While the new Income-tax Act was passed last year, many operational details were left to subordinate legislation.
The draft rules now spell out how everyday transactions, salary structures, tax filings and compliance will change for individual taxpayers. Experts say the proposals reflect a clear shift, easing compliance for routine transactions while tightening reporting and valuation norms in areas prone to misuse.
PAN rules relaxed for routine spending, but stricter for insurance
One of the most significant changes for the common man is the sharp increase in thresholds for quoting PAN in everyday transactions.
Under the existing Income-tax Rules, PAN is required if a single cash deposit exceeds ₹50,000 in a day.
Under the draft rules, PAN will be required only when total cash deposits or withdrawals across one or more bank accounts aggregate to ₹10 lakh or more in a financial year.
“This is a major compliance relief for ordinary taxpayers. Most small banking transactions will now fall outside the PAN reporting net,” said Sandeep Bhalla, Partner, Dhruva Advisors.
Similarly, cash payments at hotels, restaurants or event venues will now require PAN only if the amount exceeds ₹1 lakh, compared with the earlier threshold of ₹50,000.
Vehicle purchases also see a relaxation. Currently, PAN is required for nearly all vehicle purchases (except some two-wheelers). Under the draft rules, PAN will be needed only if the transaction value exceeds ₹5 lakh, easing compliance for entry-level buyers.
Property transactions too see relief, with the PAN quoting threshold proposed to be raised from ₹10 lakh to ₹20 lakh.
However, insurance transactions move in the opposite direction. Earlier, PAN was required mainly when annual life insurance premium exceeded ₹50,000. The draft rules propose PAN to be mandatory for all life insurance premium payments, tightening tracking of insurance-linked investments. The government has also reiterated that ULIP maturity proceeds will be taxed if annual premiums exceed ₹2.5 lakh.
Employer-provided car perks to attract higher tax
For salaried employees, the draft rules significantly revise the standard valuation of perquisites, especially employer-provided motor cars.
Under existing rules, the taxable value of a car provided by the employer for mixed personal and official use is ₹2,700 per month for cars with engine capacity up to 1.6 litres and ₹3,300 per month for cars above 1.6 litres (including driver costs).
The draft Income-Tax Rules, 2026 propose to raise this sharply. For cars up to 1.6 litres, the taxable perquisite will rise to ₹8,000 per month, while for cars above 1.6 litres, it will increase to ₹10,000 per month.
“These values have remained unchanged for years. The revision reflects current economic realities but will clearly increase the taxable salary for employees enjoying such perks,” Bhalla noted.
Higher tax-free limits for meals, gifts and staff loans
Not all salary-related changes increase tax. Several long-outdated exemptions have been substantially liberalised.
The tax-free value of employer-provided meals is proposed to be increased from ₹50 per meal to ₹200 per meal. The annual exemption for gifts from employers is proposed to rise from ₹5,000 to ₹15,000.
Similarly, interest-free loans from employers — currently exempt only up to ₹20,000 — will be tax-free up to ₹2 lakh under the draft rules.
According to Maneesh Bawa, Partner, Nangia Global, these changes “increase the non-taxable portion of salary and allow employers to structure compensation in a more tax-efficient manner.”
Big relief for parents: education and hostel allowances hiked
Parents stand to gain significantly under the draft rules. The children education allowance exemption, currently capped at ₹100 per month per child (up to two children), is proposed to be increased to ₹3,000 per month per child.
The hostel expenditure allowance, which is presently limited to ₹300 per month per child, is proposed to be increased to ₹9,000 per month per child.
For employees of educational institutions, the tax-free value of free or concessional education provided to their children is proposed to increase from ₹1,000 per month to ₹3,000 per month per child.
“These changes substantially reduce taxable income for families with school-going children,” Bawa said.
HRA exemption expanded to more cities
In another relief for salaried taxpayers under the old tax regime, the draft rules propose to expand the list of cities eligible for the higher 50% House Rent Allowance (HRA) exemption.
Currently, only Delhi, Mumbai, Kolkata and Chennai qualify for the 50% exemption, while other cities are capped at 40%. The draft rules propose to include Bengaluru, Hyderabad, Pune and Ahmedabad in the higher exemption category.
This change will allow a larger portion of HRA to be tax-exempt for employees living in these cities, reducing their overall tax liability.
Tighter filing norms, digital notices and stricter scrutiny
On the compliance side, the draft rules retain the existing ITR-1 to ITR-7 framework but introduce stricter eligibility conditions, enhanced disclosures and a stronger digital-first approach.
A new Rule 166 clearly defines when a return will be treated as defective — including missing schedules, unpaid taxes, or mismatch in MAT/AMT credit claims — placing greater responsibility on taxpayers and professionals at the filing stage.
Tax notices and orders will also be delivered through a mobile app, with real-time alerts, in addition to existing electronic modes.
For individuals earning overseas income, claiming Foreign Tax Credit will now require mandatory certification by a Chartered Accountant if foreign tax paid is ₹1 lakh or more, compared with the earlier self-certification regime.
Also Read | New income tax rules from April 1: Who benefits and who faces a tighter lens
What it means for taxpayers
Taken together, the draft Income-tax Rules, 2026 aim to reduce friction in routine transactions, modernise outdated exemptions, and tighten scrutiny where higher-value or cross-border transactions are involved.
“The approach is clear — ease compliance for the common man, but strengthen reporting and verification where revenue risks are higher,” Bhalla summed up.
Taxpayers, professionals and industry bodies now have a short window to submit feedback before these draft rules are finalised and come into force from April 2026.
