First, the children’s education allowance exemption is to be increased sharply from a token ₹100 per month per child to ₹3,000 per month per child. Second, the hostel expenditure allowance exemption is to be enhanced from ₹300 per month per child to ₹9,000 per month per child.
Third, Bengaluru, Pune, Hyderabad and Ahmedabad could be classified as metro cities for house rent allowance (HRA) purposes, making residents eligible for a 50% HRA exemption and bringing the exemption limit for residents of these cities on par with Delhi, Mumbai, Kolkata and Chennai.
Individually, each change appears incremental. Combined, however, they could prompt a section of salaried individuals to reconsider the old tax regime again in the upcoming financial year, particularly those in high-rent urban centres with school- or college-going children.
The proposals are open for public consultation till 22 February and are expected to come into effect starting 1 April.
What will change
Under the revised framework, a salaried individual can now claim up to ₹36,000 annually per child as education allowance ( ₹3,000 per month), capped at two children—translating to ₹72,000 per year for families with two school- or college-going children. For hostel expenditure, the exemption now extends to ₹9,000 per month per child, or ₹1.08 lakh annually per child, again for up to two children.
The metro reclassification for HRA purposes may prove even more consequential. HRA exemption is calculated as the least of actual HRA received, rent paid minus 10% of basic pay, or 50% of basic (for metro cities). By extending metro status to cities such as Bengaluru, where rents have surged, the government has increased the upper ceiling for exemption calculations for a large urban salaried base.
“These benefits are only available in the old regime and not in the new regime, so yes, these will definitely play an increased role now in making the choice,” said Mayank Mohanka, founder of TaxAaram India and partner at S.M. Mohanka & Associates, adding that the substantially higher limits may prompt employees to seek restructuring of their salary packages to incorporate these allowances.
The break-even math
Let’s see how these allowances can meaningfully tilt the scales.
For gross salaries in the range of ₹14 lakh to ₹24 lakh, taxpayers typically require deductions from roughly ₹5.18 lakh to ₹7.87 lakh, increasing as income rises, to make the old regime competitive with the new regime. For incomes of ₹25 lakh and above, deductions over ₹8 lakh save more tax under the old regime.
Consider salaried individual Mr A, currently earning ₹30 lakh annually in Bengaluru, paying rent of ₹60,000 per month, with two children, one in school and one living in a college hostel. Assuming his basic pay is 40% of his gross, his HRA component would be ₹6 lakh.
Currently, this is how his deductions look like: ₹2,400 in children’s education allowance + ₹3,600 in hostel allowance + ₹4.8 lakh HRA + ₹1.5 lakh in 80C and ₹50,000 standard deduction. His total deductions stand at ₹6.86 lakh, and he needs at least ₹1.2 lakh more in deductions to benefit under the old tax regime.
Under the revised rules, Mr A could claim ₹72,000 per year as children’s education allowance (for both children), ₹1.08 lakh as hostel expenditure allowance for the child in college and a higher HRA of ₹6 lakh. His total deductions increase to ₹9.8 lakh and by opting for the old tax regime, he would pay ₹39,000 less in taxes compared to the new regime.
This example assumes a best-case scenario where Mr A is able to claim all enhanced deductions. Even if he doesn’t have a child living in a college hostel, he would still benefit under the old tax regime.
Conservatively, a substantial HRA exemption, now expected to extend to high-rent cities like Bengaluru, along with another big component like car lease or ₹2 lakh home loan deduction, can push total deductions to cross the threshold required to make the old regime tax-efficient.
HRA impact widest
Himank Singla, a partner at S B H S & Associates, said while the education and hostel allowances are meaningful, the HRA revision could have the widest financial impact.
“House rent is one of the largest recurring expenses for salaried individuals in metro cities. It is common for employees in Bengaluru to pay between ₹35,000 and ₹50,000 per month in rent. With the higher metro-based exemption limit, the incremental tax saving could range between ₹15,000 and ₹30,000 annually, depending on the individual’s tax slab,” he estimates.
For people in Delhi, Mumbai, Chennai and Kolkata, even with high rent, if the total deductions fell short of the breakeven mark so far, the increased allowances towards children’s education may help.
For lower- and middle-income groups, particularly those earning below ₹24 lakh, breaking even under the old regime could still be challenging unless the HRA component is substantial, which would be difficult at low salaries as high rent can disrupt cashflows. Without HRA, the taxpayer would need 80C, National Pension System contributions, medical insurance deduction, leave travel allowance (LTA) and children’s education and hostel allowances to cross the threshold.
In dual-income households with high rent outgo, tax planning may involve structuring the salary so that one spouse claims the full HRA benefit and expenses on children’s education.
Mohanka noted that while the exemptions are generous on paper, documentation will be crucial. Employees must furnish rent receipts, hostel fee receipts and proof of children’s education to their employers so that appropriate tax deduction at source (TDS) benefits can be reflected in Form 16, he said.
Another targeted revision is the proposed enhancement in transport allowance for employees who are blind, deaf and dumb, or orthopaedically handicapped from ₹3,200 per month to ₹15,000 per month plus DA in metro cities and ₹8,000 plus DA in other cities.
These allowances, including children’s and hostel allowances, are available only to salaried taxpayers, not to businesspersons.
“The reduced slab rates of the new regime, coupled with the increased threshold rebate limit to ₹12 lakh, make the new regime more beneficial to the businessmen taxpayers. Changes in these allowances are irrelevant for them, and the choice between regimes continues to hinge largely on slab rates and rebate thresholds rather than such exemptions,” said Mohanka.
Perquisites limit raised
Apart from allowances, the draft rules propose a set of smaller revisions. The tax-free limit for employer-provided gifts and non-cash perquisites is proposed to be raised from ₹5,000. As per income tax rules, gifts, vouchers or tokens given by employers on ceremonial or other occasions up to ₹15,000 annually will be exempt.
“These typically include Diwali gift hampers, shopping vouchers, sweets, dry fruits, gadgets, concert tickets or employee-recognition rewards,” said Mohanka.
Singla called this a welcome but modest relief for salaried employees.
“While the enhanced threshold reduces the taxable portion of such benefits, the actual tax saving is small. Even for those in the highest tax bracket, the annual savings may amount to only a few thousand rupees,” said Singla.
Importantly, this exemption applies under both the old and new tax regimes, since such perquisites are taxable under Section 17 (1)(e) in either structure. As a result, the higher ₹15,000 limit does not influence the decision between the two regimes.
