CBDT seeks inputs and suggestions on the proposed Income Tax Rules, 2026 from the stakeholders and members of public up to 22nd February 2026

The Central Board of Direct Taxes (CBDT) has published a draft of proposed Income Tax Rules, 2026 and Forms (“Draft Rules”) to align with the provisions of the Income-tax Act, 2025 in supersession of the existing Income Tax Rules,1962.

The Draft Rules contains 333 rules and 190 forms, including removal of redundancy and consolidation of rules wherever possible.

CBDT is seeking inputs and suggestions on the Draft Rules and Forms from the stakeholders and members of public up to 22nd February 2026 in the following four categories:

• Simplification of Language
• Reduction of Litigation
• Reduction of Compliance Burden
• Identification of Redundant/Obsolete Rules and Forms

To facilitate this, a utility has been launched on the e-filing portal, which can be accessed through the following link – https://eportal.incometax.gov.in/iec/foservices/#/pre-login/ita-comprehensive-review

Important provisions proposed to be introduced in the new Draft Rules:

• Rule 13 of the Draft Rules now clearly defines when a non-resident will be considered to have a “Significant Economic Presence” (SEP) in India. A non-resident will be treated as having SEP if – (i) payments made from India exceed ₹2 crore in a tax year, or (ii) the non-resident has 3 lakh or more users in India in a tax year, even without physical presence. This brings certainty to digital and online businesses. Earlier, although SEP was introduced in the law, the Rules did not prescribe any numerical thresholds, making enforcement uncertain and largely theoretical.

• Rule 14 of the Draft Rules now simplifies how expenses linked to tax-free income are disallowed. The disallowance will consist of only two components: (i) expenses directly attributable to earning tax-free income, and (ii) a fixed amount equal to 1% of the average monthly value of investments that generate tax-free income. Importantly, the total disallowance cannot exceed the total expenses claimed by the taxpayer, ensuring the adjustment does not go beyond real expenditure. Earlier, under Rule 8D of the Income-tax Rules, 1962, the disallowance was calculated using a multi-step formula that separately disallowed interest expenditure and 0.5% of average investments, which was complex to apply and frequently resulted in disputes and excessive additions.

• Rule 16 now prescribes a mandatory formula to compute annual accretion (interest/dividend) taxable on employer contributions exceeding ₹7.5 lakh to recognised provident fund, NPS and superannuation funds. Earlier, although excess contribution was taxable, the computational mechanism was fragmented and largely driven by notifications.

• Rule 17 of the Draft Rules now expressly fixes a salary threshold for applying certain perquisite valuation rules. Employees with salary exceeding ₹4 lakh per year fall within the scope of specified perquisite valuation provisions, ensuring uniform application. Earlier, the threshold existed in scattered provisions and interpretations, but was not clearly consolidated in the Rules, leading to uncertainty.

• Rule 25 of the Draft Rules now imposes an express maximum depreciation cap of 40% for taxpayers opting concessional tax regimes under the Income-tax Act, 2025. This cap applies to domestic companies opting the concessional regimes under sections 199, 200 and 202, to individuals, HUFs, firms, AOPs and BOIs opting the concessional regime under section 202, and to co-operative societies opting the concessional regimes under sections 203 and 204. As a result, depreciation more than 40% cannot be claimed by any taxpayer choosing these lower-tax regimes. Earlier, a similar depreciation restriction was expressly provided only for companies opting concessional regimes under the Income-tax Act, 1961 (such as sections 115BAA and 115BAB), while other categories of taxpayers were not specifically restricted under the Rules.

• Rule 46 of the Draft Rules now mandates that where books of account are maintained electronically, they must be accessible in India at all times, backed up on servers physically located in India, and backed up daily, while the requirement to retain books for 7 years and the ₹1.5 lakh gross receipt threshold remain unchanged. Earlier, electronic maintenance of books was permitted without any requirement on data localisation, server location or backup frequency.

• Rule 47 of the Draft Rules now clearly allows a tax audit report under Section 63 of the Income-tax Act,2025 to be revised in specific situations. Where an expense is disallowed in the original audit because payment had not been made by the audit date, and such payment is subsequently made after the audit report is furnished, the auditor is now permitted to revise the audit report to reflect the correct disallowance amount. The revised audit report must be obtained and filed on or before the end of the financial year immediately following the relevant tax year. Earlier, the Income-tax Rules did not contain any express provision permitting revision of audit reports, and such revisions were allowed only based on court decisions, which created uncertainty for taxpayers and auditors.

• Rule 48 of the Draft Rules now formally recognises modern digital payment modes such as UPI, IMPS, RTGS, NEFT, debit cards, credit cards, Aadhaar-based payments and fully KYC-compliant digital currency wallets, including cross-border digital currency transactions, for compliance with cash restriction provisions. Earlier, recognition was largely limited to traditional banking instruments and limited electronic transfer systems.

• Rule 49 of the Draft Rules now provides a structured, year-wise mechanism for taxing amounts received from specified high-value life insurance policies. Where policy proceeds are received in more than one instalment over different tax years, the Rule requires that, in each year, only the net gain portion of the receipt is taxed after excluding insurance premiums that have already been considered in earlier years. This ensures that the same premium amount is not reduced multiple times and that tax is levied only on the actual accretion in value. Earlier, the Income-tax Rules did not prescribe a clear method for dealing with staggered or partial receipts, which led to ambiguity and a genuine risk of double taxation of premiums across years.

• Rule 50 of the Draft Rules applies to partnerships, limited liability partnerships, and other specified entities whose income is taxed on a pass-through basis and which undertake revaluation of capital assets. The Rule now introduces a formula-based mechanism to ensure that once revaluation-related amounts are taxed in the hands of partners or members, the same revalued amount cannot be used again by the entity to claim higher depreciation or an increased cost base on the revalued assets or on self-generated goodwill. In effect, depreciation and cost step-up are expressly denied on revaluation increments. Earlier, although distributions arising from revaluation were taxable, there was no express rule preventing the entity from also claiming tax benefits on the same revalued amount, leading to potential double tax advantages.

• Rule 58 of the Draft Rules now clearly specifies the categories of persons eligible for tax relief in Government-mandated restructurings, insolvency resolution plans, strategic disinvestment and similar notified schemes. The Rule safeguards reliefs such as non-taxation of certain receipts and carry-forward of losses, which might otherwise be denied due to technical provisions. For example, where a shareholder receives shares under a government-notified bank reconstruction or an NCLT-approved insolvency resolution plan at a value different from the original investment, such receipt will not be taxed merely due to valuation differences. Earlier, such relief depended on scattered notifications and court rulings, resulting in uncertainty and litigation.

• Rule 60 of the Draft Rules now mandates that amalgamated entities must achieve at least 50% of installed production capacity within 4 years, furnish annual certification, and permits Government relaxation in genuine hardship cases for carry-forward of losses. Earlier, while conditions existed, timelines and certification requirements were not expressly enforced in the Rules.

• Rule 75 of the Draft Rules now formalises and expands the documentation required for claiming tax treaty (DTAA) benefits. Taxpayers seeking treaty relief must now maintain prescribed supporting documents, including evidence of tax residency, eligibility for treaty benefits, and transaction-level details, and must furnish information in specified forms within the prescribed timelines. Treaty relief can be denied if these documentation requirements are not met. Earlier, while taxpayers were expected to produce documents such as tax residency certificates, the Rules did not lay down a structured documentation framework or prescribed forms, and treaty claims were examined largely based on administrative instructions and case-by-case scrutiny, leading to inconsistency and disputes.

• Rules 140 to 145 of the Draft Rules now fundamentally change how income of specified funds and IFSC entities is taxed and monitored. Income is now attributed to investors using a daily weighted average of assets under management, rather than a single year-end value, so tax allocation better reflects actual holding periods. These Rules also impose mandatory annual reporting, and failure to comply can result in loss of concessional tax benefits. In addition, a new anti-abuse rule requires that if a non-sponsor investor becomes an Indian resident, such investor must exit the fund within 3 months to continue enjoying exemption. Earlier, income attribution was based on year-end values, reporting requirements were relatively light, and there was no express mechanism to deal with resident participation risk.

• Rule 149 of the Draft Rules now introduces a formal and time-bound approval process for making valuation references by tax authorities. Each reference must carry a designated approval number, and the valuation authority must dispose of the reference within 6 months. Earlier, valuation references had no standard approval tracking or statutory timelines, often leading to delays and procedural challenges.

• Rule 150 of the Draft Rules now mandates that the stamp-duty value be used as the primary basis for valuing immovable property for tax purposes. Alternative valuation methods are permitted only where stamp-duty valuation is not feasible. Earlier, multiple valuation methods were permitted under the Rules, which frequently led to disputes over fair market value.

• Rule 157 of the Draft Rules now expands exemption from PAN requirements for certain non-residents. Non-resident investors in specified funds and eligible foreign investors dealing exclusively in IFSC-listed securities are exempted from PAN, subject to quarterly reporting by funds or brokers (Form 92). Earlier, PAN exemption was narrower and largely dependent on circulars, with compliance burden falling on the investor.

• Rules 158 and 159 of the Draft Rules now significantly tighten the PAN framework and transaction reporting. PAN allotment is linked with mandatory Aadhaar authentication, late fees are introduced for delayed linkage, and the list of transactions requiring compulsory PAN quoting is expanded. This shifts PAN compliance from a facilitative system to a strict identity-linked compliance framework. Earlier, Aadhaar linkage and PAN quoting requirements were less rigorously enforced through the Rules

• Rule 285 of the Draft Rules now makes exemption of capital gains on relocation of offshore funds to India conditional upon strict compliance with a prescribed formula and filing requirements. The exemption must be computed using a mandatory formula based on daily assets under management, and filing of the prescribed form is a condition precedent. Failure to file the form results in automatic denial of exemption. Earlier, the exemption operated on principle-based computation, and procedural lapses were often curable.

• Rule 286 of the Draft Rules now places time and structural limits on approval of employee welfare funds. Approval is restricted to three tax years at a time, the fund must be constituted as a trust, and any rejection of approval must be supported by a reasoned (speaking) order. Earlier, approvals could continue indefinitely without mandatory periodic review.

• Rule 288 of the Draft Rules now tightens the regulatory framework for Infrastructure Debt Funds (IDFs). Investments are restricted to completed (post-COD) infrastructure projects, exposure to any single project is capped at 20% of the fund corpus, and investments are prohibited where specified persons have a substantial interest, to prevent conflicts. Earlier, these prudential limits were either absent or less restrictive.

• Rule 292 of the Draft Rules now prescribes clearer investment discipline for provident funds. Funds must maintain a minimum 5% exposure to equity, along with clearly defined limits for debt investments. Earlier, asset allocation rules allowed wider discretion to fund managers.

• Rules 301 to 315 of the Draft Rules now impose tighter governance controls on superannuation funds. Employer contributions are capped at 27% of salary, trustee eligibility conditions are strengthened, and prior approval is required for amendments to fund rules. Earlier, contribution limits and governance requirements were more flexible.

• Rules 316 to 329 of the Draft Rules now put a uniform regulatory framework in place for approved gratuity funds. The Rules cap the annual contribution that an employer can claim as a deduction to 8.33% of the employee’s salary, bringing consistency across all approved gratuity funds. In addition, any restructuring, amalgamation, merger, or winding up of an approved gratuity fund now requires prior approval from the tax authorities, ensuring regulatory oversight over changes affecting employees’ retirement benefits. Earlier, while contribution limits existed in principle, they were applied inconsistently, and approvals for restructuring or closure of gratuity funds were not expressly mandated under a single, uniform framework.

• Rule 330 of the Draft Rules now expressly allows insurers to create a 100% reserve for terrorism-related fire and engineering insurance risks and clearly defines the meaning of net premium income. Earlier, the permissibility and extent of such reserves were unclear.

• Rule 331 of the Draft Rules now makes tax approval for infrastructure investment conditional on timely deployment of funds. Entities that have obtained approval for infrastructure investment must invest at least 25% of the approved amount within the first year from the date of approval. If this minimum deployment requirement is not met, the tax authority is empowered to withdraw the approval, which can result in loss of the associated tax benefits. Earlier, once approval was granted, there was no express requirement in the Rules to link continuation of the approval to year-wise deployment milestones.

• Rule 332 of the Draft Rules now formally authorises the tax administration to run compliance through a fully electronic system. The Rule empowers the designated tax authority to mandate electronic filing of returns, statements, and forms, to require the use of digital signatures or electronic verification codes (EVC), and to prescribe data standards and formats for electronic submissions. Once notified, compliance through electronic means becomes legally mandatory, not optional. Earlier, electronic filing and verification requirements were implemented largely through circulars and system advisories, without explicit statutory backing in the Rules, which occasionally gave rise to legal challenges.

• Rule 333 of the Draft Rules now makes electronic payment of tax mandatory for all prescribed categories of taxpayers. The prescribed category includes all companies and all persons whose accounts are required to be audited under section 63 of the Income-tax Act, 2025, such as firms, LLPs, individuals, HUFs and other entities subject to tax audit. These taxpayers must discharge their tax liability only through electronic modes using authorised banking or digital payment channels. Earlier, compulsory electronic payment of tax applied mainly to companies, while non-corporate taxpayers subject to audit could, in certain cases, use non-electronic modes.

Source: Press Information Bureau