Income tax overhaul: Key changes you should watch for from April 1, 2026

One of the most notable changes is the introduction of a unified ‘Tax Year’, replacing the long-standing distinction between Previous Year (PY) and Assessment Year (AY). This move is expected to eliminate confusion, particularly among individual taxpayers, by aligning income earnings, assessment periods and other aspects (like due dates, time limits etc.) with a single reference point.

The HRA benefits have also been expanded. Salaried taxpayers residing in rented premises in cities such as Bengaluru, Hyderabad, Pune, and Ahmedabad may now be eligible for higher exemption limits (reference amount being increased from 40 per cent of basic salary to 50 per cent of basic salary), bringing them at par with traditionally classified metro cities like Mumbai, Delhi, Chennai, and Kolkata. Additionally, a stricter disclosure requirement has been introduced. Taxpayers must now declare their relationship with the landlord. This measure is aimed at curbing potential misuse and improving transparency in claims.

In a move likely to benefit middle-class households, the tax exemption limits for children’s education and hostel allowances have been significantly increased. Education allowance limits have been increased from Rs 100 per month to Rs 3,000 per month per child, while hostel allowance limits have been increased from Rs 300 to Rs 9,000 per month per child. While this may still be only a fraction of the cost of education in certain cities and towns it is a welcome move to enhance these age-old limits. Similarly, the tax-free limit for employer provided meals and non-alcoholic beverages as well as food coupons has been enhanced from Rs 50 per meal to Rs 200 per meal. This increase reflects inflationary trends and aims to improve employees’ take-home pay.

The valuation of perquisites for employer provided cars has also been substantially revised and a valuation mechanism has been introduced for electric vehicles as well. Monthly taxable values range from Rs 2,000 to Rs 7,000 per month, with an additional Rs 3,000 per month where a chauffeur is provided. These updated slabs replace the earlier valuations of Rs 600 to Rs 2,400 (plus Rs 900 for chauffeur), potentially increasing the tax liability for employees availing such benefits.

Several employee related exemptions and perquisite thresholds have been revised upward. These include higher transport allowances for differently abled employees, increased limits for tax-free employer provided gifts and vouchers, updated valuation rules for education benefits, and expanded exemptions for employer provided loans.

The reforms are not just limited to tax computation, they also introduce procedural changes. Key tax forms have been replaced or consolidated, for instance, Form 130 has replaced Form 16 (popularly known as salary certificate), while Form 124 has taken the place of Form 12BB (employee declaration). Additionally, various TDS forms and PAN application processes have been streamlined. A new declaration requirement under Form 157 has been introduced for individuals leaving India, enhancing reporting obligations in cross-border scenarios where either no PAN or income below taxable limit.
 

Furthermore, taxpayers claiming foreign tax credit exceeding Rs 100,000 would now need certification from a Chartered Accountant in Form 44 which is a replacement of Form 67 under the current law required when a taxpayer is claiming foreign tax credit.
 

Additionally, certain Budget 2026 recommendations (which is yet to receive the Presidential assent) are also noteworthy, which are expected to impact the salaried taxpayers effective 1 April 2026: Extended timelines for filing Returns To provide greater flexibility, revised tax returns filing deadline is proposed to be extended to March 31 of the next tax year, instead of the earlier December 31 deadline, subject to a nominal fee. Similarly, the due date for filing original returns for taxpayers with non-audit business income is proposed to be extended from July 31 to August 31, offering additional time for compliance.

It is also proposed that for overseas tour packages and education/ medical purposes remittances, TCS rates may be reduced to 2 per cent from the current 5 per cent or 20 per cent. This change is expected to provide cash flow relief to families incurring such expenses.

Another noteworthy initiative is the proposed Foreign Assets Disclosure Scheme for small taxpayers. This would offer a six-month window for voluntary disclosure of previously unreported foreign assets, allowing taxpayers to regularise their filings upon payment of applicable taxes and levies.