New Income Tax Rules 2026 for salaried employees
New Income Tax Rules 2026 for salaried employees
Under the new Income-tax Act, 2025 (effective from April 1, 2026), several significant changes have been introduced for salaried employees, ranging from revised tax slabs to new compliance forms.
Here are the key rules and updates for salaried employees for Tax Year 2026-27 (Financial Year 2026-27):
1. The New Tax Regime is the Default
The New Tax Regime (governed by Section 202) is now the default tax regime for individuals. However, salaried employees still have the option to opt out and choose the old tax regime when filing their return of income.
The revised tax slab rates under the default New Tax Regime are:
- Up to ₹4,00,000: Nil
- ₹4,00,001 to ₹8,00,000: 5%
- ₹8,00,001 to ₹12,00,000: 10%
- ₹12,00,001 to ₹16,00,000: 15%
- ₹16,00,001 to ₹20,00,000: 20%
- ₹20,00,001 to ₹24,00,000: 25%
- Above ₹24,00,000: 30%.
2. Definition and Scope of Salary
Income chargeable under the head “Salaries” includes wages, annuities, pensions, gratuities, fees, commissions, perquisites, advance salary, and payments received for unavailed leave. Additionally, the annual accretion to an employee’s recognised provident fund is deemed to be received by the employee and is taxable if the employer’s contribution exceeds 12% of the employee’s salary or if the interest credited exceeds the rate fixed by the Central Government.
3. Standard Deduction and Exemptions
- Standard Deduction: Salaried employees opting to pay tax under the new tax regime (Section 202(1)) are eligible for a higher standard deduction of ₹75,000 or the amount of salary, whichever is less. For those not opting for the new regime, the standard deduction remains ₹50,000 or the salary, whichever is less.
- Professional Tax: Any sum paid by the assessee as a tax on employment is fully deductible from their salary income.
- Gratuity: Gratuity received is exempt up to specific limits, generally calculated as half a month’s salary for each completed year of service, capped at the maximum limit notified by the Central Government,.
- Leave Encashment: Payments received as the cash equivalent of earned leave at the time of retirement (superannuation or otherwise) are exempt up to limits specified by the Central Government,.
- Voluntary Retirement: Compensation received on voluntary retirement or termination of service is exempt up to a maximum of ₹5,00,000.
4. Valuation of Perquisites
- Rent-Free Accommodation: If an employer provides unfurnished residential accommodation, its perquisite value is calculated based on the city’s population,. It is valued at 10% of salary in cities with a population over 40 lakhs, and 7.5% of salary in cities with a population between 15 lakhs and 40 lakhs, reduced by any rent actually paid by the employee.
- Motor Cars: The valuation of employer-provided cars depends on engine capacity. For cars up to 1.6 liters (including electric vehicles) used for both official and personal purposes where the employer bears the maintenance cost, the value is ₹5,000 per month (plus ₹3,000 if a chauffeur is provided). For cars exceeding 1.6 liters, the value is ₹7,000 per month (plus ₹3,000 for a chauffeur).
- Computers and Movable Assets: The free use of computers, tablets, and mobile phones provided by the employer has a Nil perquisite value. For the use of other movable assets, the perquisite value is 10% per annum of the actual cost or the rent paid by the employer.
- Medical Treatment: Medical treatment provided in hospitals maintained by the employer, the Government, or approved local authorities is excluded from being a perquisite. Travel and stay abroad for medical treatment are also excluded, subject to conditions and limits permitted by the Reserve Bank of India,.
5. Pension and Provident Fund Contributions
- National Pension System (NPS): Employer contributions to a notified pension scheme are deductible up to 14% of the employee’s salary for Central or State Government employees, and 10% for employees of other sectors,. However, if the non-government employee opts for the new tax regime, the deductible limit for the employer’s contribution is increased to 14%. Additionally, an employee can claim a deduction of up to ₹50,000 for their own contributions to the pension scheme.
- Agnipath Scheme: Individuals enrolled in the Agnipath Scheme can claim a full deduction for the amount deposited in the Agniveer Corpus Fund, as well as for the matching contribution made by the Central Government,.
6. TDS on Salary and Evidence for Claims
Employers are responsible for deducting income-tax at the time of salary payment, based on the average rate of income-tax computed on the employee’s estimated income. To allow the employer to accurately estimate tax liability and grant deductions (such as HRA, LTA, or Chapter 8 deductions), the employee must submit evidence using Form No. 124. For instance:
- To claim House Rent Allowance (HRA) if the total rent paid in the year exceeds ₹1,00,000, the employee must provide the name, address, and Permanent Account Number (PAN) of the landlord.
- To claim Leave Travel Assistance (LTA), evidence of the travel expenditure must be submitted.
7. Higher Tax Rebate (Up to ₹12 Lakhs Tax-Free)
Under Section 156 of the new Act, a resident individual opting for the New Tax Regime receives a 100% tax rebate if their total income does not exceed ₹12,00,000 (capped at a maximum rebate of ₹60,000). This effectively makes salary income up to ₹12 lakhs entirely tax-free. Under the old regime, the 100% rebate is only available for income up to ₹5,00,000 (capped at ₹12,500).
8. Deductions Allowed vs. Disallowed
If you stay in the default New Tax Regime, you cannot claim traditional deductions such as:
- Specified savings under Section 123 (formerly 80C, up to ₹1.5 lakh).
- Health insurance premiums or medical expenditure under Section 126 (formerly 80D).
- Interest on housing loans.
- House Rent Allowance (HRA) and Leave Travel Allowance (LTA) exemptions.
However, you can still claim a deduction for your employer’s contribution to a notified pension scheme (up to 14% of your salary) and contributions to the Agnipath scheme.
9. New Forms for Salaried Employees
The old compliance forms have been renumbered and simplified under the new rules:
- Form No. 124 (Replaces Form 12BB): Employees must submit this form to their employer to declare their tax-saving investments, HRA, LTA, housing loan interest, and family-related expenses (like children’s education fees or medical reimbursements) for TDS computation.
- Form No. 130 (Replaces Form 16): This is your new annual TDS certificate on salary. Your employer must download it from the TRACES portal and issue it to you by June 15th of the following financial year.
- Form No. 39 (Replaces Form 10E): If you receive salary in arrears or advance (or items like gratuity/commutation of pension) and want to claim tax relief under Section 157 (formerly Section 89) to avoid a higher tax bracket, you must file Form 39. It now features auto-populated data and simplified computation tables.
- Form No. 138 (Replaces Form 24Q): Employers will now file their quarterly TDS returns for salaries using this new form.
10. TDS Deduction by Employers (Section 392)
Employers are required to deduct tax at source on salaries under the newly consolidated Section 392. Starting April 1, 2026, employers must reset their TDS computations based on the new Act’s provisions, applying the New Tax Regime as the default unless the employee specifies otherwise.
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