Income Tax Rules 2026: 5 Big Changes In HRA, Allowances And PAN Reporting You Must Know

The draft Income Tax Rules 2026 aim to simplify tax compliance by refining existing exemptions, allowances, and reporting norms. While they do not introduce major structural changes, they can influence everyday tax planning for salaried and middle-income households. Understanding these proposals early helps avoid last-minute confusion and supports smoother financial planning.

Clearer scope for tax savings through allowances

One of the key intentions of the draft rules is to help taxpayers use existing exemptions more effectively. Revised limits across certain allowances may allow salaried individuals to reduce their taxable income through better salary structuring. The aim is not to introduce complexity but to ensure that genuine exemptions are easier to understand and claim, rather than being overlooked due to ambiguity. 

More cities may qualify for a higher HRA exemption

The draft rules propose expanding the list of cities eligible for a higher House Rent Allowance exemption. More locations may qualify for the 50 per cent limit instead of the earlier 40 per cent. This is particularly helpful for professionals living in fast-growing cities where rent has risen sharply. For eligible employees, this change can lower taxable income without requiring additional investments. 

Consider a salaried employee earning Rs 12 lakh a year and living in a newly eligible HRA city. If they pay Rs 30,000 per month as rent, the higher HRA exemption alone could reduce taxable income by around Rs 60,000-Rs 80,000 annually. Claiming children’s education allowance for two children can further reduce taxable income by Rs 4,800. 

Higher relief on children’s education expenses

Education-related allowances are proposed to be revised upward. This includes exemptions for children’s education and hostel expenses. While these amounts may seem modest, they provide steady relief for families dealing with rising school and college costs. Over time, these allowances can ease monthly cash flow and reduce pressure on household budgets. 

Updated tax treatment for employer-provided cars

The draft rules also revise how employer-provided motor cars are valued for tax purposes. The updated approach aims to reflect actual usage more accurately. Depending on how the vehicle is used, this could either increase or reduce the taxable value of the benefit. For employees receiving transport benefits, understanding this change is important to avoid surprises in tax calculations. 

Wider PAN reporting for financial transactions

To improve transparency, the draft rules expand the range of transactions where quoting PAN is mandatory. This includes more high-value financial activities. The intent is to align spending patterns with declared income. For taxpayers, this highlights the importance of keeping financial records consistent and ensuring income disclosures reflect lifestyle spending. 

Choosing the right tax regime becomes more important

With revised exemptions and standard deductions, the draft rules encourage taxpayers to re-evaluate the choice between the old and new tax regimes. Rather than continuing with a default option, individuals may benefit from reviewing which regime suits their income structure and expenses better each year. 

The draft Income Tax Rules 2026 focus on clarity rather than complexity. By understanding these five changes early, taxpayers can plan calmly, make informed regime choices, and reduce stress during tax season. Small adjustments made on time can make tax planning smoother and more effective.

(The author is Associate Analyst, Communications, BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)