The old income tax regime has received a quiet but meaningful upgrade in the Draft Income Tax Rules 2026. The draft expands the list of cities that qualify for higher metro-level HRA exemption, raises limits for children’s education and hostel allowances, boosts meal voucher values, and updates rules for employer-linked perks, giving the older system renewed relevance for certain taxpayers.
The question for most taxpayers is simple. Do these updates make the old regime a better choice than the new one, or should you continue with the simplified tax structure the government has been nudging everyone toward?
The short answer is that the new regime still works better for most salaried Indians. But the long answer is where things get interesting.
This is because the old regime now clearly benefits a specific slice of taxpayers who rely heavily on exemptions linked to rent, children and employer-provided benefits.
CA (Dr.) Suresh Surana calls the government’s move “a transitional approach”, one that updates long-standing exemptions in order to provide equitable relief while both regimes coexist. In other words, the old regime is being polished, not resurrected.
WHY DID THE OLD TAX REGIME GET A FRESH BOOST?
When the new tax regime was introduced, the intention was to simplify taxation by removing the maze of exemptions and offering lower slab rates. It caters to people who do not want the burden of documentation and compliance.
Gaurav Makhijani, Tax Head at Makhijani Gera and Associates, explains the original purpose clearly. “The introduction of the new tax regime was primarily aimed at simplification. A large section of taxpayers found it difficult to manage documentation and compliance requirements associated with multiple exemptions and deductions under the old regime,” Makhijani tells IndiaToday.in.
Over the past five years, however, taxpayers repeatedly flagged that several exemption limits had become outdated. Rents in cities like Bengaluru and Hyderabad have risen sharply. School and hostel expenses are much higher than before. Even basic meal costs have changed dramatically.
Makhijani says the proposed changes should not be misread as a policy U-turn. “This should not be seen as a reversal or an attempt to strengthen the old regime. Rather, it reflects a long-overdue adjustment to align thresholds with current economic realities,” he adds.
Dr. Surana adds that the government is trying to balance taxpayer preferences while keeping the long-term direction toward a simpler new regime intact.
WILL THE CHANGES ACTUALLY BENEFIT YOU?
The biggest shift is the expansion of cities eligible for the 50% HRA calculation. Earlier, only Delhi, Mumbai, Kolkata and Chennai qualified.
The draft rules now include cities such as Pune and Ahmedabad, along with Bengaluru and Hyderabad. This instantly increases HRA exemptions for thousands of renters.
Dr. Surana notes that by recognising these cities as metro equivalents, “the proposed rules enhance the tax efficiency of the old regime for a broader segment of urban employees.”
Child-related allowances have been updated as well. The limits for children’s education and hostel allowances have been stagnant for years. These revised amounts directly benefit families that depend on them because such exemptions exist only under the old regime.
Meal vouchers are being revised from Rs 50 per meal to Rs 200. Several employer-linked perquisites, including rent-free accommodation, car usage and concessional loans, will now be valued using modernised rules rather than outdated formulas from the 1960s.
This reduces taxable income for many salaried employees.
Leave Travel Concession is also being upgraded. The rule limiting LTC reimbursement to economy class fare is proposed to be removed. Employees will now be reimbursed based on the class of travel they are entitled to.
A standard reimbursement of Rs 30 per kilometre is proposed where no public transport exists. Dr. Surana says this change introduces “significant flexibility that aligns tax provisions with actual employment entitlements.”
The Central Board of Direct Taxes (CBDT) has also proposed rationalised PAN-quoting rules and revised Statement of Financial Transaction thresholds, indicating an effort to streamline compliance.
SO, OLD OR NEW, WHAT’S BEST FOR YOU?
With two coexisting tax regimes, many taxpayers struggle to decide which one suits them best. Makhijani says the confusion is widespread. “In my experience interacting with non-technical individuals, there is frequent concern about whether the correct regime has been chosen. An incorrect selection can lead to higher TDS during the year and result in liquidity blockage.”
There was an expectation that the old regime would eventually be phased out to remove such confusion. Instead, the government has maintained and updated it.
Makhijani believes the revised thresholds may encourage taxpayers who were already in the old regime to remain there longer, especially if the updated exemptions tilt the calculation in their favour.
Dr. Surana agrees that the new benefits may slow the shift but also notes that the new regime remains attractive because of its simplicity and lower compliance burden.
NEW REGIME STILL BETTER CHOICE FOR MOST TAXPAYERS
Despite the fresh life injected into the old system, the majority of salaried taxpayers continue to save more under the new regime.
Take a person earning Rs 12 lakh with only the standard deduction. After applying the new 87A rebate, this taxpayer ends up with zero tax under the new system. Under the old regime, the same person pays around Rs 1.56 lakh.
Even at Rs 15 lakh, unless someone has very high rent and fully claimed deductions, the new regime still produces a lower tax bill. For many mid-level earners, the new regime remains the simpler and more affordable option.
WHO SHOULD OPT FOR OLD TAX REGIME?
The old system starts to win only for a narrower group of taxpayers. These are people living in high-rent cities such as Bengaluru or Hyderabad, receiving large HRA, and fully using deductions under Section 80C and Section 80D.
For example, an employee earning Rs 20 lakh with HRA of Rs 7 lakh, rent of Rs 7.5 lakh and deductions of Rs 1.75 lakh can reduce taxable income under the old regime to about Rs 12 lakh after the expanded metro rule is applied. The resulting tax is lower than what the new regime charges.
Makhijani says this exact group gains the most. “A taxpayer who has been following old tax regime gains the most. It may happen that the new regime was slightly beneficial earlier, but with these advantages the old regime may become more beneficial.”
Dr. Surana adds that middle-income households with housing, education and employer-linked benefits form the core group benefiting from the upgrade.
Neither expert expects dramatic changes in the old regime going forward. Makhijani believes only periodic inflation-linked adjustments are likely. Dr. Surana says the government remains committed to simpler taxation under the new regime, and any future changes to the old one will be limited and targeted.
For now, both regimes will continue to coexist. The old regime gets a timely boost, but the new system remains the better choice for most taxpayers. The right decision depends entirely on a person’s salary structure, rent, deductions and benefits.
