Income-tax Rules, 2026: Relief for Salaried Taxpayers – or Rethinking of Policy? (Part-4)

 

This article forms Part–4 of my ongoing series on the New Income-tax Act – 2025, wherein we have already examined various structural, procedural, and conceptual changes introduced in the new law. While the earlier parts focused on the framework of the Act, the notification of the Income-tax Rules, 2026 now brings the discussion to the practical level-how these provisions will actually operate in real life. In taxation, the Act lays down the law—but it is the Rules that determine how the law is experienced by the taxpayer. The newly notified Rules, 2026, effective from 1^st April 2026, replace the long-standing 1962 Rules and introduce a more updated, structured, and system-oriented framework.

One of the key areas where this practical impact is visible is in the revision of various allowances and perquisites. For years, many of these limits had become almost symbolic-figures that seemed frozen in time despite rising costs. The new Rules attempt to bridge that gap. However, before getting into the specifics, one important practical aspect needs to be noted. While these changes enhance several benefits, their actual impact may not be uniform. Many of these allowances may have limited relevance for taxpayers opting for the new tax regime, where most exemptions are not available.

What Has Changed: Long-Pending Revision in Monetary Limits:

One of the most noticeable aspects of the new Rules is that several exemption limits for salaried taxpayers, which had remained unchanged for years, have now been revised significantly to align with present economic realities. Let us look at some of the key changes where several well-known monetary limits have been revised:

1.  Children’s Education Allowance:
Earlier, it was ₹100 per month per child i.e., ₹1,200 per year and now it has been enhanced to ₹3,000 per month per child i.e., ₹ 36,000 per year [As per Rule 280 of I.T. Rules – 2026].

2.  Hostel Expenditure Allowance:
Earlier, it was ₹300 per month per child, which has now been enhanced to ₹9,000 per month per child. For a family with two children, this means a shift from ₹7,200 per year to ₹ 2,16,000 per year. [As per Rule 280 of I.T. Rules – 2026].

3.  Transport Allowance for Disabled Employees
Earlier, it was ₹3,200 per month & now it has been enhanced to ₹15,000 per month for metro cities & ₹8,000 per month for other cities [As per Rule 280 of I.T. Rules – 2026].

4.  Meal / Food Perquisite
Earlier, it was ₹50 per meal & now it has been enhanced to ₹ 200 per meal. [As per Rule 15 of I.T. Rules – 2026].

5.  HRA (House Rent Allowance) – Expansion of Metro Cities:
Earlier, it was only Mumbai, Delhi, Chennai, Kolkata and now few more cities have been added which includes – Hyderabad, Bengaluru, Pune, and Ahmedabad added. This allows employees in these cities to claim 50% of salary as HRA exemption instead of 40%. [As per Rule 279 of I.T. Rules – 2026]

For many salaried taxpayers, these changes may not just improve tax efficiency-but may finally make these allowances meaningful again

Not Just Increase-Also Rebalancing:

Interestingly, the changes are not one-sided. While several exemptions have been enhanced, certain perquisites have been recalibrated in Rule 15 of the New Income Tax Rules – 2026.
The valuation of accommodation provided by employers (other than Government employer) has been reduced-from 15% to 10% of salary in metro cities (population above 40 lakhs), from 10% to 7.5% in cities with population between 15 to 40 lakhs, and from 7.5% to 5% in other areas.

On the other hand, the motor car perquisite value has been significantly increased. For cars up to 1.6 litres (including electric vehicles), the value has increased from ₹1,800 per month to ₹5,000 per month. For cars above 1.6 litres, it has increased from ₹2,400 per month to ₹7,000 per month. The driver allowance has also been increased from ₹900 to ₹3,000 per month.

This clearly reflects an attempt to align taxation with current cost structures and changing usage patterns.  It is not just a revision of numbers—it is a reset of relevance.

Compliance Shift: New Forms, New System

Another major change is the complete restructuring of forms and compliance framework. All forms have been renumbered. Old forms will not be valid from 1^st April 2026. Systems, payroll, and reporting formats will require updates

For example:
– Form 16 → Form 130
– Form 12BB → Form 124
– Form 26AS → Form 168

– Form 15G/H → Form 121

– Form 3CA/3CB/3CD → Form 26

– Form 49A → Form 93

This may appear to be a procedural change, but in practice, it requires a complete reset of compliance systems.

 

Digital Recognition: A Step Towards Future:

For the first time, the Digital Rupee (CBDC) has been formally recognized as a valid mode of payment for tax purposes. This indicates that the tax system is gradually aligning itself with a digitally integrated financial ecosystem, where transactions, reporting, and verification are increasingly technology-driven. [Rule 48 of the New Income Tax Rules – 2026]

 

Simplicity Comes with a Condition:

At first glance, these changes appear beneficial-higher exemptions, simplified structure, updated limits. But there is an underlying message – Simplicity now comes with discipline. Taxpayers and professionals will need to update systems and forms, maintain proper records & ensure correct reporting. Because a structured system leaves less room for approximation and more need for accuracy.

Conclusion: More Benefits… But a Larger Question:

Over the last few years, the policy direction of the Government appeared quite clear – Promote the New Tax Regime (NTR) & gradually move away from deductions and exemptions. However, the Income-tax Rules, 2026 present a slightly different picture. On one hand, the NTR continues to be encouraged.

On the other hand, we now see a significant expansion in exemptions and allowances-and many of these benefits are for taxpayers who opt for the old regime. This creates an interesting policy situation:

–    The new regime is being promoted,

–    The old regime is being discouraged,

–    Yet, deductions and exemptions are being reintroduced in a revised form within the old regime.

This leads to a natural question-is the Government gradually redesigning the new regime rather than eliminating deductions altogether? Or is the old regime likely to continue longer than initially expected?

Earlier, the new tax regime appeared more beneficial for most taxpayers. However, with the enhancement & expansion of several deductions under the old tax regime, the taxpayers would again be required to do the re-calculations so as to take the final decisions. The law may have become simpler-but the thought process behind it is becoming more nuanced. What was once seen as a “no-deduction regime” is now quietly accommodating structured benefits. The lines between the two regimes now appear less rigid than before.

The direction appears evolving rather than conclusive. The practical challenges that may arise during assessment proceedings and the documentation required to substantiate various claims merit a more detailed discussion, which may be taken up separately at an appropriate time.

 

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com.  Other articles & response to queries are available at www.theTAXtalk.com]