Draft Income-tax Rules 2026: A New Framework for Salary Taxation & Perquisite Valuation
The Draft Income-tax Rules, 2026, issued as part of the transition to the proposed Income-Tax Act, 2025, signal a comprehensive reshaping of how salary components are valued and taxed. While the new statute aims at simplification in the broader sense, the draft rules go into deep detail on how specific perquisites and allowances will be computed.
For payroll teams, HR professionals, and consultants, three areas stand out as immediately impactful:
Draft Rule 15– overhauling perquisite valuation (earlierRule 3of the 1962 Rules)Draft Rule 279– revisiting House Rent Allowance (HRA) exemption mechanicsDraft Rule 280– revising limits for various allowances, particularly related to education and hostel expenses
What follows is a structured analysis of the major proposals and their practical implications for the salaried segment and employers configuring payroll for the period aligned with the Income-Tax Act, 2025.
1. Motor Car Perquisite: Substantial Increase in Taxable Value for Employer-Provided Vehicles
Relevant Provision: Draft Rule 15(3)
The most striking modification appears in the treatment of employer-provided motor cars used for both official and personal purposes. For many years, the valuation slabs under the existing framework remained unchanged and were modest, effectively providing a concessional benefit to senior employees using company cars. The Draft Rule 15(3) substantially revises these values upward.
Old vs New Monthly Perquisite Values
Under the existing Rule 3 of the 1962 Rules, the monthly taxable perquisite was:
- For a car with engine capacity less than 1.6 litres: ₹1,800 per month
- For a car with engine capacity exceeding 1.6 litres: ₹2,400 per month
- For a chauffeur provided: ₹900 per month
The Draft Rule 15(3) revises these figures as under:
- Engine capacity less than 1.6 litres: ₹5,000 per month
- Engine capacity exceeding 1.6 litres: ₹7,000 per month
- Chauffeur’s salary component: ₹3,000 per month
This translates into an approximate increase of:
- 177% for smaller cars
- 191% for larger cars
- 233% for chauffeur component
Illustrative Impact on a Senior Employee
Consider Mr. Sharma, a senior manager, who is provided with:
- A company-owned car with engine capacity exceeding 1.6 litres, and
- A full-time chauffeur,
- With the car used for both business and personal purposes.
Under the existing rules, the annual taxable perquisite would have been:
- Car: ₹2,400 × 12 = ₹28,800
- Chauffeur: ₹900 × 12 = ₹10,800
- Total: ₹39,600 per annum
Under the Draft Rule 15(3), the same arrangement would be valued at:
- Car: ₹7,000 × 12 = ₹84,000
- Chauffeur: ₹3,000 × 12 = ₹36,000
- Total: ₹1,20,000 per annum
At the highest marginal slab rate, this could lead to an additional tax incidence in the range of approximately ₹25,000 or more, depending on surcharge and cess.
Documentation for Claiming “Wholly Official Use”
Draft Rule 15(3)(c) reinforces that nil perquisite valuation for motor cars is permissible only where the vehicle is used wholly and exclusively for official duties and is backed by detailed records. Specifically, the assessee (through the employer) must maintain:
- A proper logbook
- Journey-wise details (date, origin, destination)
- Purpose of each trip (business use)
- Distance travelled (mileage)
- Related running and maintenance expenditure
In the absence of such systematically maintained documentation, the higher presumptive perquisite values under Draft Rule 15(3) will be applied by default.
Practical Consideration for Employers
- HR and payroll teams must revisit policies regarding company car provision, particularly for senior management.
- Organisations may need to evaluate whether to continue with traditional company car structures, move to car allowances, or adopt a hybrid model.
- Where cars are claimed as used wholly for work, robust logbook systems (digital or manual) must be operational well before the effective date.