Draft Income Tax Rules 2026: Strategic Overhaul of Allowances, Perquisites, and PAN Compliances

The Ministry of Finance has unveiled the Draft Income Tax Rules, 2026, setting the stage for a significant transformation in the taxation landscape starting from April 1, 2026. While the recent legislative trend has heavily favored the New Tax Regime—characterized by lower rates but fewer deductions—these proposed rules introduce a fascinating counter-narrative. By proposing substantial hikes in exemption limits for various allowances, the Government appears to be breathing new life into the Old Tax Regime.

These draft regulations are currently open for public consultation until February 22. For the salaried assessee and tax professionals, these changes are not merely procedural; they represent a fundamental shift in how salary structures should be optimized. Below is a comprehensive analysis of the proposed changes, their financial implications, and the compliance adjustments required.

1. The Resurgence of the Old Regime: A New Perspective on Allowances

For several years, exemption limits for standard allowances have remained stagnant, diminishing their real-value benefit due to inflation. The Draft Income Tax Rules, 2026, propose to correct this by significantly enhancing thresholds. These changes primarily benefit the assessee opting for the Old Tax Regime, where such exemptions are permissible.

Expansion of Metro Status for HRA Exemption

One of the most impactful proposals concerns the House Rent Allowance (HRA). Historically, the Income Tax Rules have bifurcated HRA exemptions based on location:

  • 50% of Salary: Restricted to the four metropolitan cities (Mumbai, New Delhi, Kolkata, and Chennai).
  • 40% of Salary: Applicable to all other locations.

The draft rules propose to modernize this definition by including major economic hubs—Bengaluru, Hyderabad, Pune, and Ahmedabad—in the 50% exemption category.

Impact: An assessee residing in Bengaluru or Pune, currently capped at a 40% deduction, will be able to claim a deduction equal to 50% of their salary. This could result in substantial tax savings for high-income earners in the IT and manufacturing sectors concentrated in these cities. It is pertinent to note that HRA exemptions remain exclusive to the Old Tax Regime.

Revamping Meal Allowances

The tax-free limit for employer-provided food and non-alcoholic beverages is set for a four-fold increase. Currently, the exemption stands at Rs. 50 per meal. The proposed rules elevate this to Rs. 200 per meal.