Income tax relief for salaried? More savings on EV, HRA - but there's a catch

From April 1, 2026, a new set of income tax rules will come into force, marking a structural shift in how salaried individuals are taxed and how their compensation is evaluated. While the broader tax framework remains unchanged, the Income-tax Rules, 2026 introduce targeted benefits for salaried taxpayers—particularly around perquisite taxation and house rent allowance (HRA).

These changes are part of the transition to the Income-tax Act, 2025, replacing the decades-old 1962 rules, with a sharper focus on transparency, clarity, and modern compensation structures.

EV tax treatment 

One of the most notable changes is the inclusion of electric vehicles (EVs) in perquisite valuation rules. Jignesh Shah, Partner – Direct Tax, Bhuta Shah & Co., said the new framework has now clearly classified EVs alongside smaller engine vehicles, removing earlier ambiguity in tax treatment.

Shah said that earlier, perquisite valuation was linked to engine capacity—something that did not logically apply to EVs—leading to confusion for employers and payroll teams.

Under the revised rules, EVs are treated on par with cars having engine capacity up to 1.6 litres, placing them in a lower taxable bracket. Shah said this change makes EVs a more tax-efficient component of salary packages.

For instance, where a car is used for both official and personal purposes, the perquisite value for EVs is capped at ₹5,000 per month (plus ₹3,000 if a chauffeur is provided) when maintenance is borne by the employer. This is lower compared to higher-capacity vehicles, which attract a higher taxable value.

Shah said the move is also expected to support corporate-led EV adoption while offering tangible tax benefits to employees. 

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Wider HRA relief

Another major benefit comes in the form of expanded HRA exemption limits. The new rules have widened the definition of metro cities for tax purposes, allowing more taxpayers to claim higher exemptions.

Shah said that cities such as Bengaluru, Hyderabad, Pune, and Ahmedabad have now been included in the 50% HRA exemption category, along with Mumbai, Delhi, Chennai, and Kolkata.

This means salaried individuals in these cities can now claim higher tax-free HRA, directly reducing taxable income. Shah said the move reflects rising rental costs in these urban centres and provides meaningful relief to taxpayers.

Shah said: "The scope of definition of metro cities has been widened in the New IT Rules. In the Income Tax Rules, 1961, the metro cities were confined to Mumbai, Delhi, Kolkata and Chennai. However, in the New IT Rules, Ahmedabad, Bengaluru, Hyderabad and Pune (new metros) are also covered within the ambit of ‘metro cities’ along with the above-mentioned metro cities. This will help the inhabitants of the new metros to claim higher exemption in respect of HRA allowance with effect from 1 April 2026 – Tax Year 2026-27 onwards."

However, he noted that cities like Gurugram and Noida, both prominent job centres, continue to remain under the 40% bracket, creating disparities despite similar housing costs.

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The catch

A critical aspect of these changes is that most of these benefits — including HRA exemptions and perquisite advantages — are available only under the old tax regime. Shah said taxpayers opting for the new regime will not be able to claim these exemptions.

This reinforces the importance of salary structuring for salaried individuals who wish to maximise tax efficiency. Components such as HRA, company-provided EVs, and allowances continue to play a key role in reducing taxable income—but only under the old regime. 

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Tax planning from April 1

The new rules also signal a broader shift towards structured and employer-driven tax planning. Jignesh Shah, Partner – Direct Tax, Bhuta Shah & Co., said salaried individuals must ensure that such benefits are embedded within their salary structure and supported by documentation.

As compliance becomes more digitised and reporting-driven, upfront planning will become critical for optimising tax outcomes.

A new playbook for salaried taxpayers

With EV tax breaks and expanded HRA relief, the Income-tax Rules, 2026 clearly introduce targeted advantages for salaried individuals.

Shah said these changes do not alter tax rates but improve how compensation is taxed, making it essential for taxpayers to reassess their salary structures and tax regime choices from April 1, 2026.