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New Income Tax Draft Rules Bring Old Tax Regime Back Into Focus; Know Why
New Income Tax Draft Rules Bring Old Tax Regime Back Into Focus; Know Why
A close reading of the draft Income-tax Rules, 2026 suggests that the old tax regime may not be fading 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 simplification effort is significant: the number of rules has been reduced from 511 to 333, and forms have been cut from 399 to 190.
With the new Act set to take effect in the next financial year, the government has opened the draft rules for stakeholder consultation.
The rules outline detailed procedures that taxpayers and professionals must follow, with the stated objective of easing compliance and reducing litigation. However, while the broader intent is to streamline taxation, certain provisions could make the old tax regime more attractive.
HRA relief to cover more cities
One key proposal is the expansion of cities eligible for the higher 50 percent House Rent Allowance (HRA) exemption under the old regime.
At present, only four metros — Mumbai, Delhi, Kolkata and Chennai — qualify for the 50 percent exemption, while other cities are capped at 40 percent. The draft rules propose adding Bengaluru, Hyderabad, Pune and Ahmedabad to the higher exemption bracket.
Tax experts say the move aligns HRA provisions with current housing realities in India's major job 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.
Allowances adjusted for inflation
The draft also revises several allowances that had remained unchanged for decades.
The children education allowance is proposed to increase from Rs 100 to Rs 3,000 per month per child (up to two children). The hostel expenditure allowance would rise from Rs 300 to Rs 9,000 per month per child.
These sharp revisions restore the relevance of exemptions that had become negligible due to inflation. For taxpayers who rely on deductions and allowances, the changes could tilt the balance back in favour of the old regime.
In addition, the draft tightens compliance norms for foreign income reporting. Claims of foreign tax credit through Form 44 would require certification by a chartered accountant in two cases — for companies, and where foreign tax paid exceeds Rs 1 lakh. The CA would need to verify income records, proof of tax payment and treaty eligibility.
Why the old regime could remain relevant
In recent years, the government has encouraged migration to the new regime by lowering tax rates and limiting deductions. However, the latest draft rules appear to rebalance the framework.
By updating exemptions and aligning allowances with inflation, the old regime regains practical value — particularly for salaried taxpayers paying high rents, funding children's education, or following structured tax planning strategies.
Source: News18
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