Income Tax: The draft Income Tax Rules 2026 propose increasing the allowance limit. This could result in taxpayers paying significantly less tax than they would under the old tax regime. If these changes are approved, those earning more than ₹1.5 million could potentially save more than they would under the new tax system.
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Income Tax: The government is continuously working to make the new tax regime more attractive than the old one. It has been introduced as simple, easy to comply with, and the default option for taxpayers. Changes made in the Union Budget 2025 have made the new income tax system even more attractive. The draft Income Tax Rules 2026, released by the central government, propose increasing several key allowances and tax exemption limits.
These drafts are open for public comment until February 22, 2026. If approved by Parliament, employees who chose the old tax regime could receive significant relief. Now, the question arises: can employees with salaries of ₹15 lakh, ₹20 lakh, and ₹25 lakh under the old tax regime pay less tax than under the new system? Let’s find out the full details.
These allowances are proposed to be increased.
According to a report in the Economic Times, the draft proposes increasing the exemption limit for interest-free or concessional loans from ₹20,000 to ₹2 lakh. The children’s education allowance is proposed to be increased from ₹100 to ₹3,000 per month, and the hostel allowance from ₹300 to ₹9,000 per month.
Additionally, the tax exemption on free meals has been suggested to be increased from ₹50 to ₹200 per meal, and the limit on gift vouchers has been raised from ₹5,000 to ₹15,000 annually. The 50% HRA (House Rent Allowance) exemption is now also proposed to be implemented in cities like Bengaluru, Hyderabad, Pune, and Ahmedabad.
How to Save on Increased Allowances Under the Old Tax Regime
Tax experts say that increasing the exemption limit will reduce the taxable portion of salary. This could reduce employees’ tax liability without increasing their salary, allowing them to earn more.
How Much Savings Will Be Made on a Salary Over 15 Lakhs?
According to tax experts, if an individual takes full advantage of all allowances and deductions like Sections 80C and 80D, the tax on a salary of 15 lakhs could come down to around ₹41,496, which is significantly lower than the ₹97,500 under the new tax regime. Similarly, additional savings of around ₹63,856 on a salary of ₹20 lakhs and ₹66,456 on a salary of ₹25 lakhs can be realized.
If these proposals are implemented, individuals earning more than ₹15 lakh could shift to the old tax regime. Overall, through proper tax planning, the salaried class can significantly reduce their tax liability.
When will the new Income Tax Bill be implemented?
The new Income Tax Bill will come into effect on April 1, 2026. Finance Minister Nirmala Sitharaman stated that the language in the new law has been simplified and there will be no change in tax rates. It took considerable time to prepare and has been adapted to the needs of the digital age. Options like “Previous Year” and “Assessment Year” will be eliminated, and the concept of “Tax Year” will be introduced.
Why was a new Income Tax Bill needed?
Finance Minister Nirmala Sitharaman stated that the Income Tax Act of 1961 had been amended over decades. It contained many complexities and had become outdated, necessitating a new bill. The new bill was designed to address the modern economy. The language in the new law has been simplified to make it easier for ordinary taxpayers to understand. She also clarified that the new law will not change income tax rates.
The New Income Tax Bill 2025 will feature several major changes.
- This new bill will be organized into 536 sections and 16 schedules, making it easier to understand and read.
- Zero TDS certificates will be available.
- Section 80M will be reintroduced to address dividend deductions.
- Even if the ITR is filed after the deadline, there will be no problem in getting a refund.
- All clauses that do not support this will be removed.
- Business properties that are unused or vacant for a long time will not be taxed.
