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So the taxman is finally giving middle-class wallets some breathing room. The Income Tax Department just released the Draft Rules for 2026. The goal? Fix outdated limits. In fact, many of these caps have stayed the same since 1962. Plus, the new rules align with the rising cost of living in India today.
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New Metro Cities for HRA Benefits
But here is the biggest win for city dwellers. The state is adding four new cities to the “Metro” list for House Rent Allowance (HRA). Is your city on it? Hyderabad, Ahmedabad, Pune, and Bengaluru now join the elite club. Consequently, people in these hubs can now claim a 50% HRA exemption instead of 40%.
Moreover, this shift reflects the massive growth of these tech and industrial centers. Previously, only Delhi, Mumbai, Kolkata, and Chennai enjoyed the higher cap. So this change will lower the tax bill for millions of private-sector workers. Therefore, it is time to recheck your rent receipts for 2026.
Proposed Changes in Income Tax Allowances
| Allowance Type | Old Monthly Limit | New Proposed Limit |
| 🎓 Education | ₹100 per child | ₹3,000 per child |
| 🏨 Hostel | ₹300 per child | ₹9,000 per child |
| 🚌 Transport (Sector) | ₹10,000 ceiling | ₹25,000 ceiling |
| ♿ Disabled Transport | ₹3,200 total | ₹15,000 + DA (Metro) |
| ⛏️ Underground | ₹800 flat | 15% of Basic Pay |
Education and Hostel Allowance Skyrockets
Still, the most shocking jump is in the education sector. The monthly tax break for a child’s school fees is set to rise from ₹100 to ₹3,000. Why such a big leap? Because inflation has made the old ₹100 limit look like a joke. And hostel help is moving from a tiny ₹300 to a solid ₹9,000 per month. Accordingly, parents will save thousands of rupees every year.
But wait, there is more help for specialized workers. Those in the transport sector will see their exemption cap jump to ₹25,000. Also, workers in “uncongenial” underground spots get a percentage-based cut instead of a flat rate. Essentially, the state is moving away from fixed cash caps toward more realistic math. Indeed, it is a long-overdue update.
When Will These Rules Start?
Then there is the timeline for these big shifts. The state expects to finalize these draft rules very soon. The start date? They will take effect from April 1, 2026, alongside the new Income Tax Act.
Worth noting: The department is currently asking the public for their views on these drafts. So if you think the limits should be even higher, now is the time to speak up. Ultimately, these changes mark a major policy shift toward “inflation-indexed realism.”
Frequently Asked Questions (FAQs)
Which cities are newly added to the HRA metro list for 2026? So the four new cities are Hyderabad, Ahmedabad, Pune, and Bengaluru. Because of this, employees in these cities can claim a 50% HRA exemption of their basic salary.
What is the new limit for children’s education allowance? In fact, the proposed limit is ₹3,000 per month per child. Consequently, this is a massive 30-fold increase from the current ₹100 limit.
When will the Income Tax Draft Rules 2026 come into force? But the government plans to implement them from the next financial year starting April 1, 2026. Specifically, they will work in sync with the new Income Tax Act, 2025.
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