Income Tax Rules 2026: CBDT Issues Comprehensive Procedural Framework Under the Income Tax Act 2025
The Central Board of Direct Taxes has formally notified the Income-tax Rules, 2026 vide Notification No. G.S.R. 198(E) dated 20th March, 2026, exercising powers conferred under section 533 of the Income-tax Act, 2025 (30 of 2025). These rules, bearing Notification No. 22/2026 – Income Tax, take effect from 1st April, 2026 and lay down the complete operational and procedural architecture for administering the newly enacted income tax legislation.
The rules span a wide terrain — from recognition of stock exchanges and zero coupon bond notifications to perquisite valuation, non-resident income determination, and cross-border asset transfer reporting. Taken together, they form the backbone of compliance infrastructure for the new tax era.
Key Definitions Under Rule 2
Rule 2 establishes foundational definitions applicable throughout the Income-tax Rules, 2026:
- "Act" refers to the Income-tax Act, 2025 (30 of 2025)
- "Authorised bank" means any bank appointed by the Reserve Bank of India as its agent under
section 45(1)of the Reserve Bank of India Act, 1934 (2 of 1934) - "Form" refers to a Form contained in Appendix III of the rules
- "Section" means a section of the Income-tax Act, 2025
All terms used in these rules but not separately defined shall carry the meanings assigned to them under the Act itself.
Rule 3: Dividend Declaration and Payment Arrangements in India
For the purposes of section 2(42), a company must adhere to the following arrangements for declaring and paying dividends (including preference share dividends) within India:
- The share register covering all shareholders must be maintained at the company's principal place of business in India, from a date no later than 1st April of the relevant tax year
- General meetings for passing accounts and declaring dividends must be held exclusively at a place within India
- All declared dividends must be payable only within India to every shareholder
Rule 4 and Rule 5: Conditions and Procedure for Recognition of Stock Exchanges
Conditions for Recognition Under Section 2(92)
For a stock exchange to qualify for notification as a recognised stock exchange under section 2(92), it must satisfy the following conditions in relation to derivative trading:
- It must hold SEBI approval under the Securities and Exchange Board of India Act, 1992 (15 of 1992) for trading in derivatives and must operate in conformity with SEBI guidelines
- It must record and store client particulars, including unique client identity numbers and Permanent Account Numbers, in its databases
- It must maintain a complete audit trail of all cash and derivative market transactions for seven tax years
- Transactions once registered must not be erased from the system
- Modifications to registered transactions are permitted only in cases of genuine error
- A monthly statement in Form No. 1 of all modified transactions must be submitted to the Director General of Income-tax (Systems) within fifteen days from the close of each relevant month
Application Procedure Under Rule 5
- Applications for recognition must be submitted to the Member (Income Tax), Central Board of Direct Taxes, New Delhi
- The application must be accompanied by:
- SEBI approval for derivative trading
- Up-to-date rules, bye-laws, and trading regulations
- Confirmation of compliance with Rule 4 conditions (clauses b to f)
- Any additional information the applicant wishes to place on record
- The Central Government may requisition further information from the applicant
- A decision — notification or rejection — must be issued within six months from the end of the month of receipt of application
- The recognition remains valid until SEBI withdraws or allows its approval to expire, or the Central Government rescinds the notification
Rule 6: Holding Period of Capital Assets — Special Situations
Rule 6 operationalises section 2(101)(c)(D) and prescribes how the holding period is to be computed for capital assets in specific circumstances:
| Sl. No. | Nature of Asset | How Holding Period is Determined |
|---|---|---|
| 1 | Shares or debentures acquired through conversion under section 70(1)(z) |
Includes the period for which the original bond, debenture, debenture-stock, or deposit certificate was held prior to conversion |
| 2 | Asset declared under the Income Declaration Scheme, 2016 (Finance Act, 2016 (28 of 2016)) | For immovable property with registered deed: from the date of acquisition; in all other cases: from 1st June, 2016 |
| 3 | Asset of an Indian subsidiary arising from conversion of a branch of a foreign company under section 219(1) |
Includes the period the asset was held by the foreign company's branch, or by any prior owner who acquired it under section 73(1) or section 219(1) |
Short-Term vs Long-Term Classification Under Section 67(10)
Where income is taxable under section 67(10) as Capital Gains for a specified entity:
- The income is treated as arising from a short-term capital asset if it relates to:
- A short-term capital asset at the time of taxation under
section 67(10) - A capital asset forming part of a block of assets
- A self-generated asset or self-generated goodwill as defined in
section 67(11)
- A short-term capital asset at the time of taxation under
- The income is treated as arising from a long-term capital asset if it relates to any other asset that is long-term at the time of taxation under
section 67(10)
Rule 7: Procedure for Notification of Zero Coupon Bonds
Who Can Apply
Entities eligible to apply for zero coupon bond notification under section 2(112) include:
- Infrastructure capital companies
- Infrastructure capital funds
- Infrastructure debt funds
- Public sector companies
Application Requirements
- Application must be made in Form No. 2, at least three months before the proposed date of issue
- Applications cannot be filed for bonds proposed to be issued beyond two financial years following the year of application
- Applications must be disposed of within six months from the close of the month of receipt