What the new income-tax rules mean for the salaried class

It is now well-known that the Income-tax Act, 2025 is all set to take effect from April 1, 2026. While the Act is the primary legislation, procedural details are contained in the ‘Rules’ accompanying the Act. Accordingly, the government had made the draft of the Income-tax Rules, 2026 (new IT Rules) public recently. It will receive stakeholders’ feedback up to February 22. The final draft, also effective from April 1, will be notified on a later date.

From a personal taxation point of view, a reading of the draft rules reveals noteworthy changes to how perquisites (perks) and allowances of a salaried individual will be taxed hereon. The changes broadly pertain to how perks will be valued and the thresholds for taxability/ exemption. These, in the extant rules have not been updated in a long time and thus, have been revised in the new IT rules to reflect contemporary prices and realities. While some of the revisions are beneficial for the taxpayer, some are detrimental. Read on to find out how each impacts your take home pay.

General threshold for taxing perks

Perks are non-monetary benefits given to an employee, such as free food, free/ subsidised medical treatment, rent-free accommodation, so on and so forth. These are valued according to the IT Rules and added to the income of an employee. The extant provisions exempt the value of a benefit/ amenity (received free of cost or subsidised), when received by an employee whose cash salary does not exceed ₹50,000 per annum. This threshold has now been hiked to ₹4 lakh per annum.

Overseas medical treatment

This relates to cost of overseas medical treatment of employee or his family member borne by the employer. While the provisions as to the cost of treatment and overseas stay remain the same, the new IT rules tweak the provisions relating to the travel for such treatment. The extant provisions exempt travel cost from being treated as a taxable perk only if the employee’s gross annual income does not exceed ₹2 lakh. The new IT rules take this threshold higher to ₹8 lakh.

Use of company car

It is common for employers/ companies to lend a car to employees. The cars may be owned or leased by the company and employees could use them for both official and private purposes. Since the costs of running/ owning a car have gone up significantly since the last time the extant rules were updated, the new IT Rules have bumped up the valuation of this perk. There could be various permutations based on who owns the car, who bears the running costs and purpose for which it is used – official/ personal/ both. Here we focus on four cases where there is a change in valuation per the new IT Rules.

Case A: Car is owned/ leased by the company, costs borne by the company, employee uses it for both personal and official purposes

Per the extant rules, this perk is valued at ₹1,800 per month if it is a small car (engine capacity up to 1.6 litres) and ₹2,400 per month if it is a big car (engine capacity exceeds 1.6 litres). There is an additional ₹900 per month, if the company bears the driver’s salary.

Now, the new rules value the perk at ₹5,000 per month for a small car and ₹7,000 per month for a big car. Driver’s salary is valued at ₹3,000 per month.

Case B: Car is owned/ leased by the company, employee uses it for both personal and official purposes, employee pays out of his pocket to the extent of personal use

Currently, valuation in this case is ₹600 per month for a small car and ₹900 per month for a big car. Driver’s salary at an additional ₹900 per month.

The new IT Rules value the perk at a higher ₹2,000 per month for a small car and ₹3,000 per month for a big car. Driver’s salary borne by the company is valued at ₹3,000 per month – same as in case A.

Case C: Car is owned by the employee, costs are borne by the company, employee uses it for both personal and official purposes

Valuation under the extant rules stands as follows. For a small car: actual cost to the company minus ₹1,800 per month minus ₹900 per month (if driver provided). For a big car: actual cost to the company minus ₹2,400 per month minus ₹900 per month (if driver provided).

Now, under the new rules, for a small car: actual cost to the company minus ₹5,000 per month minus ₹3,000 per month (if driver provided). For a big car: actual cost to the company minus ₹7,000 per month minus ₹3,000 per month (if driver provided).

Case D: Employee owns a vehicle not being a car, uses it for both personal and official purposes, costs are borne by the company

This case typically applies for employees who use two-wheelers. Value of the perk under current rules: actual cost to the company minus ₹900 per month. This shifts to – actual cost to the company minus ₹3,000 per month under the new rules.

Interest-free loans

It is common for employees to get interest-free loans or loans at subsidised rates from their employers. Such a perk is valued at a notional interest – calculated using interest rate charged by State Bank of India on a similar loan. Any interest paid by the employee is deducted from this notional interest. This valuation logic is carried forward in the new rules as well. However, if aggregate loans borrowed by the employee from his employer does not exceed ₹20,000, the perk is not taxable at all. This threshold moves up to ₹2 lakh under the new IT Rules.

Gifts, vouchers, tokens

The extant rules exempt the value of gifts, vouchers or tokens received by the employee from his employer on ceremonial occasions, if aggregate value does not exceed ₹5,000 per annum. The threshold per the new IT Rules is ₹15,000 per annum.

Free food

Currently, free/ subsidised food and beverages (non-alcoholic) provided by employer during working hours on premises or food vouchers does not qualify as a taxable perk if the value per meal does not exceed ₹50. This becomes ₹200 per meal under the new rules.

Leave travel assistance

Leave travel assistance (LTA) is taxed as gross value of LTA minus exemption (calculated as per IT Rules). The provisions to value the exemption largely remain the same under the new rules, except in two cases.

In case of journey by air, currently, the exemption works out to the price of economy class ticket offered by the national carrier. Now that Air India has been sold to Tata Sons, the new rules cap the exemption at the fare admissible for the class of travel to which the employee is entitled. While it appears that the company’s own by-laws might decide in which class an employee is entitled to fly, more clarity is expected on this front.

In case of a journey where the source and destination are not connected by air, rail or any other means of recognised public transport, the extant rules cap the exemption at a notional and equivalent rail fare for a journey in first class A/C. The new rules simplify the calculation of exemption to ₹30 per km.

House rent allowance

Currently, the exemption for house rent allowance (HRA) is calculated as the minimum of:

a) Actual HRA

b) Actual rent paid minus one-tenth of salary (typically, basic + dearness allowance)

c) 50 per cent of salary (basic + DA) for employees residing in Mumbai, Delhi, Kolkata or Chennai; 40 per cent of salary for other employees.

Under the new IT Rules, a and b have been retained. Under c though, employees who are residents of Bengaluru, Pune, Ahmedabad and Hyderabad – will now be eligible for an exemption up to 50 per cent of salary.

Children allowance

Under the extant rules, exemption for children’s education allowance is capped at ₹100 per month per child for a maximum of two children. In line with the rising cost of education, this has now been hiked to ₹3,000 per month per child, for max two children.

Similarly, the exemption for children’s hostel allowance is capped at ₹300 per month per child for a maximum of two children. Under the new rules, it stands capped at ₹9,000 per month per kid, for max two kids.

Transport worker allowance

The new IT rules now introduce an exemption against allowance received by an employee of any transport system (think drivers, loco pilots, guards) to meet personal expenditure. This exemption is capped at a minimum of ₹25,000 per month or 70 per cent of such allowance.

Other exemptions

These apart, exemption caps against a range of allowances have been raised substantially, under the new rules. These include allowances for the armed forces such as Siachen allowance, high altitude allowance, island duty allowance and so on. These apart, allowances such as underground allowance for mine workers, transport allowance for the physically challenged, special compensatory allowance for those posted in hilly states, among others, account for the rest.

Which regime then?

The above-mentioned provisions for perks (all sub-heads until free food) apply to both the old and new regime. However, as far as allowances are concerned (LTA onwards), the exemptions apply only to those taxpayers opting for the old regime. That said, it is difficult to simply declare the old regime to be more attractive than the new regime and vice versa. The upgraded exemptions target a certain class of employees (armed forces, for instance) or certain kinds of exemptions (child education allowance, for example). If your pay slip includes a sizeable portion of these allowances, it might make sense to switch to the old regime (refer case study in the infographic). Work out how your tax liability changes or consult a tax practitioner to make an informed decision, before opting out of the new (default) regime.

Published on February 20, 2026