As part of the revised framework for the revenues system, the government has developed new rules for the income tax system in 2026, replacing rules established since the 1960s. The draft rules contain many provisions intended to assist taxpayers with complying with their obligations, and allow for the filing of income returns and their corresponding forms (as streamlined as possible). Written public comments on the draft rules will be accepted until 22 February 2026. The final rules are expected to be published in early March 2026, with an effective date of 1 April 2026.
A few key points are noteworthy with respect to the draft rules, Including:
- The number of income tax rules has at least been reduced but not eliminated and there is therefore still duplication that can add significant to the compliance burden. The new income tax system has reduced the number of income tax rules from five hundred and eleven (511) to three hundred thirty-three (333) and the forms from three hundred ninety-nine (399) to approximately one hundred ninety (190).
- In the interest of creating an easier and less cumbersome system for tax collection, the vast majority of taxpayers will use electronic means to file their income tax returns. Only super seniors are permitted to file paper returns.
- All forms will be re-designed to be pre-filled, and be technology-enabled and data-driven in order to reduce manual error and processing delays.
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Changes in the Requirement to Quote Your PAN for High Value Transactions
At least one of the much discussed changes in the manner in which taxpayers will quote their Permanent Account Number (PAN) in the course of carrying out their daily financial transactions occurs with the cash deposit or withdrawal process.
Under the current rules of income tax, a person must quote their PAN when depositing or withdrawing cash. New rules increase the threshold from ₹50,000 per day to ₹10,00,000 per year for both cash deposits as well as cash withdrawals before you must provide your PAN.
- Purchasing Vehicles – PAN to be quoted only if value exceeds 5 lakh rupees
- Immovable Property – PAN reporting is mandatory when conducting any type of property transaction such as purchase, sale, gift or joint development when the transaction value is greater than 20 lakh rupees
- Spending on Hospitality and Lifestyle – PAN to be required when making payment for a hotel, restaurant or event services where the payment is greater than 1 lakh rupees
- Insurance Account Relationships – PAN is required for establishing an insurance relationship with an account-based structure
- The changes will help ease the administrative burden of smaller transactions but would continue to allow for oversight on larger transactions.
- Changes in the HRA Calculation (House Rent Allowance) – More locations qualify for a higher level of exemption
Under existing laws, only a few metropolitan areas allow salaried taxpayers to claim 50% of their HRA under the old tax regime. The new draft would extend this additional benefit to include Mumbai, Delhi, Kolkata and Chennai as well as the additional metropolitan areas of Pune, Hyderabad and Bengaluru, which should benefit urban renters in fast growing municipalities with greater tax benefits.
Enhanced Employee Benefits – Employee benefits and allowances have been adjusted through adjustments of the valuation norms which will result in significantly less time to calculate and in many cases a more generous benefit than they had before the adjustment.
- Higher tax exemption limits for gifts, meal vouchers, education and medical loans.
- Valuation of benefits provided by the employer in the form of a car (based on the size of the engine) and a meal (maximum of Rs. 200) will be taxed at no value.
- The objective of this is to eliminate confusion on how to administer, and better align perquisites to the current economic environment.
Examples of digital or compliance improvements would include the following:
1. Mandatory reporting of cryptocurrency transactions by cryptocurrency exchanges to the income tax department to increase transparency.
2. Recognition of Central Bank Digital Currency (CBDC) as a legitimate method of payment under the tax rules.
3. A better method for determining the fair market value (fair market value) of assets such as real estate or jewelry for tax purposes.
Public consultations on these draft rules will end on 22 February. Stakeholders such as professional and individual taxpayers may submit feedback prior to the finalization of the rules likely during the first week of March. These rules will be effective for tax compliance under the new Act for the tax year beginning on 1 April, 026.
What Remains Unchanged?
The overall Income Tax Act and the announcement of the Budget have created the original tax rates/slabs as well as what exemptions will exist (ie. no tax on income below a defined amount), rather than this draft of rules.
In addition, it appears that this draft of rules will deal with procedures, thresholds, reporting, and compliance (i.e., no significant changes to the tax liabilities).
