Draft income tax rules: Higher education-linked exemptions to boost old regime’s appeal

The exemption limit for children's education allowance has been proposed to increase from Rs 100 per month per child to Rs 3,000 per month

• Draft Income Tax Rules suggest higher exemptions for education, hostel allowances.
• Old regime's allowance exemptions may appeal more to some salaried employees.
• Taxable value for employer-provided cars to rise, increasing employee taxes

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The draft income-tax rules propose an overhaul of the way salaries are taxed, including a sharp increase in exemption limits for some allowances.

The higher allowance exemptions, available only under the old tax regime, could see salaried employees with allowance-heavy pay structures switch back, even as the new regime remains the default option.

The draft rules, released on February 7, proposed to raise the exemption limit for children's education allowance from Rs 100 a month for a child to Rs 3,000, for a maximum of two children.

Hostel expenditure allowance limit has been increased from Rs 300 to Rs 9,000 a per month per child for two children.

The two limits have remained unchanged for years.

Most exemptions for allowances are not available under the new tax regime and are relevant only under the old tax regime, Gaurav Makhijani, Partner at Makhijani Gera & Associates, told Moneycontrol.

“Accordingly, the substantial increase in exemption limits for these allowances make the old-tax regime relatively more attractive as compared to lower exemption limits,” Makhijani said.

The ultimate benefit would depend on individual salary structures, other available deductions and a detailed comparative computation under both regimes.

Allowances vs regime choice

“Overall, the draft rules make the choice between the old and new regimes more fact-specific,” Vikas Sharma, Lead–Personal Tax at AKM Global said.

“Benefit-heavy salaried employees may likely find the old regime relatively more attractive, while others may still prefer the new regime’s simpler lower-rate structure,” Sharma said.

The higher education allowance exemptions reflect long-overdue inflation adjustment.

Perquisites: higher valuation, limited relief

Perquisites refer to non-cash benefits or amenities provided by an employer to an employee in addition to salary or wages or payments made by the employer on behalf of the employee.

These form part of salary income and are taxable based on prescribed valuation rules, irrespective of whether a taxpayer opts for the old or the new regime.

The I-T Act, 1961, read with the Income-tax Rules, 1962, says when an employer provides a motor vehicle with a driver to an employee for both official and personal use, a fixed monthly value is treated as a taxable perquisite. Earlier, this value stood at Rs 2,700 a month for small cars (up to 1.6 litres) and Rs 3,300 a month for larger cars (above 1.6 litres).

The rules propose to increase these to Rs 8,000 and Rs 10,000 a month, respectively, resulting in a higher taxable salary and increased tax outgo for employees availing of employer-provided cars.

At the same time, the exemption limit for gifts provided by an employer has been raised from Rs 5,000 an annum to Rs 15,000 in aggregate, offering limited.

“Yes, perquisites are allowed and taxable as per rules under both old and new tax regimes. The difference in tax slab rate for old and new tax regime is such that even after considering the proposed changes of allowance limits, the new regime may still be more attractive,” Jatin Kumar, director at Felix Advisory told Moneycontrol.

Consultative stage

The government has sought feedback on the draft rules by February 22. The proposed limits and valuation norms are consultative and can change before the rules are finalised, experts cautioned.

While the revisions modernise outdated thresholds and recalibrate incentives, their impact on taxpayer behaviour and regime preference will become clearer after the rules are notified and applied to individual salary structures.