New Income Tax Act 2025 and Rules 2026 for India (Effective 1 April 2026)

New Income Tax Act 2025 and Rules 2026 for India (Effective 1 April 2026)


Hello everyone,

The Income Tax Act 2025 came into effect from 1 April 2026. This new law replaces the old Income Tax Act of 1961. Along with the new Act, the Income Tax Rules 2026 have also been released by the government.

These updates bring practical changes to salary processing, HRA exemptions, perquisite calculations, forms, and declarations. The new framework focuses on clearer language and updated rules for better compliance.

Info
Note: The basic tax slabs and rates remain the same.

We have already implemented all these changes in Zoho Payroll. Zoho Payroll will automatically apply the new rules, calculations, forms, and section references starting from FY 2026-27 (Tax Year 2026-27). You do not need to do any manual configuration or updates.

We still recommend reviewing the key updates below. This will help you understand the changes and communicate them clearly to your employees or management when needed.

Notes
Note: While there are several updates overall, we are highlighting the following five changes in this post because they are the most practical and immediately relevant for payroll teams.


Higher HRA Exemption for More Cities

House Rent Allowance (HRA) helps employees with their rent expenses. Employees can claim a tax exemption on this amount.

Old Rule: Only four cities (Delhi, Mumbai, Kolkata, and Chennai) were treated as metro cities.

Employees in these cities could claim exemption up to 50 percent of their basic salary (plus dearness allowance, if any). In other cities, the limit was 40 percent.

New Rule (effective 1 April 2026): Bengaluru, Hyderabad, Pune, and Ahmedabad cities have been added to the metro list.

Info
Note: This is only applicable for employees in the Old tax regime.

Employees living in these eight cities can now claim the higher exemption limit of 50 percent of basic salary (plus dearness allowance, if applicable). This will benefit many employees in these cities where rents are high.

The actual exemption allowed is still the lowest of these three amounts:
  1. Actual HRA received from the employer
  2. Rent actually paid minus 10 percent of basic salary
  3. 50 percent or 40 percent of basic salary (depending on the city)


Company-Provided Car (Higher Taxable Value)

When a company provides a car to an employee for both official and personal use, a fixed monthly value is added to the employee’s taxable salary as a perquisite regardless of whether the company or the employee bears the running and maintenance expenses. This value depends on the car’s engine capacity and who bears the running & maintenance expenses (fuel, repairs, etc.). Only the amount of this taxable value changes depending on who pays for the expenses.

Here is the new valuation under the Income Tax Rules, 2026:

Engine Capacity

Employer Bears Running & Maintenance Expenses

Employee Bears Running & Maintenance Expenses

Additional if Driver is Provided by Company

Up to 1.6 litres (including Electric Vehicles)

₹5,000 per month

₹2,000 per month

+ ₹3,000 per month

Above 1.6 litres

₹7,000 per month

₹3,000 per month

+ ₹3,000 per month



Interest-Free Loans from Employer

Companies often provide small interest-free loans to employees for personal needs.

New Rule: No perquisite tax applies if the total interest-free loan amount does not exceed Rs 2 lakh in a year.

This limit is significantly higher than the earlier limit of Rs 20,000. Any loan amount above Rs 2 lakh may attract a small notional interest as a taxable benefit.



New Section Numbers in the Income Tax Act

The new Income Tax Act 2025 has restructured and renumbered most sections of the Income Tax Act. It now has only 536 sections, organized logically. Related rules have been grouped together.

A few examples:
  1. Old Section 192 (the rule for TDS deduction on salary) is now Section 392.
  2. Many scattered sections related to other types of TDS (Tax Deducted at Source on payments like rent, commission, etc.) have been brought together and consolidated into Section 393.
  3. Provisions related to TCS (Tax Collected at Source) are now mostly under Section 394.

Zoho Payroll automatically handles the new section references and mappings.



Form Name Changes

To make tax procedures simpler and more organized, the government has introduced new form numbers under the new Act and Rules.

What has changed:

Form 16 (the familiar annual salary TDS certificate that employers issue to employees at the end of the year or when they leave the job) is now called Form 130.
The employee declaration form used for claiming HRA, LTA, home loan interest, and other exemptions (previously Form 12BB) is now Form 124.


Zoho Payroll will automatically use the new form numbers (Form 130 and Form 124) wherever required from Financial Year (FY) 2026-27 onwards.

Alert
Important Transition Note:
  1.  Form 16 for FY 2025-26 (salary paid from April 2025 to March 2026) will still be issued under the old name and the old Income Tax Act, 1961.
  2. The switch to Form 130 will apply only to the salary TDS certificate for FY 2026-27 (which will be issued in 2027).


For a complete picture of all changes under the new Act (including detailed comparisons, tables, and other updates like higher limits for children’s education allowance, hostel allowance, festival gifts, meal perquisites), you can read this comprehensive guide.

If you have any questions about how these changes appear in Zoho Payroll, or if you need help with a specific scenario, feel free to reply in this thread or contact support@zohopayroll.com. We are happy to assist.

Thank you for using Zoho Payroll. We are committed to keeping your payroll fully compliant and hassle-free with the latest tax rules.

With a shared purpose,
The Zoho Payroll Team


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