Decoding Draft Income-tax Rules, 2026: A Paradigm Shift in Salary Taxation & Perquisite Valuation

The release of the Draft Income-tax Rules, 2026 marks a significant milestone in the transition towards the proposed Income-Tax Act, 2025. While the new legislation promises a simplified tax regime, the subordinate legislation—specifically the draft rules—reveals a granular overhaul of the valuation mechanisms that govern salary taxation.

For tax professionals and payroll managers, the most critical changes lie in Draft Rule 15 (formerly Rule 3) concerning perquisites, Draft Rule 279 (HRA), and Draft Rule 280 regarding allowances.

This article provides a detailed comparative analysis of the proposed changes vis-à-vis the existing framework, highlighting the compliance imperatives for the upcoming fiscal year.

1. Motor Car Perquisite: A Fiscal Shock for Senior Management

Relevant Provision: Draft Rule 15(3)

 Perhaps the most aggressive change in the draft rules is the valuation of motor car perquisites. The concessional tax treatment for company-leased cars, which has remained static for decades, is set for a steep upward revision.

The Draft Rule 15(3) replaces the existing slab rates with significantly higher valuations, impacting the taxable salary of employees who use employer-provided vehicles for mixed purposes (official and personal).

 Impact Assessment: For a senior executive with a large car (>1.6L) and a driver, the annual taxable perquisite value will jump from ₹39,600 to ₹1,20,000. This will result in an additional tax outflow of approximately ₹25,000 (at the highest marginal rate).

Compliance Caveat: Draft Rule 15(3)(c) explicitly states that claiming “wholly official use” (nil perquisite value) requires the maintenance of a comprehensive logbook containing details of the journey, destination, mileage, and expenditure. In the absence of such documentation, the higher presumptive rates will apply.

2. Allowances: A Quantum Leap for Education & Hostel Spport

Relevant Provision: Draft Rule 280

In a move that significantly aligns tax benefits with current educational costs, the Draft Rules propose a massive hike in the exemption limits for Children Education and Hostel Allowances under Draft Rule 280 (replacing Rule 2BB of the 1962 Rules).

 Analysis: This is one of the most beneficial changes for the salaried middle class.

• Combined Impact: An employee with two children in a hostel can now claim a total annual exemption of ₹2,88,000 (₹3,000 + ₹9,000 per child × 2 children × 12 months).
• Comparison: Under the old rules, this exemption was capped at a meager ₹9,600 per annum.
• Strategic Action: Employers should immediately look into restructuring compensation packages to include these allowances up to the new maximum limits to optimize tax efficiency for employees.

3. HRA Exemption: Expanding the Definition of “Metro”

Relevant Provision: Draft Rule 279

 In a move long demanded by stakeholders, the CBDT has proposed to expand the list of cities eligible for the 50% HRA exemption limit. Historically, under Rule 2A of the 1962 Rules, only the four metropolitan cities (Delhi, Mumbai, Kolkata, Chennai) qualified for the 50% deduction against salary, while other major economic hubs were restricted to 40%.

Proposed Change: Draft Rule 279 includes Bengaluru, Hyderabad, Pune, and Ahmedabad in the 50% category.

Strategic Implication: This is a substantial relief for the salaried workforce in India’s “Tech Hubs,” where rental yields have surged. Employees in these cities can now claim a higher deduction under Section 10(13A) equivalents, potentially neutralizing the tax impact of the car perquisite hike.

4. Inflation Adjustment for Small Perks

The draft rules introduce realistic thresholds for minor perquisites, acknowledging the inflation that has rendered the old limits obsolete.

A. Free Food and Beverages

• Old Limit: ₹50 per meal.
• New Limit (Draft Rule 15): ₹200 per meal.
• Analysis: This 300% increase allows employers to provide quality meal cards or canteen facilities without triggering a tax liability for employees.

B. Gifts and Vouchers

• Old Limit: ₹5,000 per annum.
• New Limit: ₹15,000 per annum.
• Analysis: This tripling of the limit provides breathing room for festival bonuses and long-service awards.

C. Education Facilities (Perquisite)

• Old Limit: ₹1,000 per month per child.
• New Limit: ₹3,000 per month per child.
• Analysis: This applies where education is provided in institutions owned by the employer. It is pertinent to note that if the cost exceeds ₹3,000, the entire amount becomes taxable, unlike the Education Allowance (Rule 280) which is a standard deduction from cash allowance.

5. Residential Accommodation: Status Quo with Better Clarity

The valuation of Rent-Free Accommodation (RFA) had already undergone a significant amendment in September 2023, reducing the taxable rates from 15% to 10% for major cities.

The Draft Rules, 2026, codify this amendment.

• Population > 40 Lakhs: 10% of Salary.
• Population 15 Lakhs – 40 Lakhs:5% of Salary.
• Population < 15 Lakhs: 5% of Salary.

The Inflation Linked Cap introduced in 2023 also finds a permanent place in the new rules, ensuring that employees occupying the same government/employer accommodation for multiple years do not face a tax hike solely due to notional rental inflation.

Conclusion

The Draft Income-tax Rules, 2026, present a mixed bag for the salaried class. While the HRA expansion for non-metro IT hubs and the massive hike in Education & Hostel Allowances (Rule 280) are welcome relief measures, the steep hike in motor car perquisites will increase the tax burden on senior management.

Employers must use the window before April 1, 2026, to reconfigure payroll systems, update HRA logic for the new cities, and establish robust logbook mechanisms for company vehicles to ensure compliance.

Note: These rules are currently in draft stage and subject to final notification.