India: Changes in Income Tax Act & Rules effective April 1, 2026

Effective April 1, 2026, India replaced the Income-tax Act, 1961, the backbone of its direct tax system for over six decades with the Income-tax Act, 2025, accompanied by a completely new set of Income-tax Rules, 2026 notified by CBDT on March 20, 2026.

The Act itself has been restructured and condensed, obsolete provisions removed, and the language made more accessible.

But for payroll and employer compliance, the significance of this transition goes well beyond simplification of language, the new Rules recalibrate the valuation of employer-provided benefits to reflect current economic realities, realign geographical classifications that had not been updated in decades, and introduce a modernised form and reporting architecture that replaces legacy formats employers have relied on since the 1960s. Summarised below are the changes to Income Act and Rules.

A. Income Tax Changes

The Income-tax Act, 1961 is officially repealed effective March 31, 2026, replaced by the Income-tax Act, 2025 (‘the Act’). The Income-tax Rules, 2026 (G.S.R. 198(E), Notification 22/2026, gazetted March 20, 2026) (‘the Rules’) operationalize the new Act & Rules from April 1, 2026

While, the Act aimed at simplification, consolidation of scattered provisions and also brought clarity in the law, one of the important changes brought is the concept of tax year explained below:

The Act replaces the term “Previous Year” with the “Tax Year” and defines it as a 12-month financial period beginning on 1st April.

The term “Assessment Year” under the Old Act is now referred to as “the financial year” succeeding the relevant tax year.

Further, the Rules bring several important updates, including revised valuation of certain perquisites, clearer treatment of motor car perquisites, higher exemption limits for some items, and new validation requirements for certain allowances for individual and withholding tax compliances for salaries employees. The Rules also update the prescribed forms so they match the new Act.

Below is the summary of all the relevant changes announced in the Rules relevant for payroll compliance:

1 Car Perquisite Valuation Changes as per Rule 15 of the Rules:

2 Other Perquisite Valuation Changes (Rule 15)

3 Conditions for the purpose of Leave Travel concession (Rule 278 of the Rules)

The tax exemption for Leave Travel Concession (LTC/LTA) continues to be limited to the actual travel cost spent for travel within India by the employee and their family, up to the prescribed limits.

The following changes have been announced:

Change in Leave Travel Concession (LTC) Exemption Valuation

• Previously: The exemption for such routes was determined based on a notional AC first-class rail fare for the distance.
• Now: If there is no public transport system and no state transport rate is prescribed, the exemption is capped at ₹30 per kilometer of the shortest route.

Changes in the exemption limit while travelling by Air:

• Previously: If the journey is performed by air, the exempt amount was up to the economy fare of the airlines by the shortest route to the place of destination
• Now: If the journey is performed by air, , the exempt amount shall not exceed the class of travel to which the employee is entitled by the shortest route to the place of destination.

3 House Rent Allowance (HRA) Exemption Changes (Rule 279):

Recognizing demographic shifts and the growth of new economic centers, the 2026 Rules formally expand the definition of “Metro” cities for HRA calculations to receive the enhanced 50% HRA exemption benefit effective April 1, 2026.

4 Allowance exemption limits enhancement (Rule 280):

6 Form Changes

The Act and Rule implementation also brought a complete re-numbering and streamlining of all statutory forms, which is intended to centralize compliance reporting:

To simplify it further, the Tax authorities have issued FAQs and Guidance notes for all the forms on their website.

Please contact your Mercans’ services delivery team for any additional information regarding the implications of the above change.

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