India's New Tax Law: A Paradox of Simplicity and Complexity
India's government has unveiled the draft Income-tax Rules, 2026, aiming to overhaul the tax system with a focus on simplification and efficiency. This initiative, part of the broader Income-tax Act, 2025, seeks to replace the outdated Income-tax Act, 1961, with clearer language and better organization. Implementation is scheduled from April 2026, following public consultation. While the headline message emphasizes consolidation, rationalization, and smarter compliance through pre-filled returns, a deeper look reveals a significant contradiction: administrative simplification is advancing, but taxpayer decision-making, especially for salaried individuals, is becoming more complicated.
Structural Simplification and Compliance Ease
At a structural level, the draft rules deliver on their promise of reducing complexity. The number of rules has been cut from 511 to 333, and forms have been reduced from 399 to 190 through consolidation and the removal of redundant provisions. Income-tax returns are being redesigned with extensive pre-filling, standardized data fields, and automated reconciliation. For the average taxpayer, this should translate to less manual data entry, fewer inadvertent disclosure errors, and a reduction in notices triggered by clerical mismatches. Compliance is shifting from interpretation to verification, a positive step forward in streamlining processes.
Revival of Old Regime Exemptions
However, the real impact lies in the revival of several long-ignored salary allowances under the Old Tax Regime, adjusted for inflation. Key changes include:
- The children education allowance increases from ₹100 per month per child to ₹3,000 per month.
- The hostel allowance rises from ₹300 to ₹9,000 per month per child.
- Transport allowance for certain disabled employees has been sharply revised upwards.
- Bengaluru, Pune, Hyderabad, and Ahmedabad have been reclassified as metro cities, raising the house rent allowance (HRA) exemption cap from 40% to 50% of salary.
These enhancements significantly expand the tax shelter available under the Old Tax Regime, reopening a debate that many thought was settled. For years, salaried taxpayers were nudged towards the New Tax Regime with promises of lower rates and fewer exemptions. Now, these allowance changes force a reconsideration, particularly for those in reclassified metro cities where higher HRA exemptions can materially alter tax outcomes.
Increased Decision Burden for Taxpayers
True simplification should reduce decisions, not just document them better. Yet, salaried taxpayers must still confront the annual question: Old or New Tax Regime? This decision now requires deeper computation, factoring in allowances, rent levels, family structure, and employer payroll design. In practice, most taxpayers will not trust automated systems or artificial intelligence to optimize such personal and long-term financial choices. They will seek professional advice, meaning that simplification at the form level does not automatically reduce dependence on Chartered Accountants. This reality undercuts the idea that administrative simplification alone reduces advisory reliance.
Policy Contradiction and Future Implications
The government's long-term direction has been clear: the New Tax Regime is meant to be the default, with the Chairman of the Central Board of Direct Taxes noting that 88% of individual taxpayers have already opted for it. Against this backdrop, refreshing exemptions that exist only in the Old Tax Regime sends mixed signals. A framework designed to gradually fade into the background is being quietly refurbished, creating confusion.
The draft rules are open for public comments until 22 February, with final notification expected before April 2026. This period raises a critical policy question: is the objective to simplify compliance mechanics, or to simplify taxpayer decisions? Both are legitimate goals, but they are not the same. While fewer forms and cleaner reporting are welcome, when taxpayers must still simulate multiple scenarios annually, simplicity remains theoretical. A tax system feels simple not when forms are shorter, but when choices are fewer.
In summary, India's new tax rules offer a step forward in administrative ease but introduce complexities that may burden salaried individuals with tougher tax choices, highlighting a need for clearer policy alignment.
