Tax Perks Under New IT Rules 2026. It is now widely known that the Income-tax Act, 2025 will take effect on April 1, 2026. While the Act serves as the main legislation, the procedural details are explained in the ‘Rules’ that accompany the Act. Recently, the government released the draft of the Income-tax Rules, 2026 (new IT Rules) for public review. Stakeholders can provide feedback until February 22. The final draft will also be effective from April 1 and will be announced on a later date.
From a personal taxation perspective, the draft rules show significant changes in how perks and allowances for salaried individuals will be taxed. These changes mainly involve how perks will be valued and the thresholds for taxability or exemption. The existing rules have not been updated in a long time, so the new IT rules aim to reflect current prices and realities. Some revisions benefit taxpayers, while others do not. Continue reading to see how each change affects your take-home pay.
General threshold for taxing perks
Perks are non-monetary benefits given to employees, such as free food, free or subsidized medical treatment, or rent-free accommodations. These perks are valued according to the IT Rules and added to an employee’s income. The current rules exempt the value of a benefit or amenity received for free or at a discount, for employees whose cash salary does not exceed ₹50,000 per annum. This threshold has now been raised to ₹4 lakh per annum.
Overseas medical treatment
This applies to the cost of overseas medical treatment for an employee or their family members, covered by the employer. The rules for the cost of treatment and overseas stay remain unchanged, but the new IT rules modify the rules for travel related to such treatment. Under the current rules, travel costs are not considered taxable perks only if the employee’s gross annual income does not exceed ₹2 lakh. The new IT rules increase this threshold to ₹8 lakh.
Use of company car
Employers often provide cars to employees. These vehicles may be owned or leased by the company, and employees can use them for both business and personal purposes. Since the costs of running or owning a car have risen significantly since the last update of the current rules, the new IT Rules have increased the valuation of this perk. Various factors may affect the valuation based on who owns the car, who pays for its upkeep, and its intended use. We will look at four situations where the new IT Rules change the valuation.
Case A: The company owns or leases the car, pays for it, and the employee uses it for personal and business purposes.
According to the current rules, this perk is valued at ₹1,800 per month for small cars (engine capacity up to 1.6 litres) and ₹2,400 per month for large cars (engine capacity over 1.6 litres). There is an extra ₹900 per month if the company pays the driver’s salary.
The new rules now value this perk at ₹5,000 per month for small cars and ₹7,000 per month for large cars. The driver’s salary is valued at ₹3,000 per month.
Case B: The company owns or leases the car, employee uses it for both personal and business purposes, and the employee pays for personal use.
Currently, the valuation in this case is ₹600 per month for small cars and ₹900 per month for large cars. The driver’s salary is an additional ₹900 per month.
Under the new IT Rules, this perk is valued at ₹2,000 per month for small cars and ₹3,000 per month for large cars. The driver’s salary paid by the company is valued at ₹3,000 per month, same as in Case A.
Case C: The employee owns the car, costs are covered by the company, and the employee uses it for both personal and business purposes.
Under the current rules, the valuation works as follows: for a small car, it is the actual cost to the company minus ₹1,800 per month minus ₹900 per month (if a driver is provided). For a large car, it is the actual cost to the company minus ₹2,400 per month minus ₹900 per month (if a driver is provided).
Now, under the new rules, for a small car, the valuation is the actual cost to the company minus ₹5,000 per month minus ₹3,000 per month (if a driver is provided). For a large car, it is the actual cost to the company minus ₹7,000 per month minus ₹3,000 per month (if a driver is provided).
Case D: The employee owns a vehicle that is not a car, uses it for both personal and business purposes, and the costs are covered by the company.
This typically applies to employees using two-wheelers. Under the current rules, the perk’s value is the actual cost to the company minus ₹900 per month. This changes to the actual cost to the company minus ₹3,000 per month under the new rules.
Interest-free loans
Employees often receive interest-free loans or loans at subsidized rates from their employers. Such a perk is valued based on a notional interest, calculated using the interest rate charged by the State Bank of India on a similar loan. Any interest paid by the employee is subtracted from this notional interest. The new rules maintain this valuation logic, but if the total loans from the employer do not exceed ₹20,000, the perk is not taxable. This threshold rises to ₹2 lakh under the new IT Rules.
Gifts, vouchers, tokens
The current rules exempt the value of gifts, vouchers, or tokens received from an employer on ceremonial occasions if the total value does not exceed ₹5,000 per annum. The new IT Rules increase this threshold to ₹15,000 per annum.
Free food
Currently, free or subsidized food and beverages (non-alcoholic) provided by employers during working hours on their premises or in the form of food vouchers do not qualify as a taxable perk if the value per meal does not exceed ₹50. This increases to ₹200 per meal under the new rules.
Leave travel assistance
Leave travel assistance (LTA) is taxed as the gross value of LTA minus exemption (calculated according to IT Rules). The way to calculate the exemption largely stays the same under the new rules, except in two scenarios.
For air travel, the current exemption is based on the price of an economy class ticket from the national carrier. With Air India now sold to Tata Sons, the new rules cap the exemption at the fare allowed for the class of travel that the employee is entitled to. While the company’s own policies may determine the class of travel, more clarity is expected on this issue.
For journeys between locations not connected by air, rail, or other recognized public transport, the current rules cap the exemption at a notional equivalent rail fare for first-class A/C travel. The new rules simplify the exemption calculation to ₹30 per km.
House rent allowance
Currently, the exemption for house rent allowance (HRA) is calculated as the lowest of the following:
a) Actual HRA
b) Actual rent paid minus one-tenth of salary (typically, basic + dearness allowance)
c) Fifty percent of salary (basic + DA) for employees living in Mumbai, Delhi, Kolkata, or Chennai; forty percent for other employees.
Under the new IT Rules, a and b remain unchanged. However, under c, employees living in Bengaluru, Pune, Ahmedabad, and Hyderabad will now qualify for an exemption of up to fifty percent of salary.
Children allowance
Under the current rules, the exemption for children’s education allowance is capped at ₹100 per month per child for a maximum of two children. This amount has now been increased to ₹3,000 per month per child for a maximum of two children to reflect rising education costs.
Likewise, the exemption for children’s hostel allowance is currently capped at ₹300 per month per child for a maximum of two children. Under the new rules, this is raised to ₹9,000 per month per child for a maximum of two children.
Transport worker allowance
The new IT rules have introduced an exemption for allowances received by employees in any transport system (such as drivers, loco pilots, and guards) to cover personal expenses. This exemption is capped at a minimum of ₹25,000 per month or 70 percent of such allowances.
Other exemptions
In addition to these changes, exemption caps for various allowances have been significantly raised under the new rules. This includes allowances for the armed forces, such as Siachen allowance, high altitude allowance, and island duty allowance. Additionally, allowances such as underground allowance for mine workers have also increased.
