Draft Income Tax Rules 2026: Complete Summary & Key Changes Explained

If you are a salaried employee, business owner, or tax professional in India, the Draft Income Tax Rules 2026 released by CBDT on 07 February 2026 will directly affect how you file returns, calculate allowances, and manage compliance from the next financial year. These rules are not just a renumbering exercise — they propose meaningful changes to HRA calculations, PAN quoting thresholds, perquisite valuations, form structures, and transfer pricing mechanisms that have remained unchanged for decades.

This guide breaks down every major change in the draft rules, explains who is affected, and helps you prepare for the transition from the Income Tax Rules 1962 to the new framework under the Income Tax Act, 2025.

What Are the Draft Income Tax Rules 2026?

The Draft Income Tax Rules, 2026 are a proposed set of 333 rules and 190 forms released by the Central Board of Direct Taxes (CBDT) under the Income-tax Act, 2025 (Act No. 30 of 2025), to replace the existing Income Tax Rules, 1962 from 01 April 2026.

The existing Income Tax Rules, 1962 contain 511 rules and 399 forms — accumulated over six decades of amendments, notifications, and additions. The draft rules consolidate, simplify, and modernise this framework by removing obsolete provisions, merging overlapping rules, and aligning compliance with current economic realities. CBDT released the draft on 07 February 2026 and invited public feedback through the e-filing portal, with the consultation window closing on 22 February 2026.

The official draft PDF is available on the Income Tax India website.

Key Terms You Should Know

CBDT: Central Board of Direct Taxes — the apex body responsible for administering direct tax laws in India.

Income Tax Act, 2025: The new Act (Act No. 30 of 2025) that replaces the Income Tax Act, 1961 from 01 April 2026.

Draft Income Tax Rules, 2026: Proposed operational rules under the new Act — currently in draft form, pending final notification.

SFT: Statement of Financial Transactions — reported by banks, registrars, and other entities to the Income Tax Department.

APA: Advance Pricing Agreement — a mechanism for multinational enterprises to agree on transfer pricing with tax authorities.

Who Is Affected by the Draft Income Tax Rules 2026?

The draft rules impact virtually every category of taxpayer in India. If you earn a salary, run a business, file returns, or handle international transactions, these changes will affect your compliance obligations from FY 2026-27 onwards.

Salaried employees will see revised HRA exemption rules, higher children’s education and hostel allowances, updated perquisite valuations for employer-provided cars and accommodation, and new form numbers for familiar documents like Form 16 (now proposed as Form 130).

Business owners and professionals who file income tax returns will need to adapt to new form structures, updated PAN quoting thresholds, and revised Statement of Financial Transactions (SFT) reporting requirements. Companies maintaining books electronically must ensure backup servers are physically located in India.

Multinational corporations (MNCs) and GCCs face restructured transfer pricing rules including a unified safe harbour margin of 15.5% for IT services, expanded Form 48 disclosures (replacing Form 3CEB), and a 5-year block option for safe harbour from FY 2026-27.

Tax professionals and CAs must familiarise themselves with the new rule numbering, revised form structures, and the mapping between old and new provisions to advise clients accurately during the transition.

Legal Framework: Income Tax Act 2025 and the New Rules

The Draft Income Tax Rules, 2026 are framed under the Income-tax Act, 2025 (Act No. 30 of 2025), which received Presidential assent and is scheduled to come into force on 01 April 2026. The Act replaces the Income-tax Act, 1961.

Governing Act: Income-tax Act, 2025 (30 of 2025)

Rules Being Replaced: Income Tax Rules, 1962

Issuing Authority: Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance

Notification Date: 07 February 2026

Public Consultation Deadline: 22 February 2026

Effective Date: 01 April 2026

It is important to note that tax slabs and rates are not changed through rules — they can only be modified through amendments to the Income-tax Act via the Finance Act. The Draft Rules primarily reorganise compliance procedures, forms, reporting requirements, and exemption thresholds.

Major Changes Proposed in the Draft Income Tax Rules 2026

1. Allowance and Perquisite Revisions

The most widely discussed changes relate to allowances and perquisites for salaried employees. Many of these limits had not been revised for decades and were out of touch with current inflation and cost of living. The draft rules propose significant increases across the board.

These exemptions apply only under the old tax regime. Taxpayers who have opted for the new regime under Section 115BAC will not benefit from these revised limits.

2. HRA Metro City Expansion

Under Rule 279 of the Draft Income Tax Rules, 2026, the 50% HRA exemption — previously available only for Mumbai, Delhi, Kolkata, and Chennai — is proposed to be extended to four additional cities: Bengaluru, Hyderabad, Pune, and Ahmedabad.

This means salaried employees posted in these cities can now claim HRA exemption at 50% of salary (Basic + DA) instead of the earlier 40%, resulting in a higher tax-free component under the old regime. The HRA exemption continues to be calculated as the lowest of: actual HRA received, rent paid minus 10% of salary, or 50% (metro) / 40% (non-metro) of salary.

3. PAN Quoting Threshold Changes

The draft rules propose a shift from daily transaction limits to annual aggregate thresholds for PAN quoting, reducing compliance friction for routine banking and property transactions.

The removal of PAN quoting for a transaction does not mean it goes unmonitored. All high-value transactions continue to be reported to the Income Tax Department through the Statement of Financial Transactions (SFT) filed by banks, registrars, and other reporting entities.

4. Form Renumbering and Simplification

The draft rules propose renumbering several widely used income tax forms to align with the new Act’s structure. This is an administrative change — it does not alter substantive tax obligations.

The income tax scrutiny and assessment processes will also see procedural changes. Under Draft Rule 176, faceless assessment provisions from Section 144B of the old Act are formally incorporated into the rules. Additionally, the proposed Form 99 (replacing Form 35) introduces separate disclosure sections for appeal filings.

5. Transfer Pricing and International Taxation Updates

Multinational enterprises will face significant structural changes. Software development, IT-enabled services, KPO services, and contract R&D relating to software have been consolidated under a unified “IT services” category. The safe harbour margin has been set at a uniform 15.5% — lower than the previous rates of 17% to 24%. The eligibility threshold has increased from Rs 300 crore to Rs 2,000 crore, and taxpayers can now opt for the same safe harbour margin for 5 consecutive years from FY 2026-27. Companies engaged in tax audit services and international transactions should review their transfer pricing documentation well before April 2026.

6. SFT, FATCA and Digital Reporting Changes

The reporting framework has expanded significantly under the draft rules. Key changes include: SFT thresholds revised to Rs 5 lakh for non-PAN cases; immovable property reporting threshold increased to Rs 45 lakh; insurance premium reporting now included under SFT; FATCA scope expanded to include crypto assets, CBDC (Central Bank Digital Currency), and e-money; and crypto-asset service providers must file Form 167 annually.

TCS due dates have been aligned with TDS deadlines, and a single form is proposed for lower/nil TDS and TCS applications — simplifying the process for deductors and collectors.

How to Submit Feedback on the Draft Rules

CBDT invited stakeholder feedback through a dedicated utility on the e-filing portal. Here is the step-by-step process (note: the consultation window closed on 22 February 2026, but the process is documented for reference):

Step 1: Visit the feedback portal at eportal.incometax.gov.in/iec/foservices

Step 2: Complete OTP-based verification using your name and mobile number

Step 3: Select the specific rule, sub-rule, or form number to which your suggestion relates

Step 4: Provide your feedback — focus on simplification of language, reduction of compliance burden, or removal of obsolete provisions

Step 5: Submit your response. CBDT will review all submissions before issuing the final notification

You can also download the draft rules PDF, the explanatory note, and the old-to-new rules navigator from the official Income Tax India website.

Documents and Forms Checklist: What Changes from April 2026

For salaried employees: Form 130 (new Form 16) from employer; Form 168 (new AIS) from portal; Updated ITR forms (to be released separately).

For businesses: Form 26 (merged tax audit report replacing 3CA/3CB/3CD); Revised SFT reporting forms; Updated TDS/TCS return forms.

For MNCs: Form 48 (replacing Form 3CEB) for transfer pricing; Form 41 (replacing Form 10F) for TRC; Form 44 (replacing Form 67) for foreign tax credit.

For all taxpayers: Ensure PAN-Aadhaar linkage is complete before 31 March 2026. Old form names continue to apply for periods before April 2026.

Comparison: Old Rules (1962) vs Draft Rules (2026)

Common Mistakes Taxpayers Should Avoid

Mistake 1: Assuming new allowance limits apply under the new tax regime. What happens: You claim higher HRA or education allowance under the new regime and face a defective return notice. How to avoid: These enhanced limits apply only under the old tax regime. If you opt for the new regime under Section 115BAC, these exemptions are not available.

Mistake 2: Using old form numbers after April 2026. What happens: Filing with outdated form references may cause processing delays or rejections. How to avoid: Familiarise yourself with the new form numbering — Form 16 becomes Form 130, Form 26AS becomes Form 168, etc.

Mistake 3: Ignoring PAN-Aadhaar linkage deadline. What happens: Your PAN becomes inoperative, blocking return filing, refund processing, and TDS credit. How to avoid: Complete PAN-Aadhaar linkage before 31 March 2026 through the NSDL or UTIITSL portal.

Mistake 4: Not updating payroll and HR systems. What happens: Incorrect TDS deductions on salaries, leading to mismatches during automated reconciliation. How to avoid: Employers should update payroll software to reflect new perquisite valuations and allowance limits before the new FY begins.

If you receive a notice due to errors during the transition, consider seeking income tax notice assistance from a qualified CA.

Penalties and Consequences

While the Draft Income Tax Rules 2026 primarily focus on compliance simplification, failure to comply with the new requirements can attract existing penalties under the Income Tax Act, 2025.

Failure to quote PAN in specified transactions attracts a penalty under the relevant provisions of the Income-tax Act, 2025. Non-filing or delayed filing of SFT reports can attract penalties of Rs 500 per day of default. Penalty proceedings under Section 270A for under-reporting or misreporting of income continue under the new framework, with the Finance Bill 2026 proposing a common order for assessment and penalty.

Under Draft Rule 176, faceless assessment proceedings now formally include notice for initiation of penalty proceedings along with the assessment order. This means taxpayers must be prepared to defend both assessment and penalty positions simultaneously.

How the New Rules Interact with the Income Tax Act 2025

The Income Tax Act, 2025 provides the legislative framework, while the Draft Income Tax Rules, 2026 prescribe the operational procedures and compliance details. For example, Section 17 of the new Act defines perquisites, and Rule 5 of the draft rules specifies how perquisite values are computed — including the revised car, accommodation, and meal voucher limits.

The Finance Bill 2026 proposes that assessment and penalty orders be issued together, but Draft Rule 176 introduces a procedural distinction where only a notice for initiation of penalty proceedings is issued alongside the assessment order. This creates a gap that practitioners should monitor closely.

CBDT’s old-to-new rules navigator provides a complete mapping of current rules to their proposed equivalents under the new framework, helping professionals and taxpayers track the transition.

Old Regime vs New Regime — Does This Change the Equation?

The draft rules have unexpectedly made the old tax regime more relevant again. With education allowance hiked 30x, hostel allowance hiked 30x, HRA extended to 8 metro cities, loan threshold increased 10x, and meal vouchers quadrupled — the cumulative effect of these enhanced exemptions could make the old regime more beneficial for salaried individuals earning Rs 15 lakh or more per year.

Tax experts suggest that individuals should compare their total eligible deductions and exemptions under both regimes before choosing. The new regime offers simplicity with no deductions, while the old regime — with these enhanced limits — offers potentially lower tax for those who can claim multiple exemptions.

It is important to remember that tax slabs and rates remain unchanged. These are not rate changes — they are exemption threshold changes that only benefit old regime taxpayers.

Key Takeaways

1. The Draft Income Tax Rules, 2026 reduce India’s tax compliance framework from 511 rules and 399 forms to 333 rules and 190 forms, effective 01 April 2026.

2. Children’s education allowance is proposed to increase from Rs 100 to Rs 3,000 per month per child, and hostel allowance from Rs 300 to Rs 9,000 per month per child — a 30x increase applicable under the old regime only.

3. HRA at 50% of salary is proposed to be extended from 4 metro cities to 8 — adding Bengaluru, Hyderabad, Pune, and Ahmedabad under Rule 279 of the draft rules.

4. PAN quoting for cash deposits shifts from Rs 50,000 daily to Rs 10 lakh annual aggregate, and the immovable property PAN threshold doubles from Rs 10 lakh to Rs 20 lakh.

5. Transfer pricing safe harbour margin is unified at 15.5% for IT services with a 5-year block option, and the eligibility threshold increases from Rs 300 crore to Rs 2,000 crore.

Need Help Navigating the Transition?

The transition from the Income Tax Rules, 1962 to the new framework under the Income Tax Act, 2025 involves significant changes to compliance processes, form structures, and exemption calculations. If you need professional guidance on how these changes affect your tax filing or business compliance, our experienced CA team can assist.

Learn more about our income tax return filing services or call us at +91 945 945 6700 / WhatsApp for a consultation.