Draft Income-tax Rules 2026: The Ultimate Comprehensive Guide for Central Government Employees
The Ministry of Finance has released the Draft Income-tax Rules, 2026, proposed to come into effect on April 1, 2026. These rules will work alongside the Income-tax Act, 2025 to define how salary, perquisites, and exemptions are calculated for the upcoming tax years.
Table of Contents
1. Preliminary & Commencement
As per Rule 1, these rules are officially titled the "Income-tax Rules, 2026" and shall come into force on the 1st day of April, 2026. In these rules, "Act" refers to the new Income-tax Act, 2025.
2. Valuation of Perquisites (Rule 15)
Valuation of non-monetary benefits is a critical area for government employees, particularly regarding housing and vehicles.
A. Residential Accommodation
For Central or State Government employees, the perquisite value is the License Fee determined by the Government in accordance with the rules of the relevant office, minus any rent actually paid by the employee.
- Furnished Accommodation: The value increases by 10% per annum of the original cost of furniture (TVs, ACs, refrigerators) or actual hire charges if rented by the employer.
- Accommodation on Transfer: If provided with two houses at a new station, only the lower-valued one is taxed for the first 90 days. After 90 days, both become taxable
B. Motor Car Benefits
| Circumstance | Up to 1.6 Litres | Above 1.6 Litres |
|---|---|---|
| Wholly Official Use | NIL (with records) | NIL (with records) |
| Mixed Use (Official & Personal) | ₹5,000 / month | ₹7,000 / month |
| Chauffeur (Driver) Provided | Add ₹3,000 / month | Add ₹3,000 / month |
3. Exemptions & Special Allowances (Rules 278-280)
House Rent Allowance (HRA) - Rule 279
The exempt amount of HRA is the least of:
- Actual HRA received
- Rent paid minus 10% salary
- 50% of salary for Metro cities (Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad, Bengaluru) or 40% of salary for other places.
Leave Travel Concession (LTC) - Rule 278
- Exemption is available for two journeys in a block of four calendar years (starting from 2022).
- Restricted to the shortest route and entitled class fare.
- Applicable only for a maximum of two surviving children (with exceptions for children born before Oct 1, 1998, or multiple births after the first child).
Other Standard Allowances (Rule 280)
- Children Education Allowance: Exempt up to ₹3,000 per month per child (max 2 children).
- Hostel Expenditure Allowance: Exempt up to ₹9,000 per month per child (max 2 children).
- Transport Allowance (Handicapped): ₹15,000 + DA in Metros; ₹8,000 + DA elsewhere.
- Tough Location Allowance: Tier I (₹7,000/mo), Tier II (₹4,500/mo), Tier III (₹1,500/mo).
4. Medical Benefits & Treatment (Rule 18)
Medical perquisites are exempt if treatment is for "Prescribed Diseases" in approved hospitals. These include:
- Cancer, TB, and AIDS.
- Serious heart, blood, or CNS diseases requiring surgical operation.
- Mental disorders (neurotic or psychotic) requiring at least three continuous days of hospital treatment.
5. Relief for Arrears & Retirement (Rule 73 & 20)
Relief Under Section 157(1)
When salary or family pension is received in arrears (Rule 73), employees can claim tax relief. The rule provides a 4-step formula to calculate the difference between tax on total income (including arrears) and the tax that would have been paid if arrears were received in the original years.
Voluntary Retirement (VRS) - Rule 20
Deduction is available for employees of PSUs or an authority established under a Central, State or Provincial Act; if they have completed 10 years of service or 40 years of age. The amount must not exceed the higher of 3 months' salary per year of service OR salary for the remaining months before retirement.
6. Compliance, Filing & Evidence (Rule 164 & 205)
- ITR-1 (SAHAJ): Eligible for residents with salary/pension income up to ₹50 lakh and not more than two house properties.
- Form No. 124 (Evidence of Claims): Must be submitted to the DDO to claim HRA, LTC, or home loan interest. For HRA, the landlord's PAN is mandatory if annual rent exceeds ₹1 lakh.
- Taxable PF Interest (Rule 277): Interest on employee contributions is taxable if the contribution exceeds ₹2.5 lakh (where the employer also contributes) or ₹5 lakh (where no employer contribution is made).
Want to Read the Full 410-Page Draft?
Stay informed with the official notification.
Download Full Draft PDF (410 Pages)Educational Purpose Only: The information provided in this article is for general informational and educational purposes only.
Accuracy & Mistakes: While every effort has been made to ensure accuracy, human errors or omissions may occur.
No Liability: Under no circumstances shall the author or this website be held liable for any loss arising from the use of this information.
Are you a Central Government Employee?
Don’t stay in the dark! Vital updates on Service Rules, Pension policies, and your career are happening right now.
Add as Preferred Source on Google
Follow us to ensure our latest exclusive reports appear first in your Google Search and Discover feed.
Comments
Post a Comment