Higher HRA, bigger tax-free perks: How draft Income-Tax Rules 2026 could boost your take-home pay

Tax slabs have not changed in Budget 2026, but that does not mean salaried employees are walking away empty-handed.

Alongside extending the higher HRA exemption of 50% (instead of 40%) to employees residing in Ahmedabad, Bengaluru, Hyderabad and Pune, and the proposed enhancement of the children’s education allowance (from ₹100 to ₹3,000 per child per month) and hostel expenditure allowance (from ₹300 to ₹9,000 per child per month), an attempt has been made under the draft Income-Tax Rules, 2026 to reduce the tax burden on salaried employees by updating long-outdated thresholds for common perquisites—particularly housing, conveyance, gifts, food coupons and education benefits.

The proposed Rule 15 of the Draft Rules will replace the decades-old Rule 3 of the Income-tax Rules, 1962, which currently governs the taxation of employer-provided benefits, with effect from 01/04/2026.

Here’s what changes

1. Employer-provided housing: A big relief

Under the existing Rule 3, employees residing in bigger cities can see up to 15% of their salary added as a taxable perquisite for employer-owned unfurnished housing.

The percentage of salary treated as a taxable perquisite has been proposed to be rationalised across all city categories under Rule 15 of the Draft Rules by lowering the perquisite valuation between 25% and 50% (without altering the definition of “salary,” which includes the pay, allowances, bonus or commission payable monthly or otherwise, or any monetary payment, and dearness allowance or dearness pay if it is considered for computation of superannuation or retirement benefits).

See below how this could significantly lower the taxable perquisite value:

Population of City (2011 Census)	Existing Rule 3 (% of Salary)	Draft Rule 15 (% of Salary)
up to 10 lakh	7.5%	5%
10–15 lakh	10%	5%
15–25 lakh	10%	7.5%
25–40 lakh	15%	7.5%
Above 40 lakh	15%	10%

For leased accommodation provided by the employer, the taxable value—currently capped at the lower of 15% of salary or the actual rent paid by the employer —will now be restricted to the lower of 10% of salary or the actual rent paid.

Nature of Housing	Perquisite value under Old Rules (% of ₹50,00,000)	Perquisite value under Draft Rules (% of ₹50,00,000)	Reduction in Taxable Value (₹)
Employer-owned	7,50,000 (15%)	3,75,000 (7.5%)	3,75,000
Leased	7,50,000 (15%)	500,000 (10%)	2,50,000

Impact:

• For employer-owned housing, the taxable perquisite is reduced by ₹3.75 lakh, resulting in a tax saving of ₹1.24 lakh.
• For leased accommodation, the reduction is ₹2.5 lakh (assuming the lease rent paid by the employer is higher), resulting in a tax saving of ₹82,500.

At higher income slabs, this reduction in taxable salary could translate into meaningful tax savings and improved take-home pay.

2. Motor car perquisites: Different impact

Unlike housing, motor car perquisite values have been revised upward under the Draft Rules—but this is largely a long-overdue recalibration rather than a new levy.

As per Section 17(2)(e) of the Income-tax Act, 2025, “any expenditure incurred by the employer for the use of any conveyance for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence” is not a taxable perquisite. Accordingly, such expenditure is regarded as being incurred for official purposes.

There is no change in the tax treatment where the motor car is used wholly for official purposes or wholly for personal purposes; however, the standard monthly valuation for mixed official and personal use has been proposed to be increased as follows:

• Cars up to 1.6 litre: ₹1,800 → ₹5,000
• Cars above 1.6 litre: ₹2,400 → ₹7,000
• Driver: ₹900 → ₹3,000

These limits had remained frozen for years despite rising fuel, maintenance, and driver costs. The draft rules merely align the valuation with present-day cost realities.

Who pays more, who pays less?

Example:

• Car up to 1.6L with driver (mixed use):
• Employee-owned car: ₹15,000 per month reimbursed by the employer per month

Scenario	Existing	Draft	Net Effect
Employer-owned car	Rule 3	Rule 15
	₹2,700/month taxable	₹8,000/month taxable	↑Taxable salary rises
Annual taxable value	₹32,400	₹96,000	↑ ₹63,600 higher
Employee-owned car (₹15,000 reimbursed per month)	₹12,300/month taxable	₹7,000/month taxable	↓ Taxable salary falls
Annual taxable value	₹1,47,600	₹84,000	↓ ₹63,600 lower

What this means

• If the employer owns the car → taxable value increases.
• If the employee owns the car and claims reimbursement → taxable value decreases due to the higher deduction.
• Higher deductions for car owned by the employee can still be claimed where official use exceeds standard limits, subject to documentation and certification.

3. Higher limits for tax-free benefits

Here’s where salaried employees may see direct impact on their take-home pay—

(a) Employer-sponsored children’s education

Under proposed Rule 15(4), if an employer provides free or concessional education to an employee’s children—either in a school run by the employer or in any other institution—the benefit will be taxable only if its value exceeds ₹3,000 per child per month. Under the existing Rule 3, this threshold is just ₹1,000 per month.

This should not be confused with the children’s education allowance and hostel expenditure allowance, which are distinct statutory exemptions governed separately (earlier under Section 10(14) of the 1961 Act and now under Section 11 of the new Act).

(b) Interest-free or concessional loans
The increase in the threshold for taxing interest on interest-free or concessional employer loans from ₹20,000 under the existing rules to ₹2,00,000 under the draft rules will provide relief to employees who rely on short-term salary advances or small employer loans and will effectively eliminate perquisite taxation in many cases.

Loans granted for specified medical purposes will continue to remain outside the perquisite framework, subject to existing conditions.

(c) Meal vouchers and office meals

The exemption limit for meals or meal coupons provided during working hours increases from ₹50 to ₹200 per meal.

More importantly, the draft rules remove the practical regime-based restriction—meaning the higher ₹200 limit would apply regardless of whether the employee opts for the Old or the New Tax Regime.
This fourfold increase could result in substantial tax savings if such benefits form part of the employee’s CTC structure.

(d) Gifts from employer

The annual tax-free limit for gifts is proposed to be increased from ₹5,000 to ₹15,000.
That effectively triples the exemption threshold, giving employers greater flexibility to structure such gifts in a tax-efficient manner.

What this means for your take-home pay

While tax slabs remain unchanged, the proposed revisions to perquisite valuation could still translate into a higher effective take-home salary for many employees. By lowering the taxable value of employer-provided housing and substantially increasing exemption limits for education benefits, meals, gifts, the draft rules reduce the portion of compensation that gets added back as taxable income. In practical terms, this means that a larger share of commonly structured salary components could remain tax-efficient irrespective of the tax regime.

Employees living in company accommodation, using their own car for official use, receiving education support for children or using meal cards stand to benefit the most. However, the actual increase in take-home pay will depend on how compensation is structured. Where structured effectively, the changes could enhance post-tax income—even without any reduction in tax rates.

The author, O.P. Yadav, is a former IRS officer with over 36 years of experience in tax administration, education, and training. The views expressed are personal.