Massive Simplification Under New Tax Framework
The draft rules are designed to support the implementation of the New Income Tax Act, 2025 by streamlining procedures and reducing paperwork. According to official data, the number of income tax rules has been cut from 511 to 333, while prescribed forms have been reduced from 399 to 190.
This move is expected to ease compliance for both taxpayers and professionals, reduce procedural ambiguity, and curb litigation. The government has invited feedback from stakeholders before finalising the rules ahead of the next financial year.
Expanded HRA Relief Boosts Old Regime Appeal
One of the most significant changes proposed in the draft rules is the expansion of cities eligible for higher House Rent Allowance (HRA) exemption under the old tax regime. Until now, only four metro cities—Mumbai, Delhi, Kolkata, and Chennai—qualified for the 50 percent HRA exemption.
The draft rules propose adding Bengaluru, Hyderabad, Pune, and Ahmedabad to this list. Taxpayers residing in these cities will now be eligible for the higher exemption, while other cities will continue with the 40 percent limit. Experts say this adjustment reflects the sharp rise in housing costs across India’s major employment hubs.
Allowances Revised After Decades of Stagnation
Another major highlight of the draft rules is the revision of allowances that had remained unchanged for decades and had lost relevance due to inflation. The children education allowance is proposed to increase from Rs 100 to Rs 3,000 per month per child, for a maximum of two children.
Similarly, the hostel expenditure allowance is set to rise from Rs 300 to Rs 9,000 per month per child. These changes significantly enhance the real value of exemptions under the old regime, particularly for middle-income salaried households.
Higher Transport Allowance for Persons with Disabilities
The draft rules also revise transport allowance provisions for employees with disabilities. Under the proposed framework, employees who are blind, deaf and dumb, or orthopedically handicapped with disability of the lower extremities will be eligible for higher allowances.
For metro cities, the allowance has been increased to Rs 15,000 plus dearness allowance, while for non-metro cities it stands at Rs 8,000 plus DA. This marks a sharp rise from the earlier limit of Rs 3,200 per month and aligns the exemption with present-day commuting costs.
Tighter Rules for Foreign Tax Credit Claims
While exemptions have been liberalised in some areas, the draft rules also tighten compliance requirements for foreign income reporting. Claims of foreign tax credit through Form 44 will now require certification by a chartered accountant in specific cases.
This applies to companies and to situations where foreign tax paid exceeds Rs 1 lakh. Chartered accountants will be required to verify income records, proof of tax payment, and eligibility under applicable tax treaties.
Why the Old Tax Regime May Endure
In recent years, the government has encouraged taxpayers to shift to the new tax regime by offering lower rates while removing deductions. However, the latest draft rules subtly rebalance the equation by modernising exemptions and adjusting allowances for inflation.
For salaried individuals who pay rent, support children’s education, or rely on structured exemptions, the old tax regime may now offer tangible financial advantages. Tax experts believe the choice between regimes will increasingly depend on individual income structure rather than a one-size-fits-all approach.
