Synopsis: This article discusses the latest revisions under the draft income tax rules, 2026 and how a salaried employee can save potentially more than 1 lakh under the old income tax regime.
For the past six decades, even when the salary structures evolved and living costs spiked, Indian taxpayers followed the Income Tax Rules, 1962. With the Union Budget 2026, the government has finally introduced the Draft Income Tax Rules, 2026, to align income taxation with the socio-economic realities.
Major Tax-Saving Provisions under the Draft Income Tax Rules 2026
1. Higher HRA Exemptions: Bangalore, Hyderabad, Pune, and Ahmedabad are being added to the 50% HRA relief eligibility, which was previously enjoyed only by metro cities like Delhi, Mumbai, Chennai, and Kolkata. Salaried taxpayers in these cities can now claim up to 50% of their basic salary as HRA exemption. The remaining cities will continue to remain under the 40% cap.
2. Tax-Free Meal benefits: The draft rules propose to increase the tax-free meal limit from ₹50 to ₹200 per meal. This would bring the tax-free meal benefits up to ₹1,05,600 if fully utilised.
3. Increase in Children’s Allowance: An increase in the monthly children’s education allowance from ₹100 to ₹3,000 per child and a rise in the monthly hostel allowance from ₹300 to ₹9,000 per child. This is with respect to the growing expense of children’s education.
4. Employer-Provided Loan Exemption: Employer-provided interest-free or concessional loans might see a significant increase from the current ₹20,000 limit to ₹2 lakh.
5. Company-Provided Vehicle: The taxable perquisite for cars with an engine capacity of up to 1.6 litres, and the employer covering expenses for fuel and maintenance, will be raised from ₹1,800 per month to ₹5,000 per month. For cars with large engine capacity, the perquisite is increased from ₹2,400 to ₹7,000 per month.
6. Chauffeur Valuation: The chauffeur component has been proposed to increase from ₹900 to ₹3,000 per month.
7. Festival Exemption Limit: The annual tax-free exemption for gifts and vouchers from employers is expected to rise from ₹5,000 to ₹15,000.
8. Transport Allowance: The monthly transport exemption cap for employees working in transport-related sectors such as railways, airlines, and shipping will be raised from ₹10,000 to ₹25,000 while keeping the 70% allowance rule.
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So how to Save ₹1 Lakh under Draft Income Tax Rules 2026(Old Tax Regime)
A salaried employee with an annual income of ₹24 lakh, living in a metro city, eligible for 50% HRA exemption with 2 children, can save up to ₹1.1 lakh a year under the old tax regime with the draft income tax rule, 2026.
Source: ClearTax
Conclusion
For taxpayers willing to stay in the old tax regime and optimise their pay structure, the higher HRA relief, increased meal benefits, upgraded children’s allowances, and expanded perquisite exemptions can together support tax savings of over ₹1 lakh annually. Therefore, if implemented largely in their current form, the Draft Income Tax Rules, 2026 could materially improve take-home pay for urban salaried employees.
Disclaimer: The provisions discussed are based on draft proposals and may change before final notification. Tax benefits will depend on the final rules issued by the government.
Written by Nila Maria Jacob
