Last Updated on March 20, 2026 7:22 pm by INDIAN AWAAZ
R. Suryamurthy
India’s newly notified Income-tax Rules, 2026 introduce sweeping changes to the taxation of salaries and employee benefits, sharply increasing exemption limits across key allowances while formalising the treatment of emerging perks such as electric vehicles.
The rules, which come into force from April 1 under the Income-tax Act, 2025, replace long-standing thresholds under the Income-tax Act, 1961—many of which had remained unchanged for decades—signalling a broader attempt to align tax policy with current income levels and workplace practices.
Higher exemptions across everyday benefits
Among the most significant changes is a steep increase in education-related exemptions. Employer-provided education facilities will now be tax-free up to ₹3,000 per child per month, up from ₹1,000 earlier. Children’s education allowance has been raised from ₹100 to ₹3,000 per month, while hostel allowance has been increased from ₹300 to ₹9,000.
Food benefits have also been liberalised, with tax exemption on employer-provided meals rising fourfold from ₹50 to ₹200 per meal. Similarly, the exemption on gifts and vouchers has been tripled to ₹15,000 annually.
Medical support provisions have been expanded as well. Interest-free or concessional loans for specified diseases will now be tax-exempt up to ₹2 lakh (about $2,400), compared with just ₹20,000 earlier.
“These revised limits correct long-standing distortions in perquisite valuation and bring tax treatment closer to real-world costs,” said Sudhakar Sethuraman, Partner, Deloitte India, adding that the updated framework would reduce ambiguity and improve consistency in reporting.
Housing, travel and disability benefits recalibrated
The rules also revise housing benefits, expanding the 50% house rent allowance (HRA) exemption category to include Bengaluru, Hyderabad, Pune and Ahmedabad alongside Delhi, Mumbai, Chennai and Kolkata. Other cities will continue under the 40% bracket.
However, this has created disparities for high-cost urban centres such as Gurugram and Noida, which remain outside the higher exemption band.
“While the inclusion of cities like Bengaluru and Pune reflects their economic importance, the exclusion of NCR hubs means some employees will continue to face metro-level rents without equivalent tax relief,” said Amit Maheshwari, Managing Partner, AKM Global.
Transport allowance for disabled employees has been significantly increased to ₹15,000 per month plus dearness allowance in metro cities and ₹8,000 plus dearness allowance in other areas, up from ₹3,200 earlier. Leave Travel Concession (LTC) rules have also been standardised, with a fixed exemption of ₹30 per kilometre replacing earlier rail fare benchmarks in certain cases.
Electric vehicles brought into tax net
A key structural change is the formal inclusion of electric vehicles (EVs) in perquisite valuation rules for employer-provided cars—an area that previously lacked clarity.
Under the new framework, employer-provided vehicles used partly for personal purposes will attract a taxable value of ₹5,000 per month (plus ₹3,000 for chauffeur) for smaller vehicles and ₹7,000 for larger ones. Where employees bear running costs, the taxable value ranges from ₹2,000 to ₹3,000 per month.
“By explicitly including EVs in concessional valuation slabs, the government has removed a major ambiguity,” Maheshwari said. “This not only simplifies payroll calculations but also supports India’s broader clean mobility push by making EVs more tax-efficient for employees.”
Higher benchmarks, standardised valuation
The rules also revise valuation norms for employer-funded car expenses and reimbursements, increasing standard deduction thresholds and extending them to EVs. This reflects a shift towards more realistic valuation of modern compensation structures.
“The recalibration of perquisite limits and exemptions will benefit both employers and employees, particularly by reducing disputes over valuation,” said SureshKumar S, Partner, Deloitte India. “At the same time, clearer rules will make implementation more predictable.”
Balancing relief with tighter compliance
While the higher exemptions offer relief to salaried taxpayers, experts note that the broader framework remains compliance-intensive, with stricter reporting and documentation requirements under the new regime.
Overall, the changes signal a dual approach—greater tax relief on everyday benefits coupled with more structured and standardised valuation rules—reflecting India’s transition to a modern, data-driven tax system aligned with evolving income patterns and workplace realities.