The old tax regime is back in focus after Draft Income Tax Rules 2026 were published by the Income Tax Department, surprising many taxpayers who expected a gradual shift entirely towards the simplified new tax regime. The draft rules, released ahead of the implementation of the New Income Tax Act, 2025, signal that deductions and exemptions under the old tax regime will continue to play a meaningful role in India’s tax framework.
The proposed rules will come into effect from April 1, 2026, aligning with the rollout of the new income tax law announced by Finance Minister Nirmala Sitharaman in the Union Budget 2026.
New Income Tax Act 2025: A Shift Towards Simplification
The Draft Income Tax Rules 2026 are designed to support the New Income Tax Act, 2025, which will replace the six-decade-old Income-tax Act, 1961. The government’s stated objective is simplification without removing flexibility for compliant taxpayers.
One of the most significant reforms is the reduction in complexity. The number of income tax rules has been cut from 511 to 333, while the number of prescribed forms has been reduced from 399 to 190. This restructuring aims to make compliance easier, faster, and less documentation-heavy for individuals and businesses alike.
Importantly, the government has invited stakeholder feedback on the draft rules, indicating that further refinements may be made before final notification.
Why the Old Tax Regime Is Back in Focus
The old tax regime back in focus after Draft Income Tax Rules 2026 is primarily due to enhanced benefits related to exemptions and allowances. While the new tax regime offers lower slab rates with fewer deductions, many salaried taxpayers still rely heavily on exemptions such as HRA, education allowances, and hostel expenses.
The draft rules reaffirm that taxpayers will continue to have the option to choose the old tax regime and claim deductions and exemptions that are not available under the new system.
Major House Rent Allowance (HRA) Changes
One of the most notable proposals under the Draft Income Tax Rules 2026 relates to House Rent Allowance (HRA). The draft expands the list of cities eligible for a 50 per cent HRA exemption under the old tax regime.
Earlier, only Mumbai, Delhi, Kolkata, and Chennai qualified as metro cities. The draft now adds Bengaluru, Hyderabad, Pune, and Ahmedabad to this list. Other cities will continue to be eligible for a 40 per cent exemption.
Under Rule 279, HRA exemption will be the lowest of:
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Actual HRA received
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Rent paid minus 10 per cent of salary
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50 per cent of salary for notified cities or 40 per cent for others
This change significantly enhances tax-saving opportunities for salaried employees in major urban centres.
Revisions to Allowances Bring Relief
The Draft Income Tax Rules 2026 also update several allowances that had remained unchanged for decades. Children’s education allowance has been increased to ₹3,000 per month per child, subject to a maximum of two children. Similarly, hostel allowance has been revised to ₹9,000 per month per child.
Transport allowance for persons with disabilities has also been substantially increased, reflecting a more inclusive approach under the new tax framework.
These revisions further explain why the old tax regime is back in focus after Draft Income Tax Rules 2026, particularly for salaried individuals with family-related expenses.
Stricter Foreign Income Compliance
The draft rules also tighten compliance norms for taxpayers claiming foreign tax credit. Under the new proposal, claims made using Form 44 will require certification by a chartered accountant in cases involving companies or where foreign tax paid exceeds ₹1 lakh. This move aims to improve transparency and prevent misuse of treaty benefits.
What Taxpayers Should Do Next
With the old tax regime back in focus after Draft Income Tax Rules 2026, taxpayers should carefully reassess their tax planning strategies for FY 2026-27. Salaried individuals, especially those claiming HRA and family-related allowances, may continue to find the old regime more beneficial despite the availability of lower rates under the new system.
As the government moves towards implementation, the real impact will depend on final rules and effective execution.
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