The Income Tax Rules, 2026 (IT Rules 2026) introduce significant updates for salaried employees in India with effect from 1 April 2026 (Tax Year 2026–27). While tax rates and slab structures remain unchanged under both the Old and New Tax Regimes, the updated framework introduces material changes to employee benefits, payroll valuation methodologies, and employer compliance requirements. 

The Income Tax Act, 1961 has been replaced by the Income Tax Act, 2025 (ITA 2025), alongside updated statutory reporting forms and enhanced documentation requirements for employee claims processed through payroll. 

India tax updates - lnscp

House Rent Allowance (HRA): Expanded Metro Coverage  

Under Rule 279 of the Income-tax Rules, 2026, the list of metropolitan cities eligible for 50% HRA exemption under Schedule III has been expanded. 

The updated metro cities are: 

  • Mumbai
  • Delhi
  • Chennai
  • Kolkata
  • Hyderabad
  • Bengaluru
  • Pune
  • Ahmedabad   

Documentation Requirements for HRA Claims  

Employers must ensure the following supporting documentation is collected and retained: 

  •  Landlord Aadhaar number (Aadhaar – Unique Identification Authority of India issued identity number)
  • Landlord PAN (Permanent Account Number), where annual rent exceeds INR 1,00,000  
  • Declaration of relationship with landlord
  • Valid rental agreement (submitted at year end or on exit)  
  • Valid rental receipts (submitted at year end or on exit)  

Perquisites: Revised Exemption Thresholds  

Under the revised valuation framework in Rule 15 of IT Rules 2026, several perquisite exemption limits have been significantly increased. 

Perquisite   Up to 31 March 2026 (IT Rules 1962)   From 1 April 2026 (IT Rules 2026)  
Gifts, vouchers or tokens   INR 5,000   INR 15,000  
Free or concessional food and non-alcoholic beverages   INR 50 per meal   INR 200 per meal  
Interest-free medical treatment loan (specified diseases)   INR 20,000   INR 2,00,000  
Education facilities (per child)   INR 1,000 per month   INR 3,000 per month  

Motor Car Perquisite Valuation: Updated Framework (Including EVs)  

The valuation of employer-provided or employer-reimbursed motor vehicles has been revised under IT Rules 2026. This includes explicit coverage of electric vehicles (EVs) under the reimbursement framework. 

Employer Bears or Reimburses Running Costs  

Vehicle Type   Up to 31 March 2026   From 1 April 2026  
Car up to 1.6L engine   INR 1,800 per month   INR 5,000 per month  
Car above 1.6L engine   INR 2,400 per month   INR 7,000 per month  
Chauffeur provided   INR 900 per month   INR 3,000 per month  

Employee Bears Running Costs  

Vehicle Type   Up to 31 March 2026   From 1 April 2026 
Car up to 1.6L engine   INR 600 per month  INR 2,000 per month  
Car above 1.6L engine   INR 900 per month   INR 3,000 per month  
Chauffeur provided   INR 900 per month   INR 3,000 per month  

Two-Wheeler Fuel and Maintenance Reimbursement  

The exemption threshold for two-wheeler fuel and maintenance reimbursements has been increased: 

  • From INR 900 per month to INR 3,000 per month  

Allowances: Increased Exemption Thresholds  

Several allowances under Schedule III have been revised upwards, reflecting increased exemption limits across key categories. 

Key updates include: 

  • Children Education Allowance: INR 100 → INR 3,000 per month per child

  • Children Hostel Allowance: INR 300 → INR 9,000 per month per child

  • Compensatory Field Area Allowance: INR 2,600 → INR 13,500 per month

  • Compensatory Modified Field Area Allowance: INR 1,000 → INR 8,000 per month

  • Underground Allowance: INR 800 per month → 15% of basic salary

 Transport and Location-Based Allowances  

The updated framework also revises several transport and hardship-related allowances: 

  • Transport allowance:

    • INR 15,000 per month + Dearness Allowance (DA) in metro cities

    • INR 8,000 per month + DA in other locations

  • High altitude allowance: increased up to INR 7,000 per month above 15,000 feet

  • Counter insurgency allowance: increased to INR 22,000 per month

  • Highly active field area allowance: increased to INR 22,000 per month

  • Special duty allowance (Andaman & Nicobar Islands and Lakshadweep): revised to 10%–20% of basic pay depending on location   

Compliance and Documentation Requirements  

The IT Rules 2026 introduce enhanced documentation requirements across key employee claims processed through payroll. 

House Rent Allowance (HRA)  

  • Landlord Aadhaar number

  • Landlord PAN (mandatory where rent exceeds INR 1,00,000 per annum)

  • Relationship declaration

  • Rental agreement (year-end or exit submission)

  • Valid rental receipts (submitted at year end or on exit) 

Home Loan Interest Claims  

  • Loan certificate required at year end or exit

Additional Requirements  

  • Leave Travel Concession (LTC – Leave Travel Concession) supporting documentation

  • Evidence for deductions under Chapter VIII of the Income Tax Act, 2025

  • Enhanced evidentiary requirements under Rule 205   

Statutory Forms: Revised Structure  

The statutory reporting framework has been restructured under IT Rules 2026: 

 Old Form    New Form    Purpose  
12B & 12BAA  122   Salary details, Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) reporting  
12BA  123   Perquisites and benefits 
12BB   124   Employee claims and supporting evidence  
16   130   TDS certificate issued by employer  

Key Employer Considerations  

While tax rates remain unchanged, the Income Tax Rules, 2026 introduce operational changes that will have a direct impact on payroll and mobility programmes, including: 

  • Updates to payroll system configuration and processing logic

  • Revised benefit valuation methodologies

  • Increased documentation and evidentiary requirements

  • Changes to assignment cost planning and projections

  • Updated statutory reporting structures and form submissions 

India – Global Insights  

For further guidance on tax, payroll and compliance developments in India, visit our India Global Insights page on the activpayroll website

Next Steps  

For further information on the Income Tax Rules, 2026 and their impact on payroll and compliance in India, please contact our expert team via our Contact Us form and our specialists will be happy to assist with your queries. 

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