Draft Income Tax Rules 2026 Could Reshape Salary Slips And Boost Take-Home Pay
India’s proposed rewrite of long-standing tax rules could materially reshape how salaried employees view their compensation, structure their salary components, and ultimately calculate their take-home income. The Draft Income-tax Rules, 2026 — designed to replace the six-decade-old 1962 framework — introduce broader and more realistic exemption limits across housing rent allowance, children’s education, hostel expenses, meals, gifts, and employer-provided perks.
For a large section of urban salaried taxpayers, especially those who continue to use the old tax regime because of its deduction benefits, the proposed rules could translate into a meaningful reduction in taxable income and a visible rise in monthly in-hand salary. Tax professionals say these changes are not cosmetic; they attempt to correct decades of stagnation in exemption limits that no longer reflect real living costs in Indian cities.
Because salary structuring plays a major role in Indian tax planning, even moderate revisions in exemption thresholds can create a disproportionate impact on net pay. If implemented largely as proposed, the new rules could influence how HR departments design compensation packages and how employees negotiate CTC structures.
What Is Changing Under The Draft Rules And Why It Matters
The draft framework proposes higher exemption ceilings across several allowance categories that directly lower the taxable portion of salary. These include housing, child-related allowances, food benefits, and certain employee perks that are common in corporate compensation structures.
Key proposed changes include:
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Expanded HRA exemption eligibility
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Higher children’s education allowance limits
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Larger hostel allowance exemptions
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Increased tax-free meal, gift, and loan thresholds
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Revised company car perquisite valuations
These revisions matter because allowances form a sizable portion of structured salaries in India, particularly in mid-to-senior corporate roles. When exemption limits rise, a larger part of salary escapes taxation, which improves take-home pay without increasing the employer’s cost.
Tax advisors point out that many earlier caps were introduced when schooling, rent, and daily living costs were a fraction of today’s levels. Adjusting them brings the tax framework closer to economic reality and reduces friction between taxpayers and payroll compliance.
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HRA Relief Now Extends To More Cities
House Rent Allowance remains one of the most widely used components in salary structuring, and the proposed changes could benefit a large urban workforce. Currently, only Mumbai, Delhi, Kolkata and Chennai qualify for the 50% of salary HRA exemption bracket, reflecting their historical classification as top metros.
The draft proposes adding:
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Bengaluru
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Hyderabad
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Pune
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Ahmedabad
These cities have witnessed rapid urbanisation, rising rentals, and strong corporate presence over the past two decades. Including them in the higher exemption bracket recognises their real estate costs and corporate density.
For employees paying substantial monthly rent in these cities, this move could significantly reduce taxable income. Over a full financial year, the savings may become large enough to influence decisions on whether to rent or buy homes, and how employees plan their long-term finances.
Education And Hostel Allowances See Major Revision
The proposed increase in child-related exemptions is among the most striking elements of the draft rules because the previous limits had become almost symbolic in value.
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Children’s education allowance proposed to rise from ₹100 to ₹3,000 per child per month
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Hostel allowance proposed to rise from ₹300 to ₹9,000 per month per child
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Applicable for up to two children
Private schooling and hostel costs have increased dramatically across Indian cities, and many families currently receive negligible tax relief under the older limits. The revised caps better reflect modern education expenses and could provide meaningful relief to middle- and upper-middle-class households managing high schooling costs.
Tax planners say this move acknowledges the real burden of education expenses and aligns tax treatment with present-day realities.
How A ₹30 Lakh Earner Could Save ₹1.33 Lakh A Year
A practical example highlights how the proposed rules could work in real life. Consider a salaried employee earning ₹30 lakh annually and claiming standard exemptions.
Under the 1962 rules, after factoring in HRA, modest education and hostel allowances, and the standard deduction, the employee’s taxable income remains relatively high. After Chapter VI-A deductions, tax liability works out to about ₹4.08 lakh, leaving an annual take-home of roughly ₹23.48 lakh.
Under the Draft 2026 framework, significantly higher exempt allowances reduce taxable income to about ₹15.07 lakh. This lowers tax payable to about ₹2.75 lakh, generating an annual tax saving of ₹1.33 lakh. The monthly take-home rises by over ₹11,000.
Importantly, in this illustration, the tax outgo under the draft rules is also lower than what the new tax regime would require, showing why many salaried taxpayers may still prefer the old regime if these revisions are implemented.
Other Allowance Changes That Affect Salary Structures
Several other revisions could subtly change compensation planning.
Motor Car Perquisite
Valuations for employer-provided cars rise sharply, which could increase taxable perquisites for executives using company vehicles. This may lead some firms to rethink vehicle policies or shift toward allowances.
Interest-Free Loans
The exemption threshold jumps from ₹20,000 to ₹2 lakh, making small employee loans for emergencies or education more tax-efficient.
Meal Allowance
The per-meal tax-free limit rising to ₹200 reflects urban food inflation and could reduce payroll disputes.
Festival Gifts
Tripling the exemption to ₹15,000 aligns with current corporate gifting practices.
Transport Allowance
Raising the cap to ₹25,000 for transport-sector employees supports those with high travel-related job requirements.
Here’s What Happened Today And Why Traders Reacted
While tax rule proposals do not directly move markets on a daily basis, investors and traders track such reforms because of their indirect impact on consumption and savings. Higher disposable income in the hands of salaried households can support spending on housing, automobiles, consumer goods, and financial products.
Market participants often view tax relief measures as mildly positive for consumption-linked sectors. However, traders remain cautious because draft rules can change before final notification. The current reaction is more analytical than emotional, focusing on long-term implications rather than immediate price moves.
What Experts Are Saying About The Draft Framework
“With the proposed changes in the Income Tax Rules, taxpayers opting for the old regime have a better opportunity to save taxes through optimising their pay structure,” said Chandni Anandan, Tax Expert at ClearTax.
Experts broadly agree that the draft modernises exemption limits, though they also stress the importance of clear final guidelines to avoid interpretation disputes during payroll processing.
What This Means For Investors And Employees
For salaried employees, the message is clear: salary structuring and professional tax planning could become even more valuable. Employees may revisit how their CTC is broken into allowances versus fixed pay.
For investors, the implications are indirect but relevant. If disposable incomes rise, consumption-oriented sectors, housing demand, and financial savings products could see incremental support. Over time, such shifts influence broader economic momentum.
What To Watch Next
Key developments to monitor include:
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Government response after public consultation
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Final notification of rules
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Corporate HR policy adjustments
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Employee regime preferences in FY27
If implemented substantially as proposed, the Draft Income Tax Rules 2026 could quietly but meaningfully reshape how India’s salaried class manages money, plans taxes, and evaluates compensation.
