Income Tax Department Releases Draft Rules: Changes in HRA, Allowance and More

The Income Tax Department of India has released new draft rules, which every employer and employee must know. It incorporates HRA, allowance and the old tax regime. What has changed? And the relief these new rules have given us to understand this article.

The rules that will put the New Income Tax Act, 2025 into effect on April 1, 2026, were published by the Income Tax Department on Friday. The reduction in the number of rules from 511 to 333 and the decrease in the number of forms from 399 to 190 are both evidence of the magnitude of the simplification endeavor.

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According to the Income Tax Rules, 2026, the previous tax system may not be going away anytime soon. These regulations specify the exact steps that taxpayers and professionals must take in order to make compliance easier and minimize litigation. Despite the new tax law’s aim of simplifying taxation, certain sections unexpectedly render the previous tax system more appealing.

One significant suggestion is the enlargement of the list of towns that qualify for the higher 50% House Rent Allowance (HRA) exemption under the old system. Currently, only Mumbai, Delhi, Kolkata and Chennai are eligible for the 50% exemption, while all other cities are limited to 40%. Adding Bengaluru, Hyderabad, Pune and Ahmedabad to the higher exemption group is recommended by the proposed regulations.

It is suggested that the child education allowance be increased from Rs. 100 to Rs. 3,000 per month for each child (with a limit of two children). The amount of the hostel cost allowance has also increased from Rs. 300 to Rs. 9,000 each month for each child.

Furthermore, under the previous income tax regulations, an employee who are with disabilities was given a transport allowance of Rs. 3,200 per month, but this amount has now been raised to Rs. 15,000 with Dearness Allowance for metro cities and Rs. 8,000 and DA for other cities.

Companies will now need a chartered accountant to attest to foreign tax credit claims made via Form 44 in two situations, that is, when the amount of foreign tax paid is over Rs. 1 lakh or when it is. The accountant must confirm treaty eligibility, tax payment proof and income documents, as highlighted by many media reports.