Draft Income-tax Rules 2026: Key Changes, Higher Allowances & Simplified Compliance Framework

Recently, the Central Board of Direct Taxes published the Draft Income-tax Rules, 2026 to repeal the almost 6 decades old Income-tax Rules, 1962. The provisions will come into effect on 1-4-2026.

Earlier, on 8-2-2026, the Central Board of Direct Taxes issued a Press Release seeking the feedback of the stakeholders on the proposed Income-tax Rules and Forms relating to Income-tax Act, 2025 to encourage wider stakeholders’ participation.

The Income tax Department invited inputs and suggestions from stakeholders in the following 4 categories:

1. Simplification of language;

2. Reduction of Litigation;

3. Reduction of Compliance Burden;

4. Identification of Redundant/ Obsolete Rules and Forms.

To facilitate this, a utility was launched on the e-filing portal, accessible through this link: https://eportal.incometax.gov.in/iec/foservices/#/pre-login/ita-comprehensive-review.

Framework:

1. These Rules will come under the ambit of the Income- tax Act, 2025.

2. The new Rules have been simplified as compared to Income-tax Rules, 1962.

3. They have been consolidated into 333 Rules and 190 Forms.

   Earlier, the number of Rules were more than 500 and over 350 Forms.

Major changes introduced vide Draft Income-tax Rules, 2026 relating to extent to which allowance will be exempted:

1. Children Education Allowance to be increased to Rs. 3,000 per month per child up to maximum of 2 children.

2. Hostel Expenditure Allowance to be increased to Rs. 9,000 per month per child up to maximum of 2 children.

3. Counter- insurgency allowance granted to the members of armed forces operating in areas away from their permanent locations to be increased to Rs. 22,000 per month.

4. Transport allowance granted to employees having a disability to be increased to Rs. 15,000 in metro cities and Rs. 8,000 in other cities.

5. Underground allowance granted to employees working in uncongenial, unnatural climate in underground mines to be increased to 15% of Basic Pay.

6. Allowance granted to members of the armed forces in special compensatory highly active field area to be increased to Rs. 22,000 per month.

7. Siachen allowance granted to the members of armed forces to be increased to Rs. 42,500 per month.

8. Meal perquisite limit to be increased to Rs. 200 per meal.

9. House rent allowance: 50% exemption allowed in Hyderabad, Bengaluru, Pune, and Ahmedabad. Earlier, this exemption was limited to Mumbai, Delhi, Chennai, and Kolkata.

Other Benefits:

1. The value of Gift/ Voucher/ Token received by employee/ member of his household from the employer will be exempted if the value is less than Rs. 15,000.

2. Interest-free or concessional loans provided by the employer on which no value will be charged:

   • if the loans have been taken for medical treatments;

   • where the amount of loan is not more than Rs. 2,00,000.

3. While making payment to hotel or restaurant, one will have to quote the Permanent Account Number for the transactions exceeding the amount of Rs. 1,00,000. These draft rules have expanded the scope and included convention centres, banquet halls and event management service providers.