The Income Tax Rules, 2026, effective from April 1, have addressed long-standing anomalies in the old tax regime by removing outdated complex exemption limits that had remained unchanged for over three decades. These changes bring significant relief to armed forces personnel receiving hardship allowance for postings in extreme conditions, including high-altitude regions such as the Siachen Glacier, which is the world’s highest battlefield.
According to CBDT officials, the earlier limits were stuck at 1995 levels, resulting in a situation where soldiers deployed in challenging environments had to pay tax on a substantial portion of their hardship allowances, leaving them with minimal take-home benefits.
For instance, personnel posted in Siachen receive a hardship allowance of ₹42,500 per month, but only ₹ 7,000 was exempt from tax under the previous rules. This meant that ₹35,500, which was over 83 per cent of the allowance, was taxable, CBDT sources said.
Over time, while the risks and costs associated with such postings increased, the tax-exempt portion of these allowances had failed to keep pace with inflation and evolving operational demands.
Recognising this gap, the Finance Ministry revised the provisions under the Income tax Act, 1961, acknowledging that outdated caps were effectively ‘penalising’ personnel serving in difficult conditions, they explained. The updated rules are expected to benefit over one crore government employees and their families.
Previously governed by Rule 2BB under the Finance Act, 1995, the framework covered various allowances for armed forces and government employees working in challenging environments, including border areas, counter-insurgency zones, and high-altitude locations. It also included provision for children’s education, hostel, and disability allowances.
However, over the years, many of these allowances were restructured, renamed, or merged, and deployment areas were revised. Despite these changes, exemption limits remained static.
For example, the children’s education allowance for government employees stands at ₹2,812.5 per month, but the exempt amount was capped at just ₹100 under the old rules, CBDT sources stated.
The new Rule 280 under the Income Tax Rules, 2026, consolidates these updates by reflecting current allowance structures, revised hardship categories, and updated exemption limits. It also introduces a more streamlined and digitisation-friendly format, replacing the earlier text-heavy provisions that were not easily compatible with payroll software systems.
The revised framework enables precise mapping of allowances to specific locations and limits, ensuring accurate tax calculations without ambiguity and aligning them with current pay commission structures, sources pointed out.
