Income Tax Rules, 2026 Notified: HRA, Allowance And Form Changes That Salary Earners And Corporates Must Prepare For

1. Introduction

The Central Board of Direct Taxes (CBDT) has announced the Income Tax Rules of 2026 which will come into effect on April 1 2026 together with the new Income Tax Act of 2025. The Rules replace the 1962 framework because they reduce the total number of rules from 511 to 333 and the number of forms from 399 to 190 through consolidation and renumbering. The Rules maintain slab rates at their current levels but they bring substantial changes to the system because they update various areas including allowances perquisite valuations vital forms and operational limits which directly impact employees and their companies and the functions of corporate tax departments.

2. What Changes For Salaried Individuals And Perquisites?

50 percent HRA exemption extended to eight cities

Under the old rules, the higher 50 percent House Rent Allowance (HRA) exemption applied only to Mumbai, Delhi, Kolkata and Chennai. From FY 2026-27, the 50 percent limit is extended to eight cities, the original four plus Ahmedabad, Bengaluru, Hyderabad and Pune. Other locations continue with a 40 percent salary cap under the old regime. This change benefits employees who live and work in these fast growing urban centres and who continue under the old tax regime. HRA exemption remains unavailable under the simplified new regime.

Children’s education and hostel allowances multiplied

The Rules dramatically increase two long stagnant allowances that are available under the old regime where included in the pay package.

1. Children’s education allowance: up from ₹100 to ₹3,000 per month per child, for up to two children.
2. Hostel expenditure allowance: up from ₹300 to ₹9,000 per month per child, for up to two children.

These limits, set out in Rule 280 of the Rules 2026, apply across India and can substantially improve the tax efficiency of salary structures for employees with school going children under the old regime.

Meal vouchers, gift vouchers and other perquisites

Other common workplace benefits have also been updated.

1. Meal vouchers: the tax exempt amount per meal rises from ₹50 to ₹200, reflecting inflation and the practical cost of meals.
2. Employer gifts: the annual tax free limit for employer provided gifts and vouchers increases from ₹5,000 to ₹15,000.
3. Interest free or concessional loans: loans for specified medical emergencies, or total loans up to ₹2 lakh, may now be treated as non taxable perquisites, up from earlier limits around ₹20,000.
4. Company cars: the monthly perquisite value for employer provided cars has been revised upwards to bands of roughly ₹5,000–₹7,000 per month, plus about ₹3,000 where a chauffeur is provided, depending on engine capacity.

For employees in the old regime, these revisions can materially alter the optimal mix of cash versus benefits; for employers, they require a review of salary templates and HR policies.

3. How Have Key Forms Been Renumbered And Redesigned?

Form 26: the new consolidated tax audit report

From FY 2026 27, the existing tax audit forms 3CA, 3CB and 3CD are consolidated into a single, modernised Form 26 under the Rules 2026. Form 26 will be the consolidated tax audit report and statement of particulars for businesses whose accounts require audit under Section 63 of the new Act. Analyses of the draft and final formats note that it now contains around 55 segment wise clauses, up from 44 in the earlier Form 3CD, to capture deeper financial and compliance data.

Key new disclosures include:

1. Digital infrastructure: details of accounting software, cloud providers, IP addresses and backup server locations to evidence IT governance and compliance with electronic books rules.
2. Cross tax linkage: reconciliation fields to align direct tax data with GST records and to split expenses between registered and unregistered suppliers.
3. ICDS reporting: granular line item disclosures to show the impact of Income Computation and Disclosure Standards on book profit to tax profit reconciliation.
4. Transaction analytics: enhanced questions on high value cash dealings, loans, related party transactions and certain cross border items.

For businesses and auditors, this transforms the audit report into a broader compliance and risk analytics tool rather than a narrow reconciliation exercise.

Form 168: the new avatar of Form 26AS

The familiar Form 26AS annual tax credit and information statement is renumbered as Form 168 under the Rules 2026. The document serves its primary function to present all TDS and TCS and advance tax payments and specific high value transactions which connect to the taxpayer's PAN in one comprehensive report. A notable change highlighted in commentary is that Form 168 will not display the Aadhaar number, reinforcing PAN based identification and reducing exposure of sensitive identifiers in routine downloads.

Other “smart” forms for salary, exemptions and TDS

Several high use forms have been renumbered and updated to support the new Act and Rules.

Form 130: The TDS certificate for salary and pension income now uses Form 130 as a replacement for Form 16, and displays salary and pension income according to the current legal framework and provides space for new allowance and perquisite value updates.

Form 124: The new Form 124 serves as the replacement for Form 12BB which employees use to declare their investments and deductions because the new form requires them to disclose their landlord relationship for HRA claims which increases the documentation requirements.

Form 140: replaces Form 26Q as the quarterly TDS return for non salary payments to residents, with revised section references and additional reporting fields.

Form 141: consolidates property related and certain rent TDS compliances earlier covered by forms such as 26QB, 26QC and 26QE into a unified reporting format.

For employers and payers, these changes require careful mapping of old form numbers to the new ones in payroll systems, ERPs and internal SOPs to avoid confusion after 1 April 2026.

4. What Do Rule 46 And Electronic Books Require?

Rule 46 of the Income tax Rules, 2026 (carrying forward and updating the logic of old Rule 6F) introduces a more demanding regime for electronic books of account. Businesses and specified professionals that maintain books electronically must ensure that:

1. Books are accessible from India at all times, either because the primary system is in India or through robust, documented remote access arrangements.
2. Back up servers for such books are physically located in India, supporting investigation and continuity.
3. Entries are updated on a daily basis, closing off long periods of manual or batch posting.

Guidance notes and practitioner commentary emphasise that “books” here include not just ledgers but also supporting digital documents and logs needed to substantiate entries. The organizations require architectural modifications because their international ERP systems and shared service centres need them to establish three specific requirements which include data replication to Indian regions and role based access for Indian tax teams and procedures which determine how to freeze and export books during audits and surveys and investigations.

5. Have Filing Deadlines And PAN Thresholds Changed?

Extended time for non audit returns and revised filings

The Rules 2026 align due dates with the new Act and provide some breathing space for certain taxpayers.

1. For non audit business taxpayers (typically those filing ITR 3 or ITR 4 without mandatory audit), the return filing deadline is extended from 31 July to 31 August.
2. The window to file a revised return is extended from nine months to 12 months from the end of the tax year, i.e., until 31 March of the following year, subject to a nominal late fee where applicable.

The extended revision period enables taxpayers to fix authentic mistakes and add information they received after the deadline which includes foreign tax credits and postponed TDS adjustments without resorting to more contentious proceedings.

6. Higher thresholds for quoting PAN in high value transactions

The Rules also update monetary thresholds for mandatory PAN quoting in certain transactions, reflecting inflation and aiming for more targeted information reporting.

1. Hotel, restaurant, banquet or event management payments: PAN must be quoted if the payment exceeds ₹1,00,000, up from the earlier ₹50,000 limit.
2. Immovable property: for purchase, sale, gift or certain joint development agreements, PAN is mandatory where the transaction value exceeds ₹20 lakh, up from ₹10 lakh.
3. Motor vehicles: PAN is now required for transactions above ₹5,00,000, explicitly including high value two wheelers such as motorcycles, while tractors are excluded.

These revised thresholds sit alongside existing rules on cash deposits and withdrawals, and together they sharpen the Income tax Department’s ability to match information across financial and property transactions.

6. What Should Employers And Corporates Do Before FY 2026-27?

Salary and HR policy updates

Employers should work with tax advisers to:

1. Re design salary structures to take advantage of increased allowances and updated perquisite valuations where employees remain in the old regime (especially in the eight 50 percent HRA cities).
2. Update HRA and rent reimbursement processes to capture landlord relationship details in line with Form 124, and align documentation (rent agreements, receipts) accordingly.
3. Adjust internal policies on gifts, meal benefits, company cars and staff loans to reflect the new exemption ceilings and valuation rules.

Systems, forms and audit readiness

Corporate finance and tax teams should:

1. Map all old forms (Form 16, 16A, 24Q, 26Q, 27Q, 26AS and 3CA/3CB/3CD) to their new equivalents (Forms 130, 131, 138, 140, 144, 168 and 26) in ERPs, payroll systems and reporting tools.
2. Prepare for the expanded scope of Form 26 by identifying additional data fields, digital infrastructure details, GST linkages, ICDS adjustments and high value transactions and ensuring that these can be extracted reliably.
3. Review electronic books architecture and backup strategies to comply with Rule 46, documenting how daily updates, India based backups and access controls will be evidenced in future audits.

Practical FAQs On Income tax Rules, 2026

Q. Do these changes apply under both the old and new tax regimes?

Yes, the Rules 2026 support the new Act as a whole, but certain allowances such as children’s education and hostel allowances and HRA deductions are available only under the old regime and where the relevant components are part of the employee’s pay package.

Q. What happens to my existing Form 26AS on the e filing portal after 1 April 2026?

From FY 2026 27, the annual tax credit statement will appear as Form 168 instead of Form 26AS, but it will continue to display PAN linked TDS/TCS, advance tax and specified transaction information; historical 26AS data for earlier years is expected to remain accessible for reference.

Q. Do all businesses now need India based servers for their accounting systems?

It is required that the electronic books be accessible from India at all times and that backup servers for such books be physically located in India, but the Rules do not mandate that the primary ERP system must be hosted in India because international systems can meet requirements through backup systems and access agreements which are documented.

Q. By when should employers update their salary structures and payroll systems?

Since the Rules take effect from 1 April 2026, employers should aim to reflect the new allowances, perquisite valuations and form numbers in salary structures, employment contracts and payroll software before issuing the first payslips of FY 2026-27. Early testing of new forms (130, 124, 140, 141 and 26) will reduce the risk of errors once statutory deadlines apply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.