New Income Tax Act Coming? I-T Dept Releases Draft Rules—Here’s What Could Change

An early hot topic in 2023 seems to be a complete overhaul of the Indian Income Tax Act. The Income Tax Department is the latest to jump into the spotlight with the release of the draft income tax rules. The nature of this release suggests imminent reforms to the Income Tax Act, which shows a complete restructuring of how individuals and businesses meet their tax obligations.

It is our fundamental obligation to keep ourselves informed of the imminent changes to tax law in India, which in turn provides us with the opportunity to take advantage of different financial strategies to minimise our tax liability. Here, we are going to describe in detail the new Income Tax Act and Income Tax Draft Rules.

Income Tax Reforms in India - The Legacy

The Income Tax Act of 1961 has governed India's income tax system for over half a century. During this era, the Act has undergone countless alterations; however, much of the legislation is still regarded as archaic, if not overly complex. Along with a quickly growing economy, the digital age places an even greater need for the Income Tax Act to be reformed in order to streamline the income tax processes, minimise litigation for tax issues, and increase the overall ease of doing business.

In recent years, there has been a growing momentum for a new Income Tax Act, and in the Union Budget 2026, this has ultimately resulted in a new Act being announced. The new Income Tax Act 2025 will come into effect on April 1, 2026, and will replace the Income Tax Act of 1961. 

This new Income Tax Act offers the first opportunity in 60 years for the legislators to streamline the tax laws and balance revenue collection with taxpayer/resource protection. The IT Department’s draft Income Tax rules will serve as the core framework of the new Income Tax Act, and will govern everything from the processes for filing returns to the valuation of taxes for assets and everything in between.

These reforms will not only serve the IT Department’s new global standards update, but will also incorporate the automatic and technological compliance improvements to streamline and reduce taxpayer compliance. The more automated and less manually processed the aspect of tax compliance, the more intuitive and less error-prone it will be.

 

 

The IT Department Update: Release of Draft Regulations

The Central Board of Direct Taxes (CBDT) published Draft Income Tax Rules, 2026, with an invitation for comments on the rules from the public until February 22, 2026. Aside from the Draft Regulations, the public is invited to provide their comments on the forms attached to the Draft Regulations. The proposed rules and forms are anticipated to be published in March of 2026. The federal government is providing the public the opportunity to have input on the final version of the rules and forms in order to reflect a taste of finality on the Draft Regulations.

In an attempt to create a NEW Income Tax Act, Draft Regulations have rules, and forms with simplification of language, elimination of redundancies, and formal charts and tables designed for ease of understanding to the populations of the country. The Draft Regulations have positively impacted the public. 

Compared to 511 rules in the current Income Tax Rules, 1962, regulations have been positively reduced. The forms have been reduced from 399 to 190, and the common information is shared and organised for the ease of completion of information to the public. The anticipated tax compliance is positively impacted for the public.

In addition, the forms have been changed to allow for automation of the reconciliation, pre-filling, and plain language changes to reduce linguistic obstacles to understanding to minimise confusion and prevent errors. This update from the IT department also includes guides that cross-reference the previous versions of the rules and forms with their updated versions, assisting stakeholders in making the changeover.

Key Changes in India's Tax Laws: Improvements to the Previous Tax System

One of the most commonly discussed topics regarding the draft rules for income tax is the old tax system that was expected to be replaced by the new, simplified system that was introduced in 2020. Taxpayers using the old system are allowed to claim certain deductions and exemptions, and the draft rules have made it more appealing by revising certain allowances.

Starting with the House Rent Allowance (HRA) exemption being broadened. There is now the inclusion of Bengaluru, Hyderabad, Pune, and Ahmedabad, as well as the other cities, being 40% exemptions. Prior, the only cities with 50% exemptions were Mumbai, Delhi, Kolkata, and Chennai. 

As for other cities, it is Rule 279 stating that the minimum of the actual HRA received, actual rent paid, less 10% of the employee’s salary, or the percentage of salary (s) stated. Millions of employees in urban centre cities will be positively impacted and will see a reduction in the taxes they pay.

There has also been a revision regarding the educational and hostel allowance for children. The education allowance has increased from 100 (per month per child) to 3000. For hostel allowance, it has gone from 300 to 9000 (per month per child). The transport allowance for disabled people has also been increased to 15,000 plus DA for Metro and 8,000 plus DA for non-Metro from 3200. The changes regarding the inclusive and inflation-adjusted benefits are a reflection of the changes in the income tax.

Changes to PAN Quoting Requirements

Quoting PAN (Permanent Account Number) has historically been a method used to track and record tax evasion behaviour within high-value transactional tax payments. The income tax draft laws aim to focus on transactional value tax payments in a threshold incremental manner. This would provide a reprieve from minor transactional tax payments to avoid cumbersome and insignificant tax payment issues.

Below are the five major changes: 

• Cash Deposits and Withdrawals: No daily limit on cash payments and receipts. The limit is set to Rs. 10 lakhs within a fiscal year across all accounts.
• Purchase of Vehicles: No need to quote a PAN if the vehicle (including two wheelers) is less than Rs. 5 lakhs.
• Payment to Hotels and Event Managers: The requirement for quoting a PAN has been increased from Rs. 50,000 to Rs. 1 lakh.
• Transactions in Immovable Property: The limit for the purchase, sale and gifting of property has been increased from Rs. 10 lakhs to Rs. 20 lakhs.
• Insurance: Quoting a PAN is mandatory for commencing any sort of relationship with the insurance company, which is a new requirement in addition to crossing the premium threshold.

These changes in the tax laws in the country aim towards a reduction of unnecessary formalities for everyday transactions while also ensuring proper tax compliance on the part of the public.

Simplifying the Processes

The draft rules have focused on consolidation and streamlining procedures. Some major forms have been re-numbered for the new income tax acts, making filing tax returns easier. In this instance, the income tax return forms, ITR-1 through ITR-6, have been re-designated, requiring tax professionals to update their software. Smart forms that have pre-fills and automation are being developed to provide for filing tax forms more easily and to reduce the time and money needed to prepare taxes.

Additionally, the elimination of redundancy through the consolidation of these similar rules has been achieved, for example, with valuation rules (previously 11UA, 11UAA, 11UAB) into a singular Rule 57. The reduction of regulatory burdens through streamlining rules is a significant component of tax reform and is designed to improve the efficiency of the system and reduce the likelihood of disputes.

 

 

Determining the Fair Market Value Under Rule 57

The determination of the fair market value (FMV) of an asset is crucial to the calculation of taxes, particularly when considering capital gains and any other taxation related to the asset. The draft rules under Rule 57 provide a clear methodology for various forms of assets.

The FMV for jewellery and artistic works under sections 92 and 26(2)(j) is either the invoice value, if purchased from a registered dealer, or the open market price as of the valuation date. If they are acquired otherwise and the value is greater than Rs 50,000, a report from a registered valuer is required. For movable properties, the market sale price is used, and for immovable properties, the stamp duty valuation is used. This means greater standardisation and greater transparency in tax compliance.

The rule also addresses the qualifications for valuers, which, among other things, require 10 years of accounting experience as well as high annual receipts, providing a layer of credibility.

Other Notable Reforms

The draft also mentions stricter compliance measures for income earned abroad, where foreign tax credits would require the certification of a chartered accountant if foreign tax payments exceed Rs 1 lakh, or for companies. There is also a growing focus on digital assets since crypto exchanges have to furnish transaction data to the IT department. Moreover, the Central Bank Digital Currency (CBDC) is now included as an electronic payment method.

Rule 6 mentions the holding periods for pre-conversion periods of capital assets, including shares, and assets in a scheme like the Income Declaration Scheme 2016. These provisions are meant to ensure the correct classification of gains as either short-term or long-term.

Implications for Tax Compliance

The predominant aim of these income tax reforms is to simplify the compliance burden and encourage voluntary compliance. Enhanced allowances and higher thresholds for PAN have meant, for individuals, less hassle with day-to-day finance. Simplified rules and forms for businesses also mean lower admin costs and less litigation.

That said, the new income tax act will require work. Taxpayers must analyse their finances, update systems, and think about engaging professionals to take advantage of the old regime. There is a strong emphasis on technology, like pre-populated forms that would reduce the potential for errors, but this will also require a degree of digital competency.

Overall, these changes to tax laws in India increase the country's appeal to foreign investors by creating a more efficient and transparent tax system.

 

 

Conclusion

The income tax draft rules are the first of many changes that the income tax department has in store for the New Income Tax Act that will take effect on the first of April, 2026. These changes will allow for the old income tax system to be revived temporarily, increase PAN limits and create less complex valuation exercises. 

Overall, these changes will promote tax compliance and lessen the compliance burden. Undoubtedly, more changes will be made based on the comments received, and the result will promote a simpler and easier tax filing process.

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.