New Income Tax Rules 2026: How Much Will Your Salary Increase?

Income Tax Rules: In the budget revealed on February 1, Finance Minister Nirmala Sitharaman shared that new regulations would take the place of the long-standing Income Tax Act. The suggested Income Tax Rules 2026 are expected to come into effect on April 1, 2026. Currently, the draft is available for public feedback until February 22, after which it will be finalized.

Additionally, tax professionals believe that these modifications will provide direct advantages to employed individuals. TDS deductions are set to decrease, leading to an increase in take-home salaries. Specifically, the proposed adjustments to HRA, education, and hostel allowances will lower taxable income. Therefore, today we will explain how much your salary will rise under the new Income Tax Rules and how to easily understand the calculations with just one click.

List of cities with 50% HRA exemption to expand

Previously, only employees in Delhi, Mumbai, Kolkata, and Chennai qualified for an HRA exemption of up to 50 percent of their basic salary. The new draft suggests adding Bengaluru, Hyderabad, Pune, and Ahmedabad to this list. Workers residing in these cities will now be eligible to claim up to 50 percent HRA, while the 40 percent cap will still apply in other locations. Moreover, the draft rules recommend raising the education allowance from Rs. 100 per month per child to Rs. 3,000 per month. The limit for hostel allowances could also rise from Rs. 300 per child to Rs. 9,000 per month. This exemption will apply to a maximum of two children.

Relief on income up to Rs 12 lakh

For those choosing the new tax system, the rebate under Section 87A is suggested to increase to Rs 60,000. This could potentially bring the tax liability down to zero for annual incomes up to Rs 1.2 million. This change will directly benefit the middle class, while the standard deduction for salaried workers will remain intact. There are talks about raising it from Rs 75,000 to Rs 100,000. Additionally, there is a proposal to elevate the tax exemption limit on gifts received from companies from Rs 5,000 to Rs 15,000.

Comprehend the entire calculation like this:

Imagine an employee earning an annual gross salary of Rs 30 lakh. Following the previous regulations, after applying an education allowance exemption of Rs 2,400, a hostel allowance exemption of Rs 7,200, a HRA exemption of Rs 6 lakh based on a monthly rent of Rs 75,000, and a standard deduction of Rs 50,000, the net salary would amount to Rs 23,40,400. With an additional exemption of Rs 4.05 lakh under Chapter VI-A, the taxable income would be Rs 19,35,400. This results in a tax liability of roughly Rs 4,08,844. Consequently, the annual take-home salary is about Rs 23.47 lakh.

With the new proposed rules, there will be exemptions of up to Rs 72,000 for education allowance, up to Rs 206,000 for hostel allowance, and up to Rs 750,000 for HRA. After these considerable exemptions, the taxable income could drop to around Rs 15,07,000, leading to a tax liability of approximately Rs 275,184. This change could yield annual tax savings of about Rs 1.33 lakh, and the take-home salary might rise to around Rs 24.81 lakh, resulting in an increase in monthly take-home pay. Experts predict that these adjustments could boost the annual take-home salary of average salaried employees by Rs 25,000 to Rs 80,000. However, the advantages will vary based on the tax regime you select and your salary structure.