New I-T Rules, Simpler Processes, Higher Deductions for the Salaried
With the New Income-tax Act, 2025 Set to Be Enforced from April 1, the CBDT Has Released the Income-tax Rules, 2026—Introducing Key Changes in Forms, Disclosures, and Deductions for Salaried Employees
With the new Income-tax Act, 2025 set to be enforced from April 1, the Central Board of Direct Taxes has released the new Income-tax Rules, 2026. A series of changes has been introduced in the forms, disclosures and deductions for salaried employees, with some experts pointing out that the old tax regime could entail more incentives for middle-income salary earners vis-à-vis the new regime. There has also been a substantial reduction in tax forms to ease compliance.
The new rules are not merely a technical update. They represent a significant shift in how individual taxpayers will interact with the tax system, with implications for compliance burden, tax planning, and the perennial choice between the old and new tax regimes. For the salaried employee, who forms the backbone of India’s formal tax base, these changes will be felt directly.
Higher Thresholds for Quoting PAN
The thresholds for mandatory quoting of Permanent Account Number have been hiked for certain transactions. Cash deposits or withdrawals aggregating to Rs 10 lakh or more in a financial year, in one or more accounts of a person, will now require PAN. This is a significant relaxation from the current requirement for deposits exceeding Rs 50,000 in one day with a banking company or co-operative bank. The change will reduce the compliance burden for individuals who make occasional large cash deposits but do not regularly transact in high volumes.
For motor vehicles, PAN will be required for purchases priced above Rs 5 lakh. So far, PAN has been required for the sale or purchase of a motor vehicle or a vehicle other than two-wheelers. The new threshold exempts lower-value vehicle purchases from the PAN requirement, simplifying transactions for those buying economy vehicles.
For immovable property, PAN will be required for purchase or sale or gift or joint development agreement if the transaction cost is over Rs 20 lakh—double the existing limit. This change will exempt a larger number of property transactions from the PAN requirement, reducing compliance for middle-class homebuyers.
Simplified Forms for Individuals
For individuals, a single unified challan-cum-statement will replace separate forms for Tax Deducted at Source on property, rent, contractors, and crypto assets, with filing to be done using PAN rather than TAN (Tax Deduction and Collection Account Number). This is a significant simplification. Previously, individuals making payments in these categories had to navigate multiple forms and use a separate TAN. Now, a single form using their existing PAN will suffice.
TDS needs to be deducted on rent payment of Rs 50,000 per month, transfer of immovable property of Rs 50 lakh or more, on professional or contract or commission brokerage payments of Rs 50 lakh, and transfer of virtual digital assets. These thresholds remain unchanged, but the filing process has been streamlined.
For Salaried Employees: New Forms and Higher Deductions
For salaried employees, Form 130 will replace Form 16 to provide a detailed summary to an employee or pensioner about the salary, tax deducted and deductions. Fringe benefits, annuities, and profits in lieu of salary provided by employer to employees will be part of Form 123, to be digitally linked to Form 130. This digital linkage should ensure that all compensation components are captured accurately and that employees have a complete picture of their income and tax liability.
Tax exemption has been provided for “free food and non-alcoholic beverages” provided by employers at offices or “through paid vouchers usable only at eating joints”, costing under Rs 200 per meal. This provision is for both old and new tax regimes—the exclusionary provision for the new tax regime has been done away with. Previously, this benefit was available only under the old regime. Now, salaried employees in both regimes can enjoy tax-free meals provided by their employers.
Children’s education allowance and hostel expenditure allowance have also been raised. These allowances, which are exempt from tax up to certain limits, provide relief to parents with school-going children. The increase will provide additional tax savings for families.
HRA Expansion and Scrutiny
The expansion of a higher 50 per cent House Rent Allowance (HRA) to Bengaluru, Hyderabad, Pune, and Ahmedabad brings them at par with Mumbai, Kolkata, Delhi, and Chennai. This is a significant benefit for salaried employees in these cities, where housing costs have risen sharply in recent years. HRA is exempt from tax up to a certain limit, and the higher 50 per cent limit applies to those living in specified cities.
However, such benefits will face greater scrutiny with evidence required in a separate form (Form 124) at the time of computation of income and TDS. This means that employees claiming HRA exemptions will need to provide documentary evidence of rent paid, and employers will need to verify and report this evidence. The intent is to reduce fraudulent claims, but it also adds a compliance layer for genuine claimants.
Stricter Reporting for Insurance Premiums
Further, the reporting threshold for Statement of Financial Transactions—mandated for entities like banks and companies to report high-value transactions of individuals—for receipt of insurance premium payments has been lowered from Rs 10 lakh to Rs 5 lakh. This means that insurance companies will now report premium receipts above Rs 5 lakh to the tax authorities. The lower threshold reflects the increased scrutiny on high-value insurance transactions, which can sometimes be used for tax evasion.
The Old Regime vs. New Regime Debate
For people in lower and middle-income brackets, the new tax regime’s simplified structure and lower slab rates generally result in lower tax liability, experts said. The new regime, introduced in 2020 and made the default regime in 2023, offers lower rates but eliminates most deductions and exemptions. For those who do not have significant deductible expenses, it is often the better choice.
But for those in higher brackets, who actively plan their finances, the old regime may provide opportunities to optimise taxes with deductions and exemptions, experts said. The old regime retains a host of deductions—Section 80C for investments, Section 80D for health insurance, HRA, home loan interest, and others—that can significantly reduce taxable income for those who can claim them.
For taxpayers earning up to Rs 15 lakh, the new regime’s lower slab rates, higher standard deduction, and simplified structure generally make it more attractive, said Rahul Charkha, Partner, Economic Laws Practice. This is because the deductions available under the old regime may not exceed the tax savings from the new regime’s lower rates.
“For taxpayers in the Rs 15-25 lakh range, the choice becomes more nuanced: those with modest deductions often find the new regime more efficient, while those who receive substantial HRA, have home loans, and fully utilise Sections 80C, 80D, and other deductions may find the old regime equally or more beneficial,” Charkha said.
For taxpayers in the Rs 25-50 lakh bracket, regime selection increasingly depends on the scale of deductions and exemptions claimed. High-deduction profiles may still extract significant value under the old regime. A taxpayer with a large home loan, significant health insurance premiums, and substantial investments under 80C may find that the old regime’s deductions outweigh the benefits of lower rates in the new regime.
The Rush to Comply
Tax experts also pointed out the rushed timeline to comply with the new I-T rules. Even though the filings for income earned in 2026-27 will be filed in 2027-28, some provisions, such as TDS and advance tax, will kickstart based on these new rules. This means that employers, banks, and other deductors must implement the new rules from April 1, even though the full implications may not be understood until later in the year.
The timeline is tight. The rules were released on March 26, giving taxpayers and deductors just a few days to understand and implement them before the new financial year begins. While the simplification measures are welcome, the implementation timeline may create challenges, particularly for smaller employers and individuals who do not have dedicated tax professionals.
The Bigger Picture
The new Income-tax Rules, 2026, are part of a broader effort to simplify India’s tax system. The new Income-tax Act, 2025, which replaces the 1961 Act, was itself a major rewrite aimed at making the law more accessible and reducing litigation. The rules now flesh out the details of that Act.
The changes for salaried employees—higher allowances, simplified forms, digital linkages—are designed to reduce compliance burden. The higher thresholds for PAN and the simplified challan-cum-statement should make life easier for individuals. The expansion of HRA benefits to more cities recognises the reality of rising housing costs across urban India.
But the new rules also introduce greater scrutiny. The requirement for evidence of HRA claims and the lower reporting threshold for insurance premiums signal that the tax department will be paying closer attention to these areas. Taxpayers should ensure that they maintain proper documentation to support their claims.
Conclusion: A Balanced Approach
The new Income-tax Rules strike a balance between simplification and scrutiny. They make it easier for compliant taxpayers to file their returns, with fewer forms and higher thresholds. But they also tighten the screws on areas where evasion is common, with greater reporting requirements and evidence requirements.
For salaried employees, the key takeaway is to understand the rules that affect them: the new Form 130, the expanded HRA benefits, the tax-free meal vouchers, and the higher allowances for children’s education. They should also carefully evaluate their choice between the old and new tax regimes, particularly if their income falls in the Rs 15-50 lakh range where the choice is most nuanced.
The timeline is tight, but the changes are ultimately designed to make the system more taxpayer-friendly. With proper understanding and planning, salaried employees can navigate the new rules and optimise their tax outcomes.
Q&A: Unpacking the New Income-tax Rules
Q1: What are the key changes in thresholds for quoting PAN?
A: The thresholds have been hiked for several transactions: cash deposits or withdrawals of Rs 10 lakh or more in a financial year (up from the earlier requirement of deposits exceeding Rs 50,000 in one day); purchase of motor vehicles above Rs 5 lakh (previously required for any motor vehicle); and immovable property transactions above Rs 20 lakh (double the existing limit). These changes reduce compliance burden for individuals with occasional large transactions.
Q2: How have forms for salaried employees been simplified?
A: Form 130 will replace Form 16 to provide a detailed summary of salary, tax deducted, and deductions. Fringe benefits and other compensation will be in Form 123, digitally linked to Form 130. A single unified challan-cum-statement replaces separate forms for TDS on property, rent, contractors, and crypto assets, using PAN instead of TAN. This reduces the number of forms and simplifies filing.
Q3: What new tax exemptions have been introduced for salaried employees?
A: Tax exemption has been provided for “free food and non-alcoholic beverages” provided by employers at offices or through paid vouchers usable only at eating joints, costing under Rs 200 per meal. This exemption now applies to both old and new tax regimes (previously excluded under the new regime). Children’s education allowance and hostel expenditure allowance have also been raised. The 50 per cent HRA limit has been extended to Bengaluru, Hyderabad, Pune, and Ahmedabad.
Q4: How should taxpayers choose between the old and new tax regimes?
A: For incomes up to Rs 15 lakh, the new regime’s lower slab rates and simplified structure generally make it more attractive. For Rs 15-25 lakh, the choice depends on deductions—those with modest deductions may prefer the new regime, while those with substantial HRA, home loans, and Section 80C/80D deductions may find the old regime equally or more beneficial. For Rs 25-50 lakh, the scale of deductions matters most; high-deduction profiles may still benefit from the old regime.
Q5: What compliance challenges do the new rules present?
A: The rushed timeline is a major challenge. Rules were released on March 26, with enforcement from April 1. While filings for income earned in 2026-27 will be due in 2027-28, provisions like TDS and advance tax take effect immediately. Employers, banks, and other deductors must implement the new rules with minimal preparation time. Additionally, HRA claims will face greater scrutiny with evidence required in Form 124, and the reporting threshold for insurance premium payments has been lowered from Rs 10 lakh to Rs 5 lakh. Taxpayers should maintain proper documentation to support claims and ensure compliance.
