For the salaried taxpayer, the rules bring a mix of welcome simplifications and new compliance obligations, the most immediately relevant being an extension of the higher HRA exemption to four additional cities, mandatory disclosure of the relationship between tenant and landlord for claiming the exemption and a significant reduction in the number of forms required for filing and compliance.
The new rules reduce the total number of rules from 511 to 333 and the number of forms from 399 to 190, changes that, on paper at least, represent a significant reduction in compliance burden for individuals and businesses alike.
HRA: Good News for Four More Cities
The most tangible benefit for salaried employees in the new rules concerns the house rent allowance exemption. Under the existing rules, only four metros — Mumbai, Delhi, Kolkata and Chennai — qualified for the higher HRA exemption of 50% of salary. All other cities attracted a lower exemption of 40%.
The Income Tax Rules, 2026 expand the list of cities eligible for the 50% exemption to eight: Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. This means salaried employees in Bengaluru, Hyderabad, Pune and Ahmedabad, four of India's largest and most expensive urban centres, will now be able to claim a higher HRA deduction against their rent payments, resulting in a lower tax outgo on the same salary.
For all other cities and towns, the 40% exemption limit continues unchanged.
The extension is particularly significant for Bengaluru and Hyderabad, where residential rents have risen sharply over the past decade, driven by the technology sector, and where salaried employees have long argued that the 40% cap failed to reflect the actual cost of renting a home.
The New Condition: Disclose Your Landlord
The HRA relief, however, comes with a new string attached. Taxpayers claiming HRA exemption will now be required to disclose their relationship with the landlord in a specified form. The government has framed this as a transparency measure and it is consistent with the broader thrust of the new rules which emphasise enhanced disclosures across multiple areas.
In practice, this means that employees renting from a family member, a parent, sibling, or spouse, will need to formally declare that relationship when claiming the exemption. While family rental arrangements are entirely legal and have been a legitimate tax planning tool for many years, the new disclosure requirement signals that the tax department intends to scrutinise such arrangements more closely. Taxpayers in these situations should ensure that rental agreements are properly documented, that rent is actually paid through banking channels and that the landlord declares the rental income in their own tax return.
Simpler Filing, Pre-filled Forms
Beyond HRA, the rules introduce improvements to the filing experience for individual taxpayers. The number of forms has been reduced from 399 to 190, and the new rules envisage simplified, pre-filled income tax return forms that draw on data already available with the tax department, from employers, banks, and other financial institutions, reducing the effort required from individual filers.
The replacement of the terms 'financial year' and 'assessment year' with the single term 'tax year' is a small but meaningful simplification. The distinction between the financial year in which income is earned and the assessment year in which it is taxed has historically been a source of confusion for ordinary taxpayers and the consolidation of both into a single 'tax year' concept should reduce that confusion, going forward.
Perquisite Limits Revised Upward
The rules also revise upward the valuation of employer-provided perquisites, including company cars, housing and allowances that are included in taxable salary. The manner in which employer-provided accommodation is valued will now depend on criteria including the city's population, the employee's salary level and whether the accommodation is owned or leased by the employer. These revisions are generally expected to result in modest reductions in the taxable value of perquisites for salaried employees, providing a small benefit without any change in tax slabs.
PAN Thresholds Raised
The rules also raise the thresholds above which quoting a permanent account number (PAN) is mandatory for large purchases and financial transactions. Under the new framework, the PAN quoting threshold for vehicle purchases has been revised to ₹5 lakh from ₹2 lakh.
No New Taxes, but Stricter Reporting
It bears emphasising, particularly given the anxiety that accompanies any major tax law change, that the new rules do not introduce any new taxes, change Income-Tax slabs, or alter basic exemption limits. The new Income Tax Act, 2025, passed by Parliament in August last year, was explicitly designed to simplify the language and structure of the six-decade-old Income Tax Act, 1961, reducing Sections from 819 to 536, chapters from 47 to 23, and words from 5.12 lakh to 2.6 lakh, while leaving the substantive tax burden on individuals unchanged.
What the rules do introduce, alongside the simplifications, is a significantly strengthened disclosure and reporting framework. Auditors have been given greater responsibility for checking PAN duplication and verifying tax liability arising from adverse audit observations. Companies face tighter rules around dividend distribution. Stock exchanges are required to maintain audit trails for seven years and submit monthly transaction reports to the tax department. These are compliance burdens on institutions rather than individuals — but they are part of a broader official effort to tighten enforcement and reduce tax evasion through better data tracking.
