New Income Tax Rules May Boost Take-Home Pay With Higher HRA, Education Allowances
New Income Tax Rules May Boost Take-Home Pay With Higher HRA, Education Allowances
Proposed changes effective April 1, 2026 could make the old tax regime more rewarding for salaried employees, while the new regime continues offering zero tax up to Rs 12 lakh under rebate benefits.
A major overhaul of India’s income tax framework is on the horizon, with the government proposing fresh rules that could directly improve the take-home salary of salaried employees even before any annual appraisal.
In the Union Budget presented on February 1, Finance Minister Nirmala Sitharaman announced the repeal of the decades-old Income Tax Act and the introduction of a new law. As part of this shift, the Income Tax Draft 2026 has recommended several key changes that are expected to benefit working individuals, particularly those still using the old tax regime.
Tax experts believe these proposals will expand exemptions and deductions linked to everyday allowances, helping reduce taxable income and increasing net salary for many employees.
One of the biggest proposed updates relates to House Rent Allowance (HRA). Until now, only employees living in metro cities such as Mumbai, Delhi, Kolkata and Chennai could claim up to 50% of their basic salary as HRA exemption. Under the new draft, cities like Bengaluru, Hyderabad, Pune and Ahmedabad may also be included in this higher exemption category.
This revision recognises that rising housing costs are no longer limited to just a few metros. For salaried individuals paying high rent in fast-growing urban centres, this could significantly lower their taxable income.
Another meaningful proposal is the sharp increase in tax-free limits for children’s education and hostel allowances. The child education allowance exemption is expected to rise from Rs 100 per month to Rs 3,000 per month per child. Similarly, hostel allowance exemption may increase from Rs 300 per month to Rs 9,000 per month, limited to two children.
For families managing school and living expenses, these revised limits better reflect today’s costs and could ease the tax burden.
The draft also proposes a higher exemption on gifts provided by employers. The tax-free ceiling may be raised from Rs 5,000 to Rs 15,000 annually, allowing festival vouchers and small rewards to fall within a wider non-taxable band.
A sample calculation highlighted in the draft suggests that for an employee earning Rs 30 lakh annually, enhanced deductions through higher HRA, education and hostel allowances could slightly reduce taxable income, offering a small but meaningful rise in annual take-home pay.
While the old tax regime may become more attractive through these changes, the new tax regime continues to provide major benefits. Under current provisions, income up to Rs 12 lakh can become tax-free due to the Section 87A rebate of up to Rs 60,000. Salaried taxpayers also receive a standard deduction of Rs 75,000, making income up to Rs 12.75 lakh effectively tax-free.
Other benefits in the new regime include deductions for employer contributions, gratuity exemptions, and retirement-related relief, even though popular deductions like 80C, 80D and HRA are largely unavailable.
The draft rules remain open for public comments until February 22, after which the government is expected to finalise the provisions. If implemented from April 1, 2026, the changes could provide welcome relief to salaried taxpayers across both regimes.
