The new Income Tax Rules, 2026 bring long-awaited revisions to salary perquisites, form structures, and compliance requirements. Here's what every taxpayer and employer needs to know.
Published: 22 March 2026 · Saiph Business Solutions LLP
With the Income Tax Act, 2025 replacing the six-decade-old Income Tax Act of 1961, the government has notified the Income Tax Rules, 2026 — reducing rules from 511 to 333 and forms from 399 to 190. While most tax rates remain unchanged, several rule-level changes directly impact salaried employees, employers, and tax practitioners. Below, we break down the five most impactful changes taking effect from the new Tax Year 2026–27.
Children's Education Allowance — ₹100 to ₹3,000 per Month
For decades, the children's education allowance stayed frozen at a token ₹100 per month per child — an amount that bore no relation to actual schooling costs. The new rules finally bring this exemption in line with current realities, raising it to ₹3,000 per month per child (maximum two children), translating to an annual exemption of ₹72,000 for employees with two children under the old tax regime.
| Particular | Earlier | From 1 April 2026 |
|---|---|---|
| Education Allowance (per child/month) | ₹100 | ₹3,000 |
| Maximum Children Eligible | 2 | 2 (unchanged) |
| Annual Exemption (2 children) | ₹2,400 | ₹72,000 |
Hostel Expenditure Allowance — ₹300 to ₹9,000 per Month
The hostel expenditure allowance — meant for employees whose children reside in hostels — was previously capped at an almost meaningless ₹300 per month per child. The revised limit of ₹9,000 per month per child (up to two children) brings a potential annual exemption of ₹2,16,000. This is particularly beneficial for employees whose children attend residential schools or colleges in other cities.
| Particular | Earlier | From 1 April 2026 |
|---|---|---|
| Hostel Allowance (per child/month) | ₹300 | ₹9,000 |
| Annual Exemption (2 children) | ₹7,200 | ₹2,16,000 |
Free Meals from Employer — Exempt up to ₹200 per Meal
The perquisite valuation rules for employer-provided meals have been updated. Meals provided by the employer — whether through an in-house canteen or meal vouchers — are now exempt up to ₹200 per meal, a significant increase from the earlier ₹50 limit. This means meal voucher programmes offered by employers become substantially more tax-efficient for employees.
| Particular | Earlier | From 1 April 2026 |
|---|---|---|
| Exempt Limit per Meal | ₹50 | ₹200 |
Form 130 Replaces Form 16 — New TDS Certificate Format
One of the most visible changes in the new rules is the replacement of the widely recognised Form 16 (TDS Certificate for Salary) with Form No. 130. The earlier Form 16 had two parts (Part A and Part B). The new Form 130 introduces a three-part structure, with an additional annexure specifically for specified senior citizens.
This is part of a broader form rationalisation exercise — Form 16A becomes Form 131, Form 26AS becomes Form 168, PAN application Form 49A becomes Form 94, and Form 12BB is replaced by Form 124.
| Current Form | New Form No. | Purpose |
|---|---|---|
| Form 16 | Form 130 | TDS Certificate — Salary |
| Form 16A | Form 131 | TDS Certificate — Non-Salary |
| Form 12BB | Form 124 | Employee Investment Declaration |
| Form 26AS | Form 168 | Annual Tax Statement |
| Form 49A | Form 94 | PAN Application |
HRA Claims — Mandatory Disclosure of Landlord's PAN and Relationship
The government is significantly tightening scrutiny on House Rent Allowance claims. Under the new Form 124 (replacing Form 12BB), employees claiming HRA must now mandatorily disclose:
(a) The landlord's name, address, and PAN (if annual rent exceeds ₹1 lakh);
(b) The relationship with the landlord — whether the landlord is a spouse, parent, sibling, or other relative.
This is a significant compliance shift. Until now, employers generally accepted rent receipts and PAN details at face value, and genuine verification happened only during scrutiny. With the new disclosure framework, the tax department can automatically cross-verify and flag mismatches — particularly where rent is shown as paid to close family members without genuine financial substance.
Additionally, the new rules expand the 50% HRA exemption (previously limited to Delhi, Mumbai, Chennai and Kolkata) to four more cities — Bengaluru, Pune, Hyderabad, and Ahmedabad — benefiting a large number of employees in India's tech corridors.
Key Takeaways
The Income Tax Rules, 2026 bring a mix of long-overdue relief and tighter compliance. Here's what to act on immediately:
- Restructure salary components to include revised education (₹3,000/month) and hostel allowances (₹9,000/month) under the old regime
- Update meal voucher/canteen programmes to the new ₹200/meal exempt threshold
- Ensure payroll systems and TDS utilities reference the new form numbers — Form 130 (ex-Form 16), Form 124 (ex-Form 12BB), etc.
- Collect landlord PAN, address, and relationship details from employees claiming HRA before processing April salaries
- Employees in Bengaluru, Pune, Hyderabad, and Ahmedabad can now claim 50% HRA exemption at par with legacy metro cities
