Draft Income-tax Rules, 2026: Salary Taxation Finally Gets an Inflation Reality Check

 

Every Budget season, salaried taxpayers wait for relief. And every year, relief mostly comes in speeches, not in salary slips.

But the Draft Income-tax Rules, 2026 appear to be trying something different. Instead of changing tax rates or creating flashy deductions, the Government has quietly moved toward updating outdated salary provisions – some of which had remained frozen since the 1990s.

The proposals cover PAN reporting triggers, HRA metro definitions, perquisite valuation rules, and long-ignored salary exemptions. None of these are revolutionary individually, but together they signal an attempt to align salary taxation with modern economic realities.

PAN Reporting: Compliance Net Gets Wider

The draft rules significantly expand situations where quoting PAN may become mandatory.

The proposed triggers include: • Cash deposits or withdrawals exceeding ₹10 lakh annually

•  Purchase of a vehicle exceeding ₹5 lakh

•  Hotel or event expenditure beyond ₹1 lakh

•  Opening certain insurance accounts

•  Property transaction reporting threshold proposed at ₹20 lakh

This indicates a clear policy direction: data-driven tax monitoring instead of aggressive scrutiny.

Rather than questioning taxpayers later, the department wants information flows at the transaction stage itself.

For professionals, this means one thing – documentation discipline will matter more than ever.

HRA Rules: India Gets More Than Four Metros

Perhaps the most interesting change is the proposed expansion of the “metro city” definition for House Rent Allowance (HRA).

Until now, only four cities enjoyed metro status: Mumbai, Delhi, Kolkata, and Chennai.

The draft rules propose adding: Hyderabad, Pune, Ahmedabad, and Bengaluru.

This means employees living in these cities may now claim HRA exemption up to 50% of salary instead of 40%.

The change is long overdue. Anyone paying rent in Bengaluru or Pune already knows that the housing market never waited for the tax department to recognise them as metros. The law is simply catching up with reality.

For employees in these cities, the impact could be meaningful, especially where rent forms a large share of income.

Employer-Provided Accommodation: Clearer Valuation Norms

The draft rules also refine the valuation framework for residential accommodation perquisites for non-government employees.

For employer-owned accommodation: • 10% of salary where population exceeds 40 lakh

•  7.5% where population is between 15- 40 lakh

•  5% in other areas

For leased accommodation: Taxable value will be lower of actual rent paid or 10% of salary.

For hotel accommodation: Taxable value will be lower of 24% of salary or actual hotel charges, while retaining the 15-day transfer relief.

For furnished accommodation: An additional 10% per annum of furniture cost or hire charges will be added.

These provisions are more about clarity than relief.

Perquisite disputes are common in assessments, and standardised valuation reduces litigation.

Salary Allowances: The Biggest Surprise

The most taxpayer-friendly part of the draft rules is the proposed revision of long-neglected allowances under the old tax regime.

Some of the proposed enhancements are dramatic:

Children Education Allowance ₹3,000 per month per child (earlier ₹100)

Hostel Expenditure Allowance ₹9,000 per month per child (earlier ₹300)

Free Meals ₹200 per meal (earlier ₹50)

Employer Gifts ₹15,000 annual exemption (earlier ₹5,000)

Transport Allowance for Divyang Employees ₹15,000 per month (Metro) / ₹8,000 (Other cities)

(earlier ₹3,200)

These increases are not reforms – they are inflation corrections delayed by decades.

For example, the education allowance of ₹100 per month was introduced when school fees themselves were lower than today’s monthly transport cost. Updating these limits finally brings them closer to present-day expenses.

Old Regime vs New Regime: A Subtle Policy Signal

Interestingly, most of these benefits apply only if the employee opts for the old tax regime.

This creates an interesting policy balance.

The Government is not withdrawing the new regime, but it appears to be: • Making the old regime more realistic

•  Letting taxpayers decide based on actual family expenses

•  Reducing the perception that the old regime is outdated

This could lead to a more genuine choice between regimes rather than pushing taxpayers into one direction.

What Salaried Taxpayers Should Watch

If these draft rules are notified in final form, salaried employees should review:

•  Whether switching regimes changes after allowance revisions

•  Rent documentation and HRA planning

•  Structuring salary components for maximum tax efficiency

•  Tracking employer benefits that may now carry higher exemptions

Employers, too, will need to revisit payroll structuring and perquisite reporting formats.

The Real Message Behind the Draft Rules

These proposals do not change the architecture of salary taxation.

But they do something more practical – they update outdated provisions that had quietly become meaningless.

For years, salary exemptions remained frozen while inflation kept moving.

The Draft Income-tax Rules, 2026 appear to acknowledge this gap.

If implemented in their present form, they may not create headlines – but they could quietly increase take-home value for many salaried taxpayers.

And in tax policy, sometimes small realistic corrections matter more than big theoretical reforms.