New Income Tax Rules May Revive Interest in Old Regime for High-Income Salaried Taxpayers
The government has recently proposed significant revisions to the Income Tax Rules for 2026, which could dramatically shift the tax planning landscape for salaried individuals. These changes, announced last week and open for public consultation until February 22, are expected to take effect from April 1. They specifically target allowances and exemptions that are only available under the old tax regime, potentially making it more advantageous for high-income earners, particularly those residing in expensive urban centers with school- or college-going children.
Key Proposed Changes in Tax Allowances
The draft rules introduce three major enhancements that could collectively influence taxpayer decisions:
- Children's Education Allowance: The exemption is proposed to increase sharply from a nominal ₹100 per month per child to ₹3,000 per month per child. This translates to an annual benefit of up to ₹36,000 per child, capped at two children, allowing families to claim up to ₹72,000 yearly.
- Hostel Expenditure Allowance: The exemption for hostel expenses is set to rise from ₹300 per month per child to ₹9,000 per month per child. This means an annual exemption of ₹1.08 lakh per child, again limited to two children, providing substantial relief for parents with children in boarding facilities.
- HRA Metro Reclassification: Bengaluru, Pune, Hyderabad, and Ahmedabad could be classified as metro cities for House Rent Allowance (HRA) purposes. This change would make residents eligible for a 50% HRA exemption, aligning them with existing metros like Delhi, Mumbai, Kolkata, and Chennai, and potentially increasing tax savings for those in high-rent areas.
Financial Impact and Break-Even Analysis
Individually, these adjustments might seem incremental, but their combined effect could be substantial. For salaried individuals with gross incomes between ₹14 lakh and ₹24 lakh, the old regime becomes competitive when deductions range from approximately ₹5.18 lakh to ₹7.87 lakh, increasing with income. For those earning ₹25 lakh and above, deductions exceeding ₹8 lakh can result in greater tax savings under the old regime compared to the new one.
Consider a hypothetical example: Mr. A earns ₹30 lakh annually in Bengaluru, pays ₹60,000 monthly rent, and has two children—one in school and one in a college hostel. Assuming his basic pay is 40% of his gross salary, his HRA component would be ₹6 lakh. Under the current rules, his deductions total ₹6.86 lakh, requiring an additional ₹1.2 lakh to benefit from the old regime. With the proposed changes, he could claim ₹72,000 in education allowance, ₹1.08 lakh in hostel allowance, and a higher HRA of ₹6 lakh, boosting his total deductions to ₹9.8 lakh. This would reduce his tax liability by ₹39,000 under the old regime, even in a conservative scenario without the hostel allowance.
Expert Insights and Wider Implications
Tax professionals emphasize that these benefits are exclusive to the old regime, making them a crucial factor in tax planning decisions. "These will definitely play an increased role now in making the choice," said Mayank Mohanka, founder of TaxAaram India, noting that the higher limits may prompt employees to restructure their salary packages to incorporate these allowances. However, he cautioned that proper documentation, such as rent receipts and fee proofs, is essential for claiming these exemptions and reflecting them in Form 16.
Himank Singla, a partner at S B H S & Associates, highlighted that the HRA revision could have the broadest financial impact. "House rent is one of the largest recurring expenses for salaried individuals in metro cities," he said, estimating that incremental tax savings in cities like Bengaluru could range from ₹15,000 to ₹30,000 annually, depending on the tax slab. For lower- and middle-income groups earning below ₹24 lakh, achieving the break-even point under the old regime remains challenging without a substantial HRA component, as high rents can strain cash flows.
Additional Revisions and Considerations
The draft rules also propose other modifications, including an increase in the tax-free limit for employer-provided gifts and non-cash perquisites from ₹5,000 to ₹15,000 annually. This applies to items like Diwali hampers, shopping vouchers, and recognition rewards. While this offers modest relief, it does not influence the choice between tax regimes, as such perquisites are taxable under both structures.
Furthermore, a targeted enhancement is proposed for transport allowances for employees with disabilities, raising the exemption from ₹3,200 per month to ₹15,000 plus dearness allowance in metro cities and ₹8,000 plus DA in others. It is important to note that these allowances are available only to salaried taxpayers, not to businesspersons, for whom the new regime's reduced slab rates and increased rebate thresholds remain more beneficial.
In dual-income households, strategic tax planning may involve structuring salaries so that one spouse claims the full HRA benefit and children's education expenses. Overall, these proposed changes underscore a shift in tax policy that could revive interest in the old regime, particularly for high-income salaried individuals in urban areas, while emphasizing the need for careful financial planning and documentation.
