The Central Board of Direct Taxes (CBDT) on Friday notified the Income-tax (I-T) Rules, 2026, which will come into effect on April 1, 2026, as part of the new I-T Act, 2025. Finance Minister Nirmala Sitharaman said the new tax framework would significantly ease compliance for small taxpayers and bring down litigation.
Speaking at the launch of the nationwide awareness campaign, PRARAMBH 2026, Sitharaman said India’s small business owners and professionals were “really the engine of our economy”, and that under the new Act, businesses with turnover of up to ₹10 crore, subject to conditions, would be exempt from maintaining detailed books of account and undergoing audit. “This should come as a big relief.”
She said the new law had been designed to reduce errors, disputes and compliance costs, and to shift behaviour “from confusion to compliance”. Reducing litigation, she added, must be a key outcome of the new framework. “Every case that goes to a tribunal is a failure on our part.”
The newly notified rules introduce changes across salary taxation, compliance reporting, transfer pricing and foreign tax credit claims.
Under Rule 279, read with Schedule III, the higher 50 per cent House Rent Allowance (HRA) exemption will now apply to Bengaluru, Hyderabad, Pune and Ahmedabad, placing them alongside Mumbai, Kolkata, Delhi and Chennai. For all other locations, the limit will remain 40 per cent of salary.
Amit Maheshwari, managing partner at AKM Global, said the move formally recognised rising rental costs in emerging metro cities like Bengaluru, Hyderabad, Pune and Ahmedabad. However, he noted that Noida and Gurugram continued to be treated as non-metros despite similar rent levels, resulting in lower tax relief for salaried employees there.
The rules also clarify the tax treatment of employer-provided electric vehicles (EVs). Under Rule 15, electric vehicles will now be treated on a par with smaller petrol and diesel cars of up to 1.6-litre engine capacity when used partly for official and partly for personal purposes. This will determine how much of the benefit is taxed as a perquisite.
Maheshwari said the change removed a longstanding ambiguity, since earlier rules were based on engine capacity, a metric not relevant for electric vehicles. The clarification, he said, would help employers and payroll teams apply tax treatment consistently while supporting the government’s push for cleaner mobility.
The CBDT has also reduced the reporting threshold under the Statement of Financial Transactions for insurance premium payments. Insurers will now have to report premium receipts above ₹5 lakh where Permanent Account Number (PAN) details are available, and above ₹2.5 lakh where they are not.
This would widen the reporting net and bring more insurance transactions into taxpayers’ Annual Information Statements, improving transparency and strengthening the compliance trail, said Maheshwari.
In transfer pricing, the rules consolidate safe-harbour provisions for information technology-enabled services, contract research & development, software development and knowledge process outsourcing into a single category called “information technology services”, with a uniform margin of 15.5 per cent. The deadline for filing safe-harbour applications has also been aligned with the I-T return filing date.
Jitendra Jain, partner at Price Waterhouse, said companies opting for safe harbour would also have to get the application certified by their chief executive officer or managing director. In addition, the ₹2,000 crore turnover threshold would now be tested only in the first year of the five-year safe-harbour period.
Abhishek A Rastogi, partner at Rastogi Chambers, said the rationalisation was expected to simplify compliance, reduce disputes and provide greater certainty on tax margins. Aligning timelines and easing turnover conditions, he added, would help companies plan their filings more efficiently.
Rule 76 introduces a structured process for claiming foreign tax credit. Taxpayers will now need to file Form 44, giving details of foreign income and taxes paid, along with a chartered accountant’s certification in specified cases. Credit for disputed foreign taxes will not be allowed immediately and will be granted only after resolution, supported by Form 45, according to experts.
Maheshwari said the move brought greater consistency and documentation to foreign tax credit claims, ensuring that credits were granted only after proper verification.
Sitharaman said the new Act would also reduce the need for interpretation and court intervention by making provisions less ambiguous and easier to understand. Citing issues like pre-construction interest on housing loans, which earlier led to disputes, she said these had now been clearly provided for under the new law.
Besides the rollout, the government launched Income Tax Website 2.0 and a nationwide outreach campaign. Sitharaman said digital platforms had been put in place so that taxpayers could “ask questions, communicate, and file”, while officials had been directed to go beyond metros and engage with different sections of society, including students.
“You are not just passing laws… you are the face of the government’s relationship with the taxpayer,” she said, urging tax officials to adopt a more facilitative approach. “The taxpayer is not your adversary. The taxpayer is your partner in nation building.”
She said the new Act replaced the Income-tax Act, 1961, which had become unwieldy after more than 4,000 amendments over the decades. The new law reduces the number of sections from 819 to 536, chapters from 47 to 23, and cuts the length from 512,000 words to about 260,000 words. It also removes the distinction between “previous year” and “assessment year”, introducing a single tax year.
“When you give people simplicity, they embrace it,” she said.
The legislation was prepared in about six months, involving nearly 7,000 person-hours, and was examined by a select committee of Parliament, which made 196 recommendations, of which 194 were accepted.
According to Sudhakar Sethuraman, partner at Deloitte India, from April 1, 2026, taxpayers would have to use new forms, formats and terminology, comply with revised disclosure requirements, and adapt to updated perquisite valuation and reporting rules. From a policy standpoint, he said, the emphasis had clearly shifted towards simplification, standardisation and greater transparency.
Rastogi said taxpayers and employers might need to proactively reassess their compliance frameworks to ensure a smooth transition from April 2026.
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