Draft Income-Tax Rules 2026: Bigger Breaks for Salaried, Higher Compliance for Transactions

The Draft Income-Tax Rules, 2026, released by the government ahead of the new tax law taking effect from April 1, 2026, contain a mix of measures that could shift the tax burden across different groups of taxpayers, with notable gains for some salaried employees and potential compliance costs for others. 

One of the most discussed proposals revises exemption thresholds for salary and perquisites, long considered outdated. Under the draft rules, allowances such as children’s education and hostel expenditure are set to rise steeply. The monthly limit for education allowance could increase to ₹3,000 per child (from ₹100 previously), and hostel allowance could be raised to ₹9,000 per month for two children, a step that could materially cut taxable income for families. 

Similarly, changes to house rent allowance (HRA) calculations broaden the list of cities where up to 50% of basic salary can be claimed as an exemption, adding cities like Bengaluru, Pune, Ahmedabad, and Hyderabad. This could significantly reduce tax liabilities for professionals in these high-rent urban centres. 

Another noticeable benefit appears in perquisites: proposed tax-free values for employer-provided meals and company cars look likely to rise, offering larger tax breaks on everyday employee benefits. Higher thresholds for free meals and staff loans also give salaried segments more leeway before perks become taxable. 

PAN Rule Changes and Compliance Crowd Some Taxpayers

Not all changes favour taxpayers. Draft provisions on PAN (Permanent Account Number) requirements are set to tighten compliance in certain transactions. Under the new rules, PAN will be mandatory for high-value cash flows and purchases: deposits above ₹10 lakh per financial year, hotel bills exceeding ₹1 lakh, motor vehicle purchases over ₹5 lakh, and property deals above ₹20 lakh will all require PAN, even if these transactions are otherwise legitimate. 

While this reduces PAN-quoting obligations for smaller cash transactions, broader reporting on digital payments, property deals, and lifestyle spending could create additional administrative tasks for middle-class taxpayers and small businesses. Enhanced PAN compliance, coupled with stricter thresholds for high-value transactions, aims to increase transparency but may also add paperwork for affected individuals. 

Mixed Impact on Tax Regime Choices

Experts say the revised exemptions could make the older tax regime, once largely abandoned in favour of simpler slabs, more attractive than before for certain income brackets, especially where structured allowances outweigh the new regime’s lower rates. For example, workers with structured salary packages that include HRA, meal cards, and education allowances might find significant savings by remaining in or reverting to the old regime. 

However, non-salaried segments such as professionals, freelancers, and investors may see fewer direct benefits, as many of the draft changes focus on employment-linked exemptions and PAN-related reporting, rather than fundamental shifts in capital gains, interest, or business income treatment.

What Taxpayers Should Watch Next?

The draft rules, accompanied by revised ITR forms and compliance structures, are currently open for feedback until late February, after which the income tax department will finalise the norms ahead of their notification. 

Tax practitioners advise that individuals should review how enhanced allowances and PAN requirements intersect with their income patterns before making year-end tax planning decisions, especially as some changes may affect not only tax liability but also filing obligations and documentation burdens.

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