Draft Income Tax Rules 2026: Major changes likely in car perks, child education-linked allowances?

Income Tax Rules 2026 mention a number of changes, including an updated definition of the taxable value of motor vehicles and a higher provision to adjust taxable income against the money spent on children's education and hostel stay. Sources say that a lot of the changes, as proposed by the rules set to come into force from April 1, are broadly aimed at reducing the overall tax burden on income tax assessees, especially the salaried class.

The I-T department has put the draft income tax rules in the public domain, inviting comments till February 22.

These changes are regime-agnostic -- meaning they will be applicable regardless of the regime that a taxpayer has chosen.

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Tax planners say that these changes will indirectly result in leaving more money in the hands of eligible assessees while simplifying the overall tax process and documentation.

Major changes in draft income tax rules 2026

The draft rules will have a total of 333 laws instead of the 511 in the Income Tax Act, 2025, and a reduced number of income tax forms, at 190, instead of the current 399. Besides, Form 16 has been shortened to about half a page, now containing only essential information, a major change from its current size of 2-3 pages.

The new income tax rules and forms will be notified in the first week of March.

Currently, more than 120 million people pay income tax in some form, but only over 95 million taxpayers actually file income tax returns. With greater use of technology and simplified forms under the new income tax framework, the number of people filing tax returns is expected to increase, say income tax sources.

Here are key changes expected in the draft Income Tax Bill 2026, according to CBDT sources:

• Further simplification: The language of income tax documents has been simplified further, removing operational, administrative and legal ambiguities.
• Pre-filled forms: Automatically-filled forms based on assessee bank details to reduce margin of error as well as litigation
• Motor vehicle taxable value changed: A higher limit on perquisites such as an office-owned car to an employee to Rs 8,000 from the current around Rs 3,000 per month (Rs 8,000/month for small car instead of the current Rs 2,700 and Rs 10,000/month for a large car instead of the current Rs 3,300)
• Children's education allowance: A higher limit of Rs 3,000 per month per child instead of the existing Rs 100 per month; for two children, the overall limit to be Rs 72,000 versus the current limit of Rs 2,400
• Hostel allowance: A hike in the existing limit of Rs 300 per month to Rs 9,000 per month per child; the overall limit for two children to be Rs 2,16,000 per year
• Crypto exchanges to share details with I-T department: From the next year, cryptocurrency bourses will be required to share details of their trading volumes with the taxman