Draft Income-Tax Rules, 2026: Guide for Businesses and Taxpayers

A Strategic Analysis by ASC Group

The Government of India has released the Draft Income-tax Rules, 2026 along with revised forms to operationalise the Income-tax Act, 2025. These draft rules are proposed to be implemented from 1 April 2026 and have been issued to invite feedback from stakeholders and the public.

The objective is to simplify tax administration, enhance transparency, and strengthen compliance through technology-driven reporting and structured disclosures.

At ASC Group, we have carefully analysed the proposed changes and outlined the most critical updates that will impact employees, businesses, multinational groups, and reporting entities.

1. Changes in Employee Taxation

The draft rules propose significant revisions in perquisite valuation and tax-free allowances:

• Motor Car Perquisite (Car owned by employer): The taxable perquisite value has increased substantially, nearly three times in certain cases.
   
• Interest-Free Loans: Threshold increased from Rs. 20,000 to Rs. 2,00,000 (aggregate outstanding balance; less than or equal to Rs. 2,00,000).
   
• Meal Allowance: Tax-free limit increased from Rs. 50 to Rs. 200 per meal (applicable under both Old and New Regimes).
   
• Gifts/Vouchers: Annual exemption increased from Rs. 5,000 to Rs. 15,000.
   
• Children Education Allowance: Increased from Rs. 100 to Rs. 3,000 per month per child.
   
• Hostel Allowance: Increased from Rs. 300 to Rs. 9,000 per month per child.
   
• HRA Rules: Hyderabad, Pune, Ahmedabad, and Bengaluru added to the 50% salary exemption category.
   

LTC (Air Travel)

The reference restricting exemption to “economy class fare” has been removed. The concession will now apply to the class of travel to which the employee is entitled, including recognised public transport where applicable.

HRA Compliance

Employers must now:

• Disclose the relationship between employee and landlord
   
• Collect and retain rent agreement documentation
   

Impact: Payroll systems and HR compliance frameworks must be restructured before FY 2026–27.

2. Mandatory Electronic Books of Account in India

A significant compliance shift has been proposed:

• Books maintained electronically must be accessible from India at all times.
   
• Backup servers must be physically located in India.
   
• Books must be updated on a daily basis.
   

Further, Tax Audit Forms 3CA/3CB/3CD are proposed to be merged into Form 26, introducing expanded disclosures including:

• Accounting software details
   
• Reporting of statutory audit qualifications
   
• Disclosure of foreign remittances not subject to withholding tax
   
• Server IP address details
   
• MAT/AMT credit utilisation
   

Impact: Companies using overseas cloud storage must align their IT infrastructure with Indian data localisation requirements.

3. Capital Gains & Valuation Changes

• FMV reference under Section 55A threshold increased from RS. 25,000 to Rs. 10,00,000.
   
• Net worth certification for slump sale replaced with new Form 28.
   
• FMV1 and FMV2 calculations must be disclosed in Form 28.
   

These changes enhance valuation transparency and structured reporting.

4. Treaty Benefits & Foreign Tax Credit (FTC)

• Form 10F (renumbered as Form 41) mandatory even if TRC contains complete details.
   
• Indian communication address required.
   
• FTC Form 44 (replacing Form 67) requires:
   
  • Certification by an Accountant for companies or where foreign tax exceeds Rs. 1 lakh.
     
  • Computation of FTC on a net income basis.
     
• New Form 45 introduced for disputed foreign tax settlements.
   

Impact: Cross-border investors and multinational entities must strengthen documentation and certification controls.

5. Income Tax Returns & Defective Return Norms

• ITR-1 eligibility expanded to include up to two house properties.
   
• No separate form required to opt for the new tax regime.
   
• Defective return provisions tightened:
   
  • Non-filing of audit report
     
  • MAT credit mismatch
     
  • Incomplete schedules
     
  • Incorrect ITR form selection (e.g., claiming deduction from “Income from Other Sources” may require filing ITR-3 instead of ITR-4, where applicable)
     

Compliance accuracy becomes critical.

6. Assessment and Appeals

Procedure for Faceless Assessment, Reassessment or Re-computation (Rule 176)

• Procedural provisions of Section 144B of the Income-tax Act, 1961 are proposed to be formally incorporated into the Draft Income-tax Rules, 2026.
   
• The Finance Bill, 2026 proposes issuance of a common order covering both assessment and penalty for under-reporting or misreporting of income.
   
• However, under Draft Rule 176, only a notice for initiation of penalty proceedings would be issued along with the order.
   
• This creates a potential procedural distinction between the Finance Bill proposal and the Draft Rules framework.
• Draft Form 99 (replacing existing Form 35) proposes separate disclosure sections for:
   
  • Block assessments
     
  • Regular assessments
     
  • Penalty proceedings
     
  • TDS assessments
     
• Appellants may now file a declaration for repetitive appeals under Section 375 of the Income-tax Act, 2025, where identical questions of law are pending before the High Court or Supreme Court.
   
• Also, proposed in draft Form 99 that Director/authorized signatory must certify that:
   
  • The appellant is not seeking immunity from penalty under Section 440 of the Income-tax Act, 2025.
     
  • This is relevant since immunity cannot be granted where an appeal is filed.
     
• Draft Form 99 enables submission of copies of earlier appellate orders on identical issues, a facility not available under the existing Form 35.

7. Transfer Pricing & APA Reforms

Block Transfer Pricing Assessment – Determination of Arm’s Length Price for Multiple Years (New Rule 82)

• While the Income-tax Act, 1961 permitted multi-year ALP determination in a single proceeding, procedural rules were not previously prescribed.
   
• Draft Rule 82 introduces a formal framework for multi-year Arm’s Length Price determination.
   
• The Rule prescribes:
   
  • Eligibility criteria
     
  • Forms to be furnished
     
  • Timelines for filing
     
  • Documentation requirements
     
  • Supporting disclosures
     
• This formalises block transfer pricing assessments under a structured compliance mechanism.

Proposed changes related to Advance Pricing Agreement (APA):

• A flat application fee of Rs. 20 lakh is proposed for all APA applications, replacing the earlier graded fee structure.
   
• Time limit introduced for completion of Unilateral APA: Within 1 year from the end of the financial year in which the application is admitted.
   
• An APA application shall be treated as closed where no agreement is signed within 3 years from the end of the financial year in which the application is furnished.
   
• Special Timeline for IT Services (Unilateral APA):
   
  • Application to be treated as closed if no agreement is entered into within 2 years from the end of the quarter in which the application is made.
     
  • An additional 6 months may be requested.
     
  • Further extension of 6 months is proposed.
     
• These changes introduce a structured and time-bound APA regime.

Proposed changes In rules relating to Safe Harbour Rules :

• Safe Harbour margin for IT services reduced to 15.50% (where revenue does not exceed Rs. 2,000 crore).
   
• 5-year safe harbour block option from FY 2026–27.
   
• Expanded Form 48 disclosures (replacing Form 3CEB).
   
• Consolidation of software development services, IT-enabled services, KPO services, and contract R&D relating to software under a unified IT services category.
   

Impact: MNCs must revisit transfer pricing strategy and APA planning.

8. Expanded Reporting & Crypto Inclusion

The reporting framework has expanded significantly:

• SFT thresholds revised (Rs. 5 lakh for non-PAN cases).
   
• Immovable property reporting threshold increased to Rs. 45 lakh.
   
• Insurance premium reporting included under SFT.
   
• FATCA scope expanded to include crypto assets, CBDC, and e-money.
   
• Crypto-asset service providers must file Form 167 annually.
   
• TCS due dates aligned with TDS deadlines.
   
• Single form proposed for lower/nil TDS and TCS applications.

India’s tax reporting framework is moving decisively toward digital financial transparency.

Strategic Outlook

The Draft Income-tax Rules, 2026 reflect a clear policy shift toward:

• Data localisation
   
• Technology-enabled compliance
   
• Enhanced reporting transparency
   
• Stricter documentation standards
   
• Streamlined forms and procedures
   

While simplification remains the stated objective, documentation and disclosure requirements have increased significantly.

How ASC Group Can Help

ASC Group supports businesses and multinational entities with:

• Transition planning under the Income-tax Act, 2025
   
• Payroll restructuring and perquisite valuation advisory
   
• Transfer pricing and APA advisory
   
• Foreign tax credit compliance and certification
   
• Data localisation and tax audit preparedness
   
• SFT, FATCA, and crypto reporting compliance
   
• Representation and appeal advisory

These draft rules are in public domain for their feedback and businesses may find it complicated to understand the expected changes from this draft. They should take the guidance from the ASC Group.

Conclusion

The Draft Income-tax Rules, 2026 introduces structural changes across different aspects that includes payroll taxation, transfer pricing, reporting, and digital compliance. Businesses and taxpayers must check the expected changes in these rules and if they want they should provide their valuable feedback before it gets implemented i.e. on 1 April 2026.

ASC Group remains committed to guiding businesses and individuals through this evolving regulatory landscape with structured, compliant, and strategic advisory support.