Income Tax Rules 2026 Notified: 10 Key Changes for Employees, Employers, and CAs from April 1

The Central Board of Direct Taxes (CBDT) has formally notified the Income-tax Rules, 2026 vide Notification No. G.S.R. 198(E) dated March 20, 2026, under Section 533 of the Income-tax Act, 2025. These rules take effect from April 1, 2026, and establish the complete procedural framework for the new Income-tax Act. From revised perquisite valuations for company cars to expanded HRA benefits, higher PAN thresholds, and simplified ITR forms, here is everything CAs, employers, and salaried taxpayers need to act on before April 1.

1. HRA Exemption Expanded to Eight Metro Cities

Under the old tax regime, the higher HRA exemption of 50% of salary was available only to employees in Delhi, Mumbai, Kolkata, and Chennai. The final rules add four more cities to this Category 1 list: Bengaluru, Pune, Ahmedabad, and Hyderabad. Employees in these eight metros can now claim HRA exemption at 50% of salary, while those in other cities continue at 40%.

Note: HRA exemption is available only under the old tax regime. Taxpayers who have opted for the new (default) regime cannot claim this benefit.

2. Motor Car Perquisite Valuation Revised Upward

The taxable perquisite value for company-provided motor cars used partly for personal purposes has been significantly revised:

Component	Old Valuation (Per Month)	New Valuation (Per Month)
Car up to 1.6 litre (running costs by employer)	Rs 1,800	Rs 5,000
Car above 1.6 litre (running costs by employer)	Rs 2,400	Rs 7,000
Chauffeur provided by employer	Rs 900	Rs 3,000

Electric vehicles are treated at par with cars having engine capacity up to 1.6 litre, attracting the lower concessional valuation of Rs 5,000 per month.

Impact: Employees with employer-provided cars will see a higher taxable perquisite in their Form 16 from FY 2026-27. Employers must update payroll systems to reflect the revised values.

3. Education and Hostel Allowance: Substantial Increase

Two allowances that had remained unchanged for decades have been revised sharply:

• Children Education Allowance: Exemption increased from Rs 100 per month per child to Rs 3,000 per month per child (maximum two children).
• Children Hostel Expenditure Allowance: Exemption increased from Rs 300 per month per child to Rs 9,000 per month per child (maximum two children).

This means an employee with two children in a hostel can now claim an annual exemption of up to Rs 2,88,000 (Rs 12,000 per month x 2 children x 12 months), compared to just Rs 9,600 under the old limits.

4. Gift and Voucher Exemption Tripled

The perquisite value of gifts, vouchers, or tokens provided by an employer is treated as nil if the aggregate value does not exceed Rs 15,000 during a tax year, revised upward from the earlier threshold of Rs 5,000. Festival gifts, Diwali bonuses in the form of vouchers, and similar employer-provided benefits up to this limit will not attract tax.

5. Meal Exemption Increased to Rs 200

The exemption limit for free food and non-alcoholic beverages provided by an employer during working hours has been increased from Rs 50 per meal to Rs 200 per meal. This is a significant update for companies operating subsidised canteens or providing meal allowances.

6. PAN Quoting Thresholds Revised

Several key thresholds for mandatory PAN quoting have been updated:

Transaction	Old Threshold	New Threshold
Motor vehicle purchase	All motor vehicles	Above Rs 5 lakh only
Cash deposits/withdrawals (aggregate)	Rs 50,000 per day	Rs 10 lakh per financial year (aggregate)
Immovable property transactions	Rs 10 lakh	Rs 20 lakh

The shift from a daily cash limit to an annual aggregate limit for PAN quoting simplifies compliance while still capturing high-value transactions.

7. SFT Reporting: Insurance and Mutual Funds

The Statement of Financial Transactions (SFT) reporting framework has been updated with two significant changes:

• Insurance premium reporting: Insurers must now report premiums exceeding Rs 5 lakh (where PAN is available) or Rs 2.5 lakh (where PAN is not available).
• Mutual fund reporting removed: The earlier requirement for mutual fund houses to report investments of Rs 10 lakh or more per investor per financial year has been removed.

These changes will directly affect the data flowing into each taxpayer’s Annual Information Statement (AIS).

8. ITR Forms and Filing Deadlines

The rules consolidate the tax form ecosystem from 399 forms to 190 forms. The familiar ITR-1 to ITR-7 structure continues, but with sharper eligibility criteria and pre-fill features.

Key filing deadline change: ITR-3 and ITR-4 (for business/profession income, non-audit cases) now have a due date of August 31, extended from July 31. ITR-1 and ITR-2 deadlines remain at July 31.

The terms “Previous Year” and “Assessment Year” are formally replaced by a single concept: Tax Year.

9. Zero Coupon Bond Framework

New rules govern zero coupon bonds issued by infrastructure capital companies or funds. Key requirements include:

• Application at least three months before issue date
• Bond maturity between 10 and 20 years
• Minimum two investment-grade credit ratings from SEBI-registered agencies
• Mandatory listing on a recognized stock exchange in India

10. Stock Exchange Recognition Conditions

Recognised stock exchanges must now comply with enhanced transparency requirements: maintain audit trails for seven tax years, prevent deletion of transaction records, and submit monthly reports on revised transactions. These conditions support the government’s broader push for data integrity in capital markets.

Practical Implications

For CA Professionals

Send an advisory to all employer clients immediately. Payroll systems must be updated before the April salary cycle to reflect revised perquisite values for motor cars, higher education and hostel allowance limits, the new meal exemption, and the gift threshold. File a note with audit clients about the SFT reporting changes and removed mutual fund thresholds.

For Employers and HR Teams

Update your CTC structures and payroll software before April 1. The motor car perquisite increase will raise taxable salary for affected employees. Conversely, the education allowance and hostel allowance increases provide meaningful tax relief that should be communicated to employees proactively.

For Salaried Employees

If you live in Bengaluru, Pune, Ahmedabad, or Hyderabad and are paying rent, consider whether the old tax regime with 50% HRA exemption is more beneficial for you from FY 2026-27. Also review your employer’s gift and meal policies to ensure you capture the higher exemptions.

For Startups and MSMEs

The extended ITR-3 and ITR-4 filing deadline (August 31 instead of July 31) gives you an additional month to file. Use this time to reconcile your books with the new form numbers and updated SFT data in your AIS.

Key Deadlines

Action	Deadline	Who Must Act
Update payroll for revised perquisite values	Before April 1, 2026	All employers
Review old vs new regime for HRA benefit	Before April 1, 2026	Salaried employees in 8 metros
File ITR-1 / ITR-2 for Tax Year 2026-27	July 31, 2027	Salaried individuals
File ITR-3 / ITR-4 for Tax Year 2026-27	August 31, 2027	Business/profession income earners

Next Steps

The final notification closes the loop on the procedural framework for the Income-tax Act, 2025. With 333 streamlined rules replacing 511, and 190 forms replacing 399, the intent is clear: simpler compliance, fewer disputes, and better data integration. But the transition demands immediate action from employers, CAs, and taxpayers. Update your systems, review your tax regime choice, and prepare for a fundamentally restructured filing experience from April 1.

Need help navigating the new Income Tax Rules 2026? The tax advisory team at A S Banka Advisors Private Limited can review your payroll setup, optimise your tax regime choice, and ensure compliance readiness before April 1. Talk to an expert today.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified professional for advice specific to your situation. Information is current as of March 24, 2026.