Income Tax 2026: Key rule changes that would increase salaried take-home pay

April 1, 2026, marks a significant shift in India’s direct tax framework, with the new Income Tax Rules, 2026 coming into effect under the Income Tax Act, 2025. While tax slabs remain unchanged, a series of targeted tweaks in exemptions, allowances, and compliance norms are set to materially benefit salaried taxpayers.

EV tax reforms

Changes in perquisite valuation rules may have mixed implications. The updated framework now explicitly includes electric vehicles (EVs), ensuring uniform tax treatment with conventional vehicles. While this removes ambiguity and supports EV adoption, higher valuation thresholds for employer-provided cars could increase taxable perquisites for some employees.

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CA (Dr.) Suresh Surana said: "Under Rule 15(3)(a), Table II of the Income Tax Rules, 2026 [corresponding rule 3(2)(A) Table II of Income tax Rules 1962] governing the valuation of perquisites for employer-provided motor cars has been updated to explicitly include vehicles “where the cubic capacity of the engine does not exceed 1.6 litres or the motor car is an electric vehicle.” This clarification brings electric vehicles (EVs) within the ambit of the rule and removes the ambiguity that previously existed. With the Income-tax Rules 2026 now expressly covering EVs under the perquisite valuation framework, key uncertainties have been addressed around whether EVs should be treated differently from conventional fuel-based vehicles and the methodology for computing their perquisite value within salary structures. Overall, this clarification ensures a uniform tax treatment for both EVs and conventional vehicles."

HRA benefits

One of the most impactful changes is the expansion of House Rent Allowance (HRA) benefits. The government has widened the list of cities eligible for the higher 50% salary-based exemption to include Bengaluru, Hyderabad, Pune, and Ahmedabad, in addition to the traditional metros. 

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One of the most impactful changes is the expansion and refinement of House Rent Allowance (HRA) benefits. As highlighted by CA  Surana, the rules continue to follow the “least of three conditions” formula—actual HRA received, 50% of salary for metro cities (40% for non-metros), or rent paid minus 10% of salary. Importantly, “salary” for this purpose includes basic pay, dearness allowance, and commission linked to turnover.

In a significant update, the list of cities eligible for the higher 50% exemption has been expanded beyond Delhi, Mumbai, Chennai, and Kolkata to include Bengaluru, Hyderabad, Pune, and Ahmedabad. This move is expected to provide meaningful tax relief amid rising urban rents. Additionally, new compliance requirements have been introduced—salaried taxpayers must now disclose their relationship with the landlord in Form 124, especially in cases where rent is paid to relatives—signalling tighter reporting norms alongside higher exemptions.

Child'e education allowance

Further easing the burden on households, the government has sharply increased exemptions for children’s education and hostel allowances. These limits have been revised upward, offering significant tax savings for salaried individuals with dependent children. However, these benefits continue to be available only under the old tax regime, making regime selection a critical decision for taxpayers.

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Experts note that while the new tax regime continues to offer lower rates with minimal deductions, the enhanced exemptions under the old regime could tilt the balance in its favour for many salaried taxpayers. The revised limits for HRA, education, and other allowances mean that individuals may achieve higher tax efficiency under the old structure, depending on their salary composition.