The government has finally replaced its 64-year-old income tax law. The Central Board of Direct Taxes (CBDT) has officially notified the Income-tax Rules, 2026, which will come into force on April 1, 2026, as part of the new Income-tax Act, 2025.
Finance Minister Nirmala Sitharaman described the new framework as a major step forward one that will make tax compliance simpler, reduce unnecessary disputes, and bring relief to millions of small taxpayers across the country.
The old Income-tax Act of 1961 had become a complex web of rules after more than 4,000 amendments over the decades. It had 819 sections, 47 chapters, and ran to over 512,000 words making it extremely difficult for ordinary taxpayers to understand.
The new Act cuts this down sharply: 536 sections, 23 chapters, and approximately 260,000 words. It also removes the confusing distinction between the ‘previous year’ and ‘assessment year’, replacing them with a single ‘tax year’ , a change that alone will reduce a lot of everyday confusion.
One of the most celebrated changes is the relief given to small businesses and professionals.
Under the new Act, businesses with a turnover of up to ₹10 crore will be exempt from maintaining detailed books of account and undergoing a tax audit, subject to certain conditions. Speaking at the launch of the PRARAMBH 2026 awareness campaign, Sitharaman said this should be ‘a big relief’ for small business owners and professionals who are, in her words, ‘really the engine of our economy’. The government’s clear message is that compliance should be easy enough that people choose to follow the rules rather than avoid them.
For salaried employees, one of the most talked-about changes is the expansion of the higher House Rent Allowance (HRA) exemption. Earlier, only employees living in Mumbai, Kolkata, Delhi, and Chennai could claim 50 per cent of salary as HRA exemption. Now, under Rule 279, Bengaluru, Hyderabad, Pune, and Ahmedabad have been added to this list, recognising the rapidly rising rental costs in these cities. Employees in all other cities will continue to get 40 per cent exemption.
While experts have welcomed this change, some have pointed out that cities like Noida and Gurugram where rents are equally high are still not covered, leaving employees there at a disadvantage.
Another important clarification in the new rules concerns electric vehicles provided by employers. Earlier tax rules calculated the taxable value of a company car based on engine capacity a metric that simply does not apply to electric vehicles. This created confusion for HR and payroll teams.
Under Rule 15 of the new rules, electric vehicles will now be treated on a par with smaller petrol and diesel cars of up to 1.6-litre engine capacity when used for both official and personal purposes. This removes the ambiguity and, as tax experts note, also fits well with the government’s broader push towards cleaner mobility.
On the compliance and reporting front, the government has tightened the rules around insurance premium reporting. Insurers must now report premium receipts above ₹5 lakh where PAN details are available, and above ₹2.5 lakh where PAN is not linked. This means more insurance transactions will show up in a taxpayer’s Annual Information Statement making it harder to underreport income and easier for the tax department to spot discrepancies without having to send notices.
In the area of transfer pricing which deals with how multinational companies price transactions between their own subsidiaries the new rules bring welcome simplification. Various categories of services like IT-enabled services, software development, contract R&D, and knowledge process outsourcing have been merged into a single category called ‘information technology services’ with a uniform safe-harbour margin of 15.5 per cent.
This means companies no longer need to worry about which sub-category they fall under. Filing deadlines have also been aligned with the regular income tax return date, making planning easier. Additionally, the ₹2,000 crore turnover condition for safe harbour will now only be checked in the first year of the five-year period removing a recurring compliance burden.
For taxpayers who earn income abroad, Rule 76 now introduces a clear process for claiming foreign tax credit, the mechanism by which taxes already paid in another country can be offset against Indian tax liability. Taxpayers will need to file Form 44 with details of foreign income and taxes paid, and obtain a chartered accountant’s certificate in certain cases.
Credits for taxes that are still under dispute in a foreign country will not be given immediately; these will only be allowed after the matter is resolved, supported by Form 45. Tax professionals say this brings greater clarity and prevents misuse.
The Finance Minister also emphasised that reducing litigation should be a key outcome of the entire exercise. Under the old system, unclear provisions often led to differing interpretations by taxpayers, their advisors, and tax officers resulting in disputes that clogged tribunals for years. Sitharaman was candid: ‘Every case that goes to a tribunal is a failure on our part.
The new Act, she said, had been specifically designed to minimise such ambiguity. Issues like pre-construction interest on housing loans, which used to be a common source of disputes, have now been clearly addressed in the law itself.
The government has also launched Income Tax Website 2.0 and a nationwide outreach campaign to help taxpayers understand the changes. The idea is to reach beyond the big metros engaging with students, small traders, and ordinary citizens across the country so that the transition from April 1, 2026 is as smooth as possible.
Tax experts advise that businesses and salaried individuals should start reviewing their compliance frameworks now, update their understanding of the new forms and terminology, and prepare for revised disclosure requirements before the new tax year begins. The overall message from the government is clear: when rules are simple, people follow them and that is exactly the outcome the new Income-tax Act 2025 is designed to deliver.
