India Introduces New Income Tax Rules 2026 Under Revised Tax Law

The Income Tax Rules 2026 came into force on April 1, 2026, replacing the six-decade-old Income-tax Act, 1961 with a fully restructured framework applicable from Tax Year 2026–27 onwards. The Central Board of Direct Taxes (CBDT) issued the new rules following the enactment of the Income Tax Act, 2025, which received Presidential assent on August 21, 2025. This overhaul does not change core tax rates but rewrites how individuals, businesses, and investors calculate, report, and comply with direct tax obligations across India.

Income Tax Rules 2026: The New Legislative Structure

The Income Tax Act, 2025 reorganises all provisions into 23 simplified chapters, replacing the older law’s complex, heavily amended structure that had grown difficult to navigate over 64 years. The new legislation uses contemporary language, removes redundant provisions, and aligns India’s direct tax system with global best practices.

The most significant structural change is the abolition of “Assessment Year” and “Financial Year” terminology. Both terms now merge into a single concept called “Tax Year,” which runs from April 1 to March 31. For most taxpayers, this simplifies how they track their income period and file their returns.

New Tax Regime: Default Status and Slab Structure

The new tax regime now serves as the default tax regime under Section 202 of the Income Tax Act, 2025. Taxpayers who prefer the old regime must actively opt into it at the time of filing.

The new regime offers zero tax liability on income up to ₹12 lakh through the Section 87A rebate mechanism. Salaried individuals with a standard deduction of ₹75,000 effectively pay no tax on income up to ₹12.75 lakh under this regime.

New Tax Regime Slabs for Tax Year 2026–27

The old tax regime continues to co-exist alongside the new one, and taxpayers with significant deductions under Section 80C, 80D, or home loan interest may still benefit from choosing it.

HRA Exemption Extended to Four More Cities

The Income Tax Rules 2026 expand the 50% House Rent Allowance (HRA) exemption previously limited to Delhi, Mumbai, Kolkata, and Chennai to include four additional metros. Taxpayers in Bengaluru, Pune, Hyderabad, and Ahmedabad now qualify for the 50% HRA deduction, bringing the total list of eligible cities to eight.

This change directly benefits millions of salaried employees in India’s largest tech and manufacturing hubs. Earlier, employees in these four cities could only claim 40% HRA exemption, putting them at a disadvantage compared to peers in the original four metros.

Revised SFT Reporting Thresholds

The new rules update the Statement of Financial Transactions (SFT) limits — the thresholds above which banks, businesses, and registrars must report transactions to the tax department. These revised limits reflect inflation and aim to reduce compliance burden on routine transactions.

Key SFT changes under Income Tax Rules 2026 include:

• Motor vehicle purchases: Previously reported for all transactions (except two-wheelers); now only transactions above ₹5 lakh require reporting (includes motorcycles, excludes tractors)
• Cash payments to hotels/restaurants: Threshold raised from ₹50,000 to ₹1,00,000 per transaction
• Immovable property transactions: Reporting threshold raised from ₹10 lakh to ₹20 lakh
• Life insurance premium: Previous ₹50,000 annual threshold replaced by an account-based relationship trigger covering all transactions

ULIPs Above ₹2.5 Lakh Now Taxed as Capital Gains

The Income Tax Act, 2025 brings a material change for investors in Unit Linked Insurance Plans (ULIPs). Proceeds from ULIP policies where the annual premium exceeds ₹2.5 lakh will now attract capital gains tax instead of tax-free treatment.

This aligns the tax treatment of high-value ULIPs with that of equity mutual funds, which already attract capital gains tax at maturity. Policies where the premium stays below the ₹2.5 lakh annual threshold continue to enjoy full tax exemption.

Updated ITR Forms for FY 2026–27

CBDT has released new Income Tax Return (ITR) forms applicable from the 2026–27 Tax Year to match the restructured provisions of the Income Tax Act, 2025. These revised forms carry updated field references, replaced the older section numbering from the 1961 Act, and include new schedules for digital assets and foreign income disclosures.

The ITR filing deadline for ITR-3 and ITR-4 filers primarily self-employed professionals and business owners also undergoes revision under the new rules. Not publicly disclosed is whether the deadline shifts from July 31 or October 31; reports suggest CBDT will issue a formal circular before the filing season opens.

Income Tax Rules 2026: New Compliance Norms for PAN

The new rules revise PAN (Permanent Account Number) requirements to reflect changes in the account-based reporting system. PAN now becomes mandatory from the commencement of the account-based relationship for life insurance providers removing the older threshold-based trigger and creating a stronger audit trail from day one.

CBDT has also directed financial institutions to update their internal systems to reflect new section numbers from the 2025 Act before raising any compliance notices. Reports suggest this transition period runs until September 30, 2026, after which old section references will carry no legal standing.

Foreign Companies and Non-Residents: Streamlined Filing

The Income Tax Rules 2026 introduce a streamlined filing framework specifically designed for foreign companies operating in India. Updated forms and reporting requirements reduce the document burden on non-resident entities while bringing their compliance timelines in line with Indian domestic taxpayers.

India Briefing reports the new rules aim to make the country a more attractive jurisdiction for foreign direct investment by reducing the regulatory friction that previously accompanied cross-border tax filings.