAN required above Rs. 50,000 | PAN required only if payment exceeds Rs. 1 lakh |
| Purchase of a motor vehicle | PAN is required for most vehicle purchases | PAN is required only if transaction value exceeds Rs. 5 lakh |
| Life insurance premium payment | PAN is required when the annual premium exceeds Rs. 50,000 | PAN is proposed to be mandatory for all premium payments |
8. Other Important Changes
(a) Higher Exemption Limit for Gifts, Vouchers., and Tokens: Under the Draft Rules, the taxable value of gifts, vouchers., or tokens provided by an employer will be treated as NIL if the aggregate value does not exceed Rs. 15,000 in a financial year. This represents a significant increase from the earlier exemption threshold of Rs. 5,000 per annum.
(b) Higher Tax-Free Limit for Employer-Provided Medical Loans: The Draft Rules propose increasing the tax-free threshold for employer-provided loans used to treat specified diseases. Under the proposed change, such loans will be tax-free up to Rs.2 lakh, as against the earlier limit of Rs.20,000.
(c ) Enhanced Tax-Free Limit for Employer-Provided Educational Facilities: The Draft Rules propose increasing the tax-free threshold for employer-provided educational facilities. Under the revised limit, the value of such perquisite will be tax-free up to Rs.3,000 per month per child, as compared to the earlier limit of Rs.1,000 per month per child.
(d) Transport Allowances to specially abled employees : Under the Draft Income-tax Rules 2026, the tax-exempt transport allowance for (blind, deaf, dumb, or orthopedically handicapped with lower extremity disability) is proposed to be significantly increased to Rs.15,000 per month plus Dearness Allowance (DA) in notified metro cities, and Rs.8,000 per month plus DA in other cities. This is a major increase from the previous exemption limit of Rs.3,200 per month.
9. Choice between New v Old Regime : In light of the proposed changes, the choice between the old and new tax regimes may once again need careful reconsideration. Taxpayers, especially those claiming HRA and incurring education-related expenses, should carry out a fresh tax calculation before deciding. Since the overall benefit depends on individual income, deductions, and family circumstances, each taxpayer must evaluate which regime is truly more advantageous in their case.
10. Conclusion: Even though the Draft Income-tax Rules, 2026, are yet to be finalised, understanding them at this stage is important for both taxpayers and professionals. Early awareness helps anticipate possible compliance changes, plan finances more carefully, and be prepared for the final framework once notified. Staying informed today ensures smoother decisions and fewer surprises tomorrow.
Disclaimer: The article is for educational purposes only.
The author can be approached at caanitabhadra@gmail.com
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When will the draft get finalized and notified?