The Draft Income Tax Rules, 2026 has been released by the Income Tax Department, which will come into force from 1st April 2026, aligning procedural and compliance rules with the Income Tax Act, 2025. The draft rules consolidate definitions, valuation norms, residency computation, capital gains treatment, perquisite valuation and cross-border taxation mechanisms under a single updated framework.
Effective Date and Legal Framework
The draft rules are formally titled Income Tax Rules, 2026 and will apply from the beginning of FY 2026-27. All references to sections, chapters and schedules are aligned with the Income-tax Act, 2025, ensuring consistency in interpretation and administration.
Major Highlights of Draft Income Tax Rules, 2026
1. Dividend Declaration and Payment Restricted to India
Companies declaring dividends must:
- Maintain share registers within India
- Hold shareholder meetings in India
- Pay dividends only within India
This aims to strengthen regulatory oversight and prevent jurisdictional ambiguity in dividend taxation.
2. New Framework for Recognised Stock Exchanges
Detailed eligibility conditions have been prescribed for stock exchanges dealing in derivatives, including:
- Mandatory SEBI approval
- Client PAN and audit trail maintenance
- Monthly reporting to the Income-tax Systems Directorate
The rules also define a six-month approval timeline for recognition or rejection by the Central Governmen.
3. Capital Gains: Period of Holding Clarified
The rules specify how the period of holding will be calculated in special cases such as:
- Conversion of bonds into shares
- Assets declared under Income Declaration Scheme, 2016
- Conversion of foreign branches into Indian subsidiaries
This brings long-awaited clarity for capital gains classification as short-term or long-term.
4. Zero Coupon Bonds: Detailed Approval Process
Infrastructure entities issuing zero coupon bonds must:
- Apply at least three months in advance
- Maintain a minimum bond tenure of 10 years
- Invest proceeds within specified timelines
- Submit annual accountant certifications
Non-compliance can lead to withdrawal of bond notification by the Government.
5. Residency Rules for Indian Seafarers Simplified
For Indian citizens working as crew on foreign-bound ships, the draft rules exclude voyage periods recorded in the Continuous Discharge Certificate from stay calculation in India, helping avoid unintended resident status.
6. Non-Resident Income Attribution Rules
Where income of a non-resident cannot be precisely determined, Assessing Officers may compute income based on:
- Turnover percentage
- Proportion of global profits
- Any other reasonable method
This codifies discretionary assessment mechanisms under the new Act.
7. Fair Market Value Rules for Indirect Transfers
A comprehensive valuation framework has been laid down for:
- Listed and unlisted Indian shares
- Partnership interests
- Foreign entities deriving value from Indian assets
International valuation standards and merchant banker certifications have been made mandatory in key cases.
8. Significant Economic Presence Thresholds
For non-residents:
- Transaction payments threshold: Rs 2 crore
- User interaction threshold: 3 lakh users
These thresholds trigger taxation under India's digital economy nexus rules.
9. Disallowance for Exempt Income Rationalised
Expenditure relating to exempt income will be capped at:
- Direct expenses, plus
- 1% of average monthly investment value, subject to total expenditure claimed
This replaces earlier complex formulas with a simpler computation method.
10. Extensive Overhaul of Perquisite Valuation
The draft rules comprehensively revise valuation of:
- Employer-provided accommodation
- Motor cars
- Club memberships
- Gifts, loans, food, utilities, and ESOPs
Clear monetary thresholds and inflation-indexed caps have been introduced to reduce litigation and improve salary structuring clarity.
Also Read: Income Tax Rules, 2026 Notified: Rule-Wise Comparison with Old IT Rules, 1962
Why This Matters
The Draft Income-tax Rules, 2026 mark a structural reset of India’s tax compliance ecosystem, bringing transparency, global alignment and reduced ambiguity for:
- Salaried taxpayers
- Corporates
- Non-residents
- Start-ups and infrastructure entities
Stakeholders are expected to review these provisions carefully ahead of final notification.
Official copy of the Draft Income Tax Rules,2026 has been attached
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