India's direct tax landscape changed permanently on 1 April 2026. The Income Tax Act 2025 - passed by Parliament on 12 August 2025 and signed by the President on 21 August 2025 - officially replaced the Income Tax Act 1961, a law that had been in place for over six decades.
Along with it, the Income Tax Rules 2026 were notified by the Central Board of Direct Taxes (CBDT) on 20 March 2026, with all new ITR forms also notified and ready. For Indian businesses, startups, and founders, this is not just a structural change in numbering - it brings real compliance implications starting from Tax Year 2026-27.
This blog breaks down what changed, what it means for your business, and what you need to do today.
What Is the Income Tax Act 2025?
The Income Tax Act 2025 is a complete rewrite of India's income tax law. According to the official press release by the CBDT (1 April 2026), it 'represents a comprehensive effort to simplify and modernise the country's income tax law... through simple language, a streamlined structure and a reader-friendly presentation, without altering the underlying tax policy.'
In short, the rules themselves have not changed dramatically - but the way they are written, numbered, and applied has been overhauled to remove decades of amendments, cross-references, and complex language.
Key Changes Under the Income Tax Rules 2026
The Income Tax Rules 2026, which operationalise the new Act, bring the following practical changes for businesses and employers:
1. New Tax Year Terminology
The old terms 'Previous Year' and 'Assessment Year' have been replaced. The new Act uses a single concept called 'Tax Year' - a 12-month financial period beginning 1 April. This aligns India's system with global standards and simplifies documentation.
2. Revised Perquisite Valuation for Employers
Businesses that offer employee benefits - company cars, meal vouchers, interest-free loans, transport allowances - will see updated rupee thresholds that had not been revised since 1962. Key updates include:
- Meal vouchers: Tax-free up to Rs 200 per day (revised upward)
- Interest-free loans: Threshold increased to Rs 2 lakh (from Rs 20,000), making routine staff support far more practical
- Company car perquisites: Tripled in value, which will increase monthly TDS deductions - employers must review CTC structures immediately
- Children's education allowance: Increased to Rs 3,000 per child per month
- Hostel allowance: Increased to Rs 9,000 per child per month
3. HRA Expansion to More Cities
Employees working in Bengaluru, Hyderabad, Pune, and Ahmedabad can now claim the higher 50% HRA exemption - the same rate previously available only to Metro cities. This affects payroll calculations for businesses in these cities.
4. Simplified and Standardised ITR Forms
All income tax forms have been redesigned, re-numbered, and standardised. Businesses must use new form numbers for their filings in Tax Year 2026-27 onwards. CBDT has published FAQs and guidance notes for each form on the official income tax portal.
5. Digital and Faceless Compliance
The new rules expand the framework for digital reporting, faceless assessments, and coverage of global digital transactions. Businesses engaged in cross-border trade, digital services, or with NRI involvement must take note.
What Should Your Business Do Right Now?
- Review your payroll: Update employee salary structures to reflect new perquisite values and TDS thresholds
- Update CTC for company car benefits: The tripling of perquisite values significantly changes TDS obligations
- Check HRA eligibility: If your employees are in Bengaluru, Hyderabad, Pune or Ahmedabad, update their HRA exemption claims
- File using new forms only: All filings for Tax Year 2026-27 must use the updated ITR forms - old forms are no longer valid
- Review DTAA implications: The new Act brings updates to double taxation treaty provisions, relevant for businesses with foreign clients or investments
A Note on the Old Tax Regime vs New Tax Regime
Both regimes continue to co-exist. The new regime remains the default, with no deductions but lower slab rates. The old regime with deductions under Sections 80C, 80D, and similar provisions continues to be available. The new perquisite thresholds under Rules 2026 apply only under the old tax regime. Employees and businesses should plan which regime benefits them more under the updated framework.
How Targolegal Can Help
At Targolegal, we work with startups and growing businesses to stay on top of compliance changes exactly like this one. Our team of Chartered Accountants and tax professionals is already updated on the Income Tax Rules 2026 and can:
- Review and restructure your employee salary and CTC packages
- Ensure your TDS calculations and deductions are correct from April 2026
- File your business income tax returns using the new ITR forms
- Advise on old vs new regime for your business and its employees
Speak to us before the next payroll cycle. Get in touch with Targolegal today.
