A Strategic Analysis by ASC Group
The Government of India has released the Draft Income Tax Rules, 2026 with amended forms to implement the Income Tax Act, 2025. These draft rules are proposed to come into force from April 1, 2026 and have been issued to invite feedback from stakeholders and the public.
It aims to simplify tax administration, increase transparency and strengthen compliance through technology-driven reporting and structured disclosures.
At ASC Group, we have carefully analyzed the proposed changes and outlined the most significant updates that will impact employees, businesses, multinational groups and reporting entities.
1. Changes in employee taxation
The draft rules propose significant amendments in perquisite valuation and tax-free allowances:
- Motor Car Perks (Employer Owned Car): The taxable perquisite value has increased significantly, in some cases almost three times.
- interest-free credit: The limit increased from Rs. 20,000 to Rs. 2,00,000 (Total outstanding balance; less than or equal to Rs 2,00,000).
- Meal Allowance: Tax-free limit increased from Rs. 50 to Rs. ₹200 per meal (applicable under both the old and new regimes).
- Gift Vouchers: Annual discount increased from Rs. 5,000 to Rs. 15,000.
- Child Education Allowance: Increase from Rs. 100 to Rs. Rs 3,000 per month per child.
- Hostel Allowance: Increase from Rs. 300 to Rs. ₹9,000 per month per child.
- HRA Rules: Hyderabad, Pune, Ahmedabad and Bengaluru were added to the 50% salary relaxation category.
LTC (air travel)
The reference restricting exemption to “economy class fare” has been removed. The concession will now apply to the category of travel to which the employee is entitled, including recognized public transport, where applicable.
HRA compliance
Employers must now:
- Disclose the relationship between the employee and the landlord
- Collect and retain rental contract documents
Effect: The payroll system and HR compliance framework should be restructured before FY 2026-27.
2. Mandatory electronic books of account in India
One important compliance change has been proposed:
- Books maintained electronically should be accessible from India at all times.
- Backup servers must be physically located in India.
- Books should be updated on daily basis.
Further, it is proposed to merge Tax Audit Forms 3CA/3CB/3CD Form 26Including extended disclosures:
- accounting software description
- Statutory Audit Competencies Reporting
- Disclosure of foreign remittances not subject to withholding tax
- Server IP Address Details
- MAT/AMT credit utilization
Effect: Companies using foreign cloud storage will have to align their IT infrastructure with Indian data localization requirements.
3. Capital gains and valuation changes
- FMV reference limit under section 55A increased from Rs. 25,000 to Rs. 10,00,000.
- Net worth certification for slump sales replaced with new Form 28.
- FMV1 and FMV2 calculations should be disclosed in Form 28.
These changes enhance evaluation transparency and structured reporting.
4. Treaty Benefits and Foreign Tax Credit (FTC)
- Form 10F (renumbered as Form 41) is mandatory even if the TRC contains complete details.
- Indian communication address is required.
- FTC Form 44 (replacing Form 67) is required to:
- Certification by accountant for companies or where foreign tax exceeds Rs. 1 lakh.
- FTC calculation based on net income.
- New Form 45 introduced for disputed foreign tax settlement.
Effect: Cross-border investors and multinational entities should strengthen documentation and certification controls.
5. Income Tax Returns and Defective Return Criteria
- ITR-1 eligibility has been expanded to include two house properties.
- No separate form is required to opt for the new tax regime.
- Defective return provisions tightened:
- non filing of audit report
- MAT credit mismatch
- incomplete program
- Wrong ITR form selection (for example, claiming deduction from “Income from other sources” may require filing ITR-3 instead of ITR-4, where applicable)
Compliance accuracy becomes critical.
6. Evaluation and Appeal
Process of faceless assessment, revaluation or recalculation (Rule 176)
- The procedural provisions of section 144B of the Income Tax Act, 1961 are proposed to be formally incorporated in the Draft Income Tax Rules, 2026.
- The Finance Bill, 2026 is proposed to issue a general order This includes both assessment and penalty for under-reporting or mis-reporting of income.
- However, under Draft Rule 176, only a Notice to initiate penalty proceedings Will be issued with the order.
- This creates a potential procedural gap between the Finance Bill proposal and the draft rules framework.
- Draft Form 99 (replacing the existing Form 35) proposes separate disclosure sections for:
- stop evaluation
- regular evaluation
- penalty proceedings
- tds assessment
- Appellants can now file declaration for Repeated appeal under Section 375 of the Income Tax Act, 2025Where similar questions of law are pending before the High Court or the Supreme Court.
- Additionally, the draft Form 99 proposes that the director/authorized signatory will have to certify that:
- The Appellant is not seeking exemption from penalty under Section 440 of the Income Tax Act, 2025.
- This is relevant because exemption cannot be granted where an appeal has been filed.
- Draft Form 99 enables submission of copies of earlier appellate orders on similar issues, a facility not available under the existing Form 35.
7. Transfer Pricing and APA Improvements
Block Transfer Pricing Assessment – Determining arm's length pricing for multiple years (New Rule 82)
- While the Income Tax Act, 1961 allowed multi-year ALP determination in a single proceeding, the procedural rules were not prescribed earlier.
- Draft Rule 82 introduces a formal framework for multi-year arm's length pricing.
- The rules stipulate:
- eligibility criteria
- forms to be submitted
- filing deadline
- Documentation Requirements
- supporting disclosures
- It formalizes block transfer pricing assessments under a structured compliance mechanism.
Proposed changes related to Advance Pricing Agreement (APA):
- A flat application fee of Rs. Rs 20 lakh is proposed for all APA applications, replacing the earlier tiered fee structure.
- Time limit introduced for completing unilateral APA: Within 1 year from the end of the financial year in which the application is accepted.
- An APA application will be considered closed where no agreement has been signed within 3 years from the end of the financial year in which the application is submitted.
- Special Timeline for IT Services (One-way APA):
- If no agreement is reached within 2 years from the end of the quarter in which the application is made then the application will be considered closed.
- An additional 6 months may be requested.
- Another extension of 6 months is proposed.
- These changes introduce a structured and time-bound APA system.
Proposed changes to the rules related to the Safe Harbor rules:
- Safe harbor margin reduced to 15.50% for IT services (where revenue does not exceed Rs 2,000 crore).
- 5-year safe harbor block option from FY 2026-27.
- Extended Form 48 Disclosure (replacing Form 3CEB).
- Integration of software development services, IT-enabled services, KPO services and software related contract research & development under the integrated IT services category.
Effect: MNCs should re-think the transfer pricing strategy and APA scheme.
8. Expanded Reporting and Crypto Inclusion
The reporting framework has expanded significantly:
- SFT limit revised (Rs 5 lakh for non-PAN cases).
- Fixed asset reporting limit increased to Rs. 45 lakhs.
- Insurance premium reporting is covered under SFT.
- FATCA's scope expanded to include crypto assets, CBDCs and e-money.
- Crypto-asset service providers must file Form 167 annually.
- TCS due dates aligned with TDS deadlines.
- Single form proposed for low/nil TDS and TCS applications.
India's tax reporting framework is moving decisively towards digital financial transparency.
strategic outlook
The Draft Income Tax Rules, 2026 mark a clear policy shift:
- data localization
- Technology-Enabled Compliance
- Enhanced reporting transparency
- Strict Documentation Standards
- streamlined forms and processes
While simplification remains the stated objective, documentation and disclosure requirements have increased significantly.
How ASC Group can help
ASC Group supports businesses and multinational entities:
- Transformation Scheme under Income Tax Act, 2025
- Payroll Restructuring and Perks Valuation Advice
- Transfer Pricing and APA Advice
- Foreign Tax Credit Compliance and Certification
- Data Localization and Tax Audit Preparation
- SFT, FATCA and Crypto Reporting Compliance
- Representation and appeal advice
These draft rules are in the public domain for feedback and businesses may find it complex to understand the changes expected from this draft. They should take guidance from ASC Group.
conclusion
The draft Income Tax Rules, 2026 introduce structural changes in various aspects including payroll taxation, transfer pricing, reporting and digital compliance. Businesses and taxpayers should examine the expected changes in these rules and if they wish, provide their valuable feedback before its implementation i.e. 1st April 2026.
ASC Group is committed to guiding businesses and individuals through this evolving regulatory landscape with structured, compliance and strategic advisory support.