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The Income Tax Act, 1961 has been replaced by the Income Tax Act, 2025 (ITA 2025), alongside updated statutory reporting forms and enhanced documentation requirements for employee claims processed through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.
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:
Employers must ensure the following supporting documentation is collected and retained:
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 |
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.
| 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 |
| 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 |
The exemption threshold for two-wheeler fuel and maintenance reimbursements has been increased:
Several allowances under Schedule III have been revised upwards, reflecting increased exemption limits across key categories.
Key updates include:
The updated framework also revises several transport and hardship-related allowances:
The IT Rules 2026 introduce enhanced documentation requirements across key employee claims processed through payroll.
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 |
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:
For further guidance on tax, payroll and compliance developments in India, visit our India Global Insights page on the activpayroll website.
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