Part 1
The Indian government has released the Draft Income-tax Rules 2026, set to come into effect from April 1, 2026, alongside the new Income-tax Act 2025. The Draft Income Tax Rules, 2026 was released by the Central Board of Direct Taxes seeking Opinions and views from all sections of the society and will be reviewed finalised around 22nd February 2026.
The Draft Income-tax Rules 2026 isn’t a complete overhaul-it’s more of a modernisation exercise. The core framework remains intact, but several monetary thresholds have been significantly increased to reflect current economic realities. Many of these limits hadn’t been revised in years, some even decades.
The proposal is a part of Draft Income-tax Rules, 2026 made available to stakeholders on Saturday, 14 February 2026. The proposals, once approved, will apply from April 1, 2026.
The Gist of Change are as follows:
| Category | Changes | Details |
| Allowances | Changes to House Rent Allowance, Child Education Allowance, Child Hostel Allowance IT Rule Reference: Rule 2A (1962) → Rule 279 (2026) IT Rule Reference: Rule 2BB (1962) → Rule 280 (2026) | HRA: Increased to 50% of basic salary as HRA exemption limit instead of current 40%. Child Education Allowance: Increased from Rs 2400/- per Annum to Rs 72000/- per Annum. * Child Hostel Allowance: Increased from 7200/- to Rs 2,16.000/- per Annum*. * Upto a Max of 2 Children |
| Perquisites | Changes to Free Meals Exemption, Annual Gift Exemption, Education in Employer-Owned Institutions, IT Rule Reference: Rule 3 (1962) → Rule 15 (2026) | Free Meals: Increased from Rs 50/- per mean to upto 200/- per Meal. Annual Gift Exemption: Increased from Rs 5000/- to Rs 15000/ per Annum. Education in Employer-Owned Institutions: Increased from Rs 12000/- to Rs 36000/ per Annum, per Child. |
| HRA Cities | Addition of 4 new Cities as Metro cities – Bangalore, Hyderabad, Pune & Ahmedabad IT Rule 2A (1962) → Rule 279 (2026) | The newly added cities would also enjoy exemption for HRA upto 50% like other Metro Cities. |
| Loans | Threshold limits raised for Interest-Free Loans from Employers IT Rule Reference: Rule 3 (1962) → Rule 15 (2026) | Threshold for Perquisite tax applicability increased from 20000/- to 200000/- on Interest free concessional loans from Employers. |
| Company Cars | Revision of Perquisite valuation for Company cars IT Rule Reference: Rule 3(2) (1962) → Rule 15(3) (2026) | Perquisite valuation varies based on ownership, Usage, Cubic Capacity of the Car and the mode of payment. Key: If an employee-owned car for official purposes is used and reimbursed – the deduction allowed has increased from ₹1,800 or ₹2,400 to ₹5,000 or ₹7,000 per month. |
| Leave Travel Concessions | Updated Travel Rates IT Rule Reference: Rule 2B (1962) → Rule 278 (2026) | For LTC claims involving Bus travel without a recognised a public transport system, the rates has increased to Rs 30/- per KM from Rs 20/- |
| Transport Allowance for Employees with Disabilities * | Changes to Exemption Limits IT Rule Reference: Rule 2BB (1962) → Rule 280 (2026) | Exemption limits increased to physically challenged employees from: Metro Cities: Rs 3200/- to 15000/- + DA Non-Metro Cities: Rs.3200/- to 8000/- + DA * Available under Both Regimes. |
| Exemptions for Underground Allowance for employees working in Underground Mines and in Uncongenial and unnatural conditions | Changes to exemptions limits IT Rule Reference: Rule 2BB (1962 → Rule 15(1) 2026) | Increased from Rs 800/- per month to 15% of Basic Pay as exemption. |
⚠️ Note: These exemptions are available only under the Old Tax Regime. Under the New Tax Regime these allowances are not available.
Part 2 – Changes to Forms and Formats
Starting April 1, 2026, familiar tax forms will get new numbers. Form 16 becomes Form 130, and Form 26AS will be known as Form 168. This change is part of the new Income Tax Act, 2025. While initial adjustments may occur, the transition aims for a simplified tax framework. Proceedings for earlier tax years will continue under old rules.
The Income-tax Act, 2025 read with the Draft Income Tax Rules 2026 has updated the numbering of several statutory forms, with the corresponding changes notified under the Draft Income-tax Rules, 2026. Based on the notified form matrix, the references mentioned above are corrected and summarised below:
| Form Number as per New Draft Rules 2026 | Current Form Numbers (1962) |
| 26 | 3CA, 3CB, 3CD |
| 130 | 16 |
| 131 | 16A |
| 138 | 24Q |
| 140 | 26Q |
| 144 | 27Q |
| 168 | 26AS |