India’s tax compliance landscape is set for a significant reset. The Central Board of Direct Taxes (CBDT) has released the draft Income-Tax Rules, 2026,
offering the first detailed roadmap for how the Income-Tax Act, 2025 will operate from April 1, 2026. The draft has been opened for public comments until February 22, 2026, after which the final rules will be notified. While the new Act was passed last year, several operational mechanics were left to subordinate legislation. The draft rules now fill those gaps — and they signal a calibrated shift in approach: easing compliance for routine transactions while tightening reporting standards in high-risk or high-value areas.For taxpayers, this means both relief and heightened scrutiny — depending on the nature of their transactions. PAN Rules Relaxed for Routine Banking, Tightened for Insurance One of the most visible changes for individuals is the sharp revision in PAN-quoting thresholds. Under current rules, PAN must be quoted for a cash deposit exceeding Rs 50,000 in a single day. The draft rules propose a far more generous limit: PAN would be required only when aggregate cash deposits or withdrawals across bank accounts exceed Rs 10 lakh in a financial year. Tax experts say this will significantly reduce compliance burdens for small and routine banking transactions. Cash payments at hotels, restaurants or event venues will require PAN only if they exceed Rs 1 lakh, up from the earlier Rs 50,000 threshold. Similarly, PAN will now be mandatory for vehicle purchases only if the transaction value exceeds Rs 5 lakh, easing compliance for entry-level buyers. Property transactions also see relief. The threshold for quoting PAN is proposed to rise from Rs 10 lakh to Rs 20 lakh. However, insurance transactions move in the opposite direction. The draft rules mandate PAN for all life insurance premium payments, regardless of amount. Earlier, PAN was required only if annual premiums exceeded Rs 50,000. In addition, the government has reiterated that Unit Linked Insurance Plan (ULIP) maturity proceeds will be taxable if annual premiums exceed Rs 2.5 lakh — reinforcing tighter oversight of insurance-linked investments. Employer-Provided Car Perks to Attract Higher Tax For salaried employees, the biggest impact may come from revised perquisite valuations. The taxable value of employer-provided cars has remained unchanged for years. Under the existing framework, the perquisite value ranges between Rs 2,700 and Rs 3,300 per month depending on engine capacity. The draft rules propose a sharp revision. The taxable value will increase to Rs 8,000 per month for cars up to 1.6 litres and Rs 10,000 per month for cars above 1.6 litres. This revision aligns valuations with current economic realities — but it will increase taxable salary for employees availing such benefits. Higher Exemptions for Meals, Gifts and Staff Loans Not all changes add to the tax burden. The draft rules modernise several outdated exemptions:
- Tax-free employer-provided meals increase from Rs 50 per meal to Rs 200.
- The annual tax-free gift limit rises from Rs 5,000 to Rs 15,000.
- Interest-free employer loans will be exempt up to Rs 2 lakh, compared to the earlier Rs 20,000 limit.
These revisions expand the non-taxable component of salary structures, offering employers more flexibility in compensation design.
Major Relief for Parents: Education and Hostel Allowances Hiked
Families with school-going children stand to gain substantially.
The children’s education allowance exemption — currently Rs 100 per month per child (for up to two children) — is proposed to rise to Rs 3,000 per month per child.
The hostel expenditure allowance will increase from Rs 300 per month to Rs 9,000 per month per child.
Employees of educational institutions will also benefit, with the tax-free value of free or concessional education for their children proposed to increase from Rs 1,000 to Rs 3,000 per month per child.
For middle-class families, these changes could materially reduce taxable income.
HRA Exemption Expanded to More Cities
Under the old tax regime, House Rent Allowance (HRA) exemptions differ by city category.
Currently, only Delhi, Mumbai, Kolkata and Chennai qualify for the higher 50% HRA exemption. Other cities are capped at 40%.
The draft rules propose to include Bengaluru, Hyderabad, Pune and Ahmedabad in the higher exemption category. For employees living in these cities, a larger portion of HRA would become tax-free, lowering effective tax liability.
Stricter Compliance, Digital Scrutiny and Foreign Income Reporting
While routine transactions see relaxation, compliance norms are tightening in other areas.
The draft rules retain the ITR-1 to ITR-7 structure but introduce stricter eligibility conditions and enhanced disclosures.
A new Rule 166 clearly defines when a tax return will be treated as defective — including missing schedules, unpaid taxes or mismatched MAT/AMT credit claims — placing greater responsibility on taxpayers at the filing stage.
Tax notices and orders will increasingly be delivered via a mobile app with real-time alerts, reinforcing a digital-first compliance framework.
For individuals earning foreign income, claiming Foreign Tax Credit will now require certification from a Chartered Accountant if the foreign tax paid exceeds Rs 1 lakh. Previously, self-certification was sufficient.
The Bigger Picture
Taken together, the draft Income-Tax Rules, 2026 reflect a clear policy direction.
Routine financial activity is being de-bureaucratised. Outdated exemptions are being modernised. Family-related allowances are being expanded.
At the same time, high-value transactions, cross-border income and insurance-linked investments are coming under tighter tracking and digital scrutiny.
The broad message is evident: ease for the common taxpayer, but deeper verification where revenue risks are higher.
With implementation scheduled for April 2026, individuals and businesses have a limited window to review their tax planning strategies — and submit feedback before the rules are finalised.
