Siddharth Roy
(siddharth001.roy@gmail.com)
India's taxation landscape is on the cusp of a meaningful transformation. With the government releasing the draft Income-Tax Rules, 2026, set to come into force on April 1, 2026, alongside the new Income-Tax Act, 2025, the rules that govern how millions of Indians calculate, report, and comply with income taxes are undergoing a major revision. These draft rules, open for public feedback, aim to simplify compliance, align tax provisions with modern economic realities, and make India's tax system more transparent and taxpayer-friendly. The changes are significant, touching everything from exemptions and allowances to tax reporting and PAN requirements.
At the outset, the most visible shift is administrative: the number of tax rules has been reduced from 511 to 333, and forms from 399 to 190. This streamlining dismantles multiple redundant provisions and outdated requirements, making the tax code easier to interpret for taxpayers and professionals alike. More concise rules mean less confusion and a better understanding of obligations, reducing the scope for disputes and compliance errors.
One of the more impactful areas of change involves tax exemptions and allowances for salaried employees. For decades, many such allowances were fixed at levels that shrank in real terms due to inflation. The 2026 draft rules propose a much more realistic update. For example, children's education allowance may increase from Rs 100 per month to Rs 3,000 per month per child, and hostel allowance from Rs 300 per month to Rs 9,000 per month. Even routine benefits, like meal vouchers, are proposed to rise to Rs 200 per meal, which can translate into significant extra tax savings for employees receiving subsidised meals at work.
Another notable reform that directly affects salaried taxpayers relates to House Rent Allowance (HRA). Traditionally, only Mumbai, Delhi, Kolkata and Chennai qualified for the 50 per cent HRA exemption category. The draft rules propose including Bengaluru, Hyderabad, Pune and Ahmedabad on this list, reflecting the reality of rising rents in these cities and offering tangible relief to residents there. This change acknowledges how urbanisation and cost of living have evolved, offering a fairer break for rent-paying employees.
The draft rules also propose changes to PAN card requirements for various financial transactions, designed to strengthen financial transparency while reducing burdens on smaller taxpayers. Under the proposed norms, PAN will be mandatory for annual cash deposits or withdrawals exceeding Rs 10 lakh but not required for some smaller transactions such as hotel bills below Rs 1 lakh. For major purchases, such as vehicles costing over Rs 5 lakh, jewellery above Rs 10 lakh, or property deals over Rs 20 lakh, PAN must still be quoted. Such thresholds aim to strike a balance between curbing tax evasion and not overburdening ordinary taxpayers.
The 2026 draft rules also reflect how technology and digital transactions now underpin India's financial system. They recognise Central Bank Digital Currency (CBDC) as a valid electronic payment mode and integrate digital reporting formats to improve efficiency. At the same time, certain asset classes-especially crypto exchanges-are now required to share information with the tax department, indicating a focus on transparency in rapidly expanding digital investment markets.
For businesses and professionals, the rules tighten valuations and reporting requirements. Detailed fair market value (FMV) formulas for share valuations, capital gains calculations and cross-border asset transfers are now part of the draft, affecting startups, investors, and non-resident Indians alike. These provisions aim to reduce ambiguity and ensure consistency in tax treatment, particularly for complex transactions.
Another important reform area is the approach to Income-Tax Return (ITR) forms. As part of the modernisation effort, eligibility criteria for ITR forms are being tightened, and digital filing has become the norm. For example, ITR-4 (often used by small business owners) is no longer a catch-all form; taxpayers with more complex incomes may be moved to ITR-3, which is designed for business or professional income. Electronic filing is now mandatory for most categories, reducing the scope for errors and enhancing data accuracy.
Crucially, the draft rules are not yet final. They have been released to invite public feedback until February 22, 2026, allowing tax professionals, citizens and stakeholders to submit suggestions. This consultative process reflects an inclusive approach to policymaking, ensuring that those affected by the changes have a voice in shaping the final norms.
For the average taxpayer, these changes carry meaningful implications. Employees can potentially save more through enhanced allowances. HRA relief for additional cities acknowledges rising urban rents. Simplified rules and reduced forms can make tax filing less daunting. At the same time, expanded PAN requirements and digital reporting reflect a push for accountability and fairness in high-value financial activities.
Still, the proposed reforms also require taxpayers to stay informed and adapt. The digital filing environment and tighter reporting norms mean that careful recordkeeping and early preparation will matter more than ever. The changes may initially seem complex, but once implemented and fully understood, they could streamline compliance and make India's tax system more predictable and equitable.
The Draft Income-Tax Rules 2026 mark an important milestone in India's long-term tax reform journey. By simplifying procedures, aligning exemptions with present-day needs and using digital tools to improve transparency, the rules hold the potential to make the tax system fairer and more efficient. As the nation prepares to adopt these changes from April 1, 2026, it is essential for taxpayers and professionals alike to engage with the process, understand the implications, and prepare for a new era of income-tax compliance in India.