New income tax draft rules put old tax regime back in play; here's why

After the Income Tax Draft Rules, why Old Tax Regime is here to Stay!

• Draft Income-tax Rules, 2026 cut rules to 333 and forms to 190.
• HRA exemption extended to more cities, benefiting salaried taxpayers.
• Increased education and transport allowances make old regime more appealing

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After going through the draft Income-tax Rules, 2026, one thing becomes clear that the old tax regime may not fade away anytime soon.

The Income Tax Department on Friday released the draft rules that will operationalise the New Income Tax Act, 2025 from April 1, 2026.  The scale of simplification is visible. The number of rules has been reduced from 511 to 333 and forms from 399 to 190.

With the Act scheduled to kick in coming financial year, the government has now opened the draft for stakeholder consultation.

These rules lay down the detailed procedures taxpayers and professionals must follow aimed at simplifying compliance and reducing litigation. However, while the new tax law intends to streamline taxation, some provisions surprisingly make the old tax regime more appealing.

HRA relief expands to more cities

One major proposal is the expansion of cities eligible for the higher 50 percent House Rent Allowance (HRA) exemption under the old regime.

Currently, only four metro cities qualify: Mumbai, Delhi, Kolkata and Chennai. The draft rules propose adding Bengaluru, Hyderabad, Pune and Ahmedabad to this list, while other cities will continue with the 40 percent limit.

Tax experts say this reflects the reality of rising housing costs in India’s major employment hubs.

"This revision reflects an effort to modernise HRA provisions in line with changing urban demographics and escalating residential costs in key economic centres," said Himank Singla, Founding Partner, SBHS & Co.

Inflation adjustment introduced

Another notable change is the revision of allowances that had remained unchanged for decades.

Children education allowance is proposed to rise from Rs 100 to Rs 3,000 per month per child (maximum two children). Hostel expenditure allowance also increases from Rs 300 to Rs 9,000 per month per child.

These changes effectively restore the relevance of exemptions that had become meaningless due to inflation. As a result, taxpayers who benefit from deductions and allowances may reconsider the old regime.

Moreover, transport allowance granted to an employee who is blind or deaf and dumb or orthopedically handicapped with disability of lower extremities has been increased to Rs 15,000 + Dearness Allowance for metro cities and Rs 8,000 + DA for other cities compared to Rs 3,200 per month under old income tax rules.

Valuation of motor car perquisite

Under Rule 15 of the Income-tax Rules, 2026 (Draft), when a car is used partly for official and partly for private purposes and the running and maintenance costs are paid or reimbursed by the employer, the taxable value is proposed at Rs 5,000 per month for cars with engine capacity up to 1.6 litres and Rs 7,000 per month for cars above 1.6 litres. An additional Rs 3,000 per month will be added if a chauffeur is also provided. In comparison, under Rule 3 of the Income-tax Rules, 1962, the value was much lower at Rs 1,800 per month (up to 1.6 litres) or Rs 2,400 per month (above 1.6 litres), with a further Rs 900 per month if a chauffeur was provided.

Where a car is used partly for official and partly for private purposes but the private running and maintenance expenses are fully met by the employee, the draft 2026 rules propose a taxable value of Rs 2,000 per month for cars up to 1.6 litres and Rs 3,000 per month for cars above 1.6 litres. If the employer provides a chauffeur, an extra Rs 3,000 per month will be added. Under the existing 1962 rules, the corresponding values were Rs 600 per month (up to 1.6 litres) or Rs 900 per month (above 1.6 litres), plus Rs 900 per month if a chauffeur was provided by the employer.

Moreover, as per the draft, the exemption threshold for such meal vouchers has been enhanced to Rs 200 per meal from Rs 50 per meal, provided all other prescribed conditions continue to be satisfied

Why the old regime may stay relevant

For the past few years, the government has nudged taxpayers toward the new regime by lowering tax rates and reducing deductions. But the latest draft rules subtly rebalance the equation.

By modernising exemptions and adjusting allowances for inflation, the old regime regains practical value for many salaried taxpayers especially those paying rent, supporting children’s education, or having structured financial planning.