The Central Government has released the Draft Income-tax Rules, 2026, laying down the detailed procedural and substantive framework for implementing the Income-tax Act, 2025. The draft rules are proposed to come into force from 1 April 2026, marking a major overhaul of India’s direct tax administration and compliance architecture.
The draft rules span a wide range of areas including dividend payments, capital gains, valuation of assets, taxation of non-residents, perquisite valuation, significant economic presence, and fair market value computation, offering clarity on several complex provisions introduced under the new Act.
As per Rule 1, the rules shall be called the Income-tax Rules, 2026 and will apply from the beginning of the financial year 2026–27. Rule 2 defines key expressions such as “Act”, “authorised bank”, and references to forms, which will be contained in Appendix III to the Rules.
Under Rule 3, companies declaring dividends are required to maintain their share register within India, hold general meetings for dividend declaration only in India, and ensure that all dividends are payable exclusively within India.
This rule reinforces territorial compliance for dividend distribution under the new tax regime
Rules 4 and 5 prescribe stringent conditions for stock exchanges to be notified as recognised stock exchanges for derivatives trading under section 2(92) of the Act. These include SEBI approval, maintenance of audit trails for seven tax years, client identification norms, and mandatory monthly reporting to the Director General of Income-tax (Systems)
Capital Gains: Period of Holding Clarified
Rule 6 provides detailed guidance on determining the period of holding for capital assets in special cases such as:
- Conversion of debentures into shares,
- Assets declared under the Income Declaration Scheme, 2016, and
- Assets transferred to Indian subsidiaries upon conversion of foreign branches.
The rule also explains classification of gains as short-term or long-term for specified entities taxed under section 67(10).
Zero Coupon Bonds: Fresh Compliance Framework
Rule 7 lays down a comprehensive approval and compliance mechanism for notification of zero coupon bonds, including:
- Minimum bond tenure of 10 years,
- Mandatory investment-grade ratings from two SEBI-registered agencies,
- Listing on recognised Indian stock exchanges, and
- Time-bound deployment of bond proceeds.
The government also retains the power to withdraw notification in case of non-compliance.
Residency Rules for Indian Seafarers
Rule 8 excludes time spent on eligible foreign voyages from the calculation of stay in India for Indian citizens who are crew members of foreign-bound ships. The rule relies on entries in the Continuous Discharge Certificate to compute eligible periods.
Income Attribution for Non-Residents
Rule 9 empowers Assessing Officers to estimate income of non-residents where actual income from Indian sources cannot be precisely determined. Income may be computed based on turnover percentage, proportional profits, or any other reasonable method deemed suitable by the Assessing Officer.
Fair Market Value of Assets and Indirect Transfers
Rules 10 to 12 provide a detailed valuation regime for determining:
- Fair market value of Indian and foreign assets,
- Valuation of listed and unlisted shares,
- Valuation of partnership interests, and
- Attribution of income to Indian assets in indirect transfer cases.
The rules introduce formula-based attribution for offshore transfers deriving substantial value from assets located in India, significantly strengthening India’s indirect transfer taxation framework.
Significant Economic Presence Thresholds Notified
Rule 13 specifies thresholds for determining Significant Economic Presence (SEP) of non-residents:
- Aggregate payments exceeding ₹2 crore in a tax year, or
- Engagement with 3 lakh or more users in India.
These thresholds are critical for taxing digital and cross-border business models.
Revised Rules on Exempt Income Expenditure
Rule 14 prescribes a revised method for computing expenditure relating to income not includible in total income, capping such disallowance at 1% of average monthly investments, subject to the overall expenditure claimed by the assessee.
Detailed Valuation of Perquisites
Rule 15 extensively revises the valuation of perquisites, covering:
- Residential accommodation,
- Furnished housing,
- Employer-provided vehicles,
- Utilities, domestic help, education facilities, and
- Interest-free or concessional loans.
The rules introduce city-wise salary percentages, engine-capacity-based car valuation, and inflation-linked caps on long-term accommodation benefits
Conclusion
The Draft Income-tax Rules, 2026 represent a decisive shift towards rule-based clarity and digitised tax administration under the new Income-tax Act, 2025. By codifying valuation methods, compliance thresholds, and procedural safeguards, the draft aims to reduce interpretational disputes while expanding the tax base, particularly in cross-border and digital transactions.
Stakeholders are expected to closely examine the draft rules, as these provisions will significantly shape tax compliance and litigation strategies from Assessment Year 2026–27 onwards.
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